Hydro One Ltd 6-K, filed Nov 8, 2023
Hydro One Ltd (HRNNF)
6-K
2023-11-08
For: 2023-09-30
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Added on
July 04, 2026
About this 6-K
Hydro One Ltd filed this 6-K on November 8, 2023.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934
For the month of: November 2023
Commission File Number: 333-225519-01
HYDRO ONE LIMITED
(Translation of Registrant’s name into English)
483 Bay Street, South Tower, 8th Floor, Toronto Ontario M5G 2P5 Canada
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☐ Form 40-F ☒
EXHIBIT INDEX
Unaudited interim consolidated financial statements of the Registrant as at and for the three and nine months ended September 30, 2023 and 2022 | ||||||||
Management’s Discussion and Analysis of the Registrant as at and for the three and nine months ended September 30, 2023 and 2022 | ||||||||
| Certification of President and Chief Executive Officer | ||||||||
| Certification of Executive Vice President, Chief Financial and Regulatory Officer | ||||||||
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| HYDRO ONE LIMITED | |||||||||||
| /s/ Christopher Lopez | |||||||||||
| Name: Christopher Lopez | |||||||||||
| Title: Executive Vice President, Chief Financial and Regulatory Officer | |||||||||||
| Date: | November 8, 2023 | ||||||||||
HYDRO ONE LIMITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited)
For the three and nine months ended September 30, 2023 and 2022
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||
(millions of Canadian dollars, except per share amounts) | 2023 | 2022 | 2023 | 2022 | ||||||||||
Revenues | ||||||||||||||
Distribution (includes related party revenues of $90 and $267 (2022 - $71 and $213) for the three and nine months ended September 30, respectively) (Note 23) | 1,329 | 1,458 | 4,123 | 4,289 | ||||||||||
Transmission (includes related party revenues of $589 and $1,695 (2022 - $558 and $1,587) for the three and nine months ended September 30, respectively) (Note 23) | 594 | 562 | 1,708 | 1,597 | ||||||||||
| Other | 11 | 11 | 34 | 32 | ||||||||||
| 1,934 | 2,031 | 5,865 | 5,918 | |||||||||||
| Costs | ||||||||||||||
Purchased power (includes related party costs of $456 and $1,609 (2022 - $555 and $1,753) for the three and nine months ended September 30, respectively) (Note 23) | 854 | 963 | 2,662 | 2,829 | ||||||||||
Operation, maintenance and administration (Note 23) | 293 | 296 | 957 | 870 | ||||||||||
Depreciation, amortization and asset removal costs (Note 4) | 248 | 240 | 747 | 735 | ||||||||||
| 1,395 | 1,499 | 4,366 | 4,434 | |||||||||||
Income before financing charges and income tax expense | 539 | 532 | 1,499 | 1,484 | ||||||||||
Financing charges (Note 5) | 143 | 122 | 423 | 358 | ||||||||||
| Income before income tax expense | 396 | 410 | 1,076 | 1,126 | ||||||||||
Income tax expense (Note 6) | 36 | 100 | 165 | 247 | ||||||||||
| Net income | 360 | 310 | 911 | 879 | ||||||||||
Other comprehensive income (loss) (Note 7) | — | 2 | (12) | 14 | ||||||||||
| Comprehensive income | 360 | 312 | 899 | 893 | ||||||||||
| Net income attributable to: | ||||||||||||||
| Noncontrolling interest | 3 | 3 | 7 | 7 | ||||||||||
| Common shareholders | 357 | 307 | 904 | 872 | ||||||||||
| 360 | 310 | 911 | 879 | |||||||||||
| Comprehensive income attributable to: | ||||||||||||||
| Noncontrolling interest | 3 | 3 | 7 | 7 | ||||||||||
| Common shareholders | 357 | 309 | 892 | 886 | ||||||||||
| 360 | 312 | 899 | 893 | |||||||||||
Earnings per common share (Note 21) | ||||||||||||||
| Basic | $0.60 | $0.51 | $1.51 | $1.46 | ||||||||||
| Diluted | $0.59 | $0.51 | $1.51 | $1.45 | ||||||||||
Dividends per common share declared (Note 20) | $0.30 | $0.28 | $0.87 | $0.83 | ||||||||||
See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).
1 |  | |||||||
HYDRO ONE LIMITED
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS (unaudited)
At September 30, 2023 and December 31, 2022
As at (millions of Canadian dollars) | September 30, 2023 | December 31, 2022 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | 59 | 530 | ||||||
Accounts receivable (Note 8) | 748 | 767 | ||||||
Due from related parties (Note 23) | 299 | 282 | ||||||
Other current assets (Note 9) | 183 | 281 | ||||||
| 1,289 | 1,860 | |||||||
Property, plant and equipment (Note 10) | 26,298 | 25,077 | ||||||
| Other long-term assets: | ||||||||
Regulatory assets (Note 12) | 3,186 | 2,964 | ||||||
| Deferred income tax assets | 117 | 114 | ||||||
Intangible assets (Note 11) | 645 | 608 | ||||||
| Goodwill | 373 | 373 | ||||||
Other assets (Note 13) | 579 | 461 | ||||||
| 4,900 | 4,520 | |||||||
| Total assets | 32,487 | 31,457 | ||||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
Short-term notes payable (Note 16) | 927 | 1,374 | ||||||
Long-term debt payable within one year (Notes 16, 17) | 700 | 733 | ||||||
Accounts payable and other current liabilities (Note 14) | 1,327 | 1,274 | ||||||
Due to related parties (Note 23) | 95 | 271 | ||||||
| 3,049 | 3,652 | |||||||
| Long-term liabilities: | ||||||||
Long-term debt (Notes 16, 17) | 13,802 | 13,030 | ||||||
Regulatory liabilities (Note 12) | 1,307 | 1,123 | ||||||
Deferred income tax liabilities | 1,005 | 715 | ||||||
Other long-term liabilities (Note 15) | 1,561 | 1,545 | ||||||
| 17,675 | 16,413 | |||||||
| Total liabilities | 20,724 | 20,065 | ||||||
Contingencies and Commitments (Notes 25, 26) | ||||||||
Subsequent Events (Note 28) | ||||||||
Noncontrolling interest subject to redemption | 20 | 20 | ||||||
| Equity | ||||||||
Common shares (Note 19) | 5,706 | 5,699 | ||||||
| Additional paid-in capital | 29 | 34 | ||||||
| Retained earnings | 5,944 | 5,562 | ||||||
| Accumulated other comprehensive (loss) income | (1) | 11 | ||||||
| Hydro One shareholders’ equity | 11,678 | 11,306 | ||||||
| Noncontrolling interest | 65 | 66 | ||||||
| Total equity | 11,743 | 11,372 | ||||||
| 32,487 | 31,457 | |||||||
See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).
2 | | |||||||
HYDRO ONE LIMITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
For the nine months ended September 30, 2023 and 2022
Nine months ended September 30, 2023 (millions of Canadian dollars) | Common Shares | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Hydro One Shareholders’ Equity | Non-controlling Interest | Total Equity | |||||||||||||||||||
| January 1, 2023 | 5,699 | 34 | 5,562 | 11 | 11,306 | 66 | 11,372 | |||||||||||||||||||
| Net income | — | — | 904 | — | 904 | 5 | 909 | |||||||||||||||||||
Other comprehensive loss (Note 7) | — | — | — | (12) | (12) | — | (12) | |||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | (6) | (6) | |||||||||||||||||||
Dividends on common shares (Note 20) | — | — | (522) | — | (522) | — | (522) | |||||||||||||||||||
| Common shares issued | 7 | (7) | — | — | — | — | — | |||||||||||||||||||
| Stock-based compensation | — | 2 | — | — | 2 | — | 2 | |||||||||||||||||||
| September 30, 2023 | 5,706 | 29 | 5,944 | (1) | 11,678 | 65 | 11,743 | |||||||||||||||||||
Nine months ended September 30, 2022 (millions of Canadian dollars) | Common Shares | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Hydro One Shareholders’ Equity | Non-controlling Interest | Total Equity | |||||||||||||||||||
| January 1, 2022 | 5,688 | 38 | 5,174 | (12) | 10,888 | 68 | 10,956 | |||||||||||||||||||
| Net income | — | — | 872 | — | 872 | 5 | 877 | |||||||||||||||||||
Other comprehensive income (Note 7) | — | — | — | 14 | 14 | — | 14 | |||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | (6) | (6) | |||||||||||||||||||
Dividends on common shares (Note 20) | — | — | (494) | — | (494) | — | (494) | |||||||||||||||||||
| Common shares issued | 11 | (8) | — | — | 3 | — | 3 | |||||||||||||||||||
| Stock-based compensation | — | 4 | — | — | 4 | — | 4 | |||||||||||||||||||
| September 30, 2022 | 5,699 | 34 | 5,552 | 2 | 11,287 | 67 | 11,354 | |||||||||||||||||||
See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).
3 | | |||||||
HYDRO ONE LIMITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the three and nine months ended September 30, 2023 and 2022
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||
(millions of Canadian dollars) | 2023 | 2022 | 2023 | 2022 | ||||||||||
| Operating activities | ||||||||||||||
| Net income | 360 | 310 | 911 | 879 | ||||||||||
| Environmental expenditures | (3) | (5) | (27) | (24) | ||||||||||
| Adjustments for non-cash items: | ||||||||||||||
Depreciation and amortization (Note 4) | 215 | 212 | 651 | 637 | ||||||||||
| Regulatory assets and liabilities | 26 | (3) | 1 | 18 | ||||||||||
| Deferred income tax expense | 22 | 91 | 128 | 226 | ||||||||||
| Other | 4 | 2 | 20 | 29 | ||||||||||
Changes in non-cash balances related to operations (Note 24) | 18 | (13) | (40) | (107) | ||||||||||
| Net cash from operating activities | 642 | 594 | 1,644 | 1,658 | ||||||||||
| Financing activities | ||||||||||||||
| Long-term debt issued | 425 | — | 1,475 | — | ||||||||||
| Long-term debt repaid | — | — | (731) | (601) | ||||||||||
| Short-term notes issued | 2,120 | 1,730 | 5,480 | 4,590 | ||||||||||
| Short-term notes repaid | (2,295) | (1,650) | (5,930) | (4,120) | ||||||||||
Dividends paid (Note 20) | (177) | (167) | (522) | (494) | ||||||||||
| Distributions paid to noncontrolling interest | (2) | (2) | (8) | (8) | ||||||||||
| Common shares issued | — | — | — | 3 | ||||||||||
| Costs to obtain financing | (1) | (1) | (7) | (5) | ||||||||||
| Net cash from (used in) financing activities | 70 | (90) | (243) | (635) | ||||||||||
| Investing activities | ||||||||||||||
Capital expenditures (Note 24) | ||||||||||||||
| Property, plant and equipment | (581) | (478) | (1,643) | (1,452) | ||||||||||
| Intangible assets | (36) | (28) | (95) | (81) | ||||||||||
| Change in future use assets | (59) | — | (133) | — | ||||||||||
| Capital contributions received | — | 3 | 2 | 13 | ||||||||||
| Other | (1) | (7) | (3) | (18) | ||||||||||
| Net cash used in investing activities | (677) | (510) | (1,872) | (1,538) | ||||||||||
| Net change in cash and cash equivalents | 35 | (6) | (471) | (515) | ||||||||||
| Cash and cash equivalents, beginning of period | 24 | 31 | 530 | 540 | ||||||||||
| Cash and cash equivalents, end of period | 59 | 25 | 59 | 25 | ||||||||||
See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).
4 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
For the three and nine months ended September 30, 2023 and 2022
1. DESCRIPTION OF THE BUSINESS
Hydro One Limited (Hydro One or the Company) was incorporated on August 31, 2015, under the Business Corporations Act (Ontario). On October 31, 2015, the Company acquired Hydro One Inc., a company previously wholly-owned by the Province of Ontario (Province). At September 30, 2023, the Province held approximately 47.1% (December 31, 2022 - 47.2%) of the common shares of Hydro One. The principal businesses of Hydro One are the transmission and distribution of electricity to customers within Ontario.
Earnings for interim periods may not be indicative of results for the year due to the impact of seasonal weather conditions on customer demand and market pricing.
The Company's transmission business consists of the transmission system operated by Hydro One Inc.’s subsidiaries, which include Hydro One Networks Inc. (Hydro One Networks) and Hydro One Sault Ste. Marie LP (HOSSM), as well as an approximately 66% interest in B2M Limited Partnership (B2M LP), and an approximately 55% interest in Niagara Reinforcement Limited Partnership (NRLP).
Hydro One’s distribution business consists of the distribution system operated by Hydro One Inc.'s subsidiaries, Hydro One Networks and Hydro One Remote Communities Inc. (Hydro One Remotes).
Rate Setting
Hydro One Networks
On August 15, 2021, Hydro One Networks filed a custom Joint Rate Application (JRAP) for distribution rates and transmission revenue requirement for the period from 2023-2027. On November 29, 2022, the Ontario Energy Board (OEB) issued a Decision and Order approving the application and issued its final rate order for 2023-2027 transmission and distribution rates. As part of this decision, the OEB approved revenue requirement of $1,952 million for 2023, $2,073 million for 2024, $2,168 million for 2025, $2,277 million for 2026 and $2,362 million for 2027 for the Transmission Business. The OEB also approved revenue requirement of $1,727 million for 2023, $1,813 million for 2024, $1,886 million for 2025, $1,985 million for 2026 and $2,071 million for 2027 for the Distribution Business.
Deferred Tax Asset (DTA)
On March 7, 2019, the Ontario Energy Board (OEB) issued its reconsideration decision (DTA Decision) with respect to Hydro One's rate-setting treatment of the benefits of the DTA resulting from the transition from the payments in lieu of tax regime to tax payments under the federal and provincial tax regimes. On July 16, 2020, the Ontario Divisional Court rendered its decision on the Company's appeal of the OEB's DTA Decision. On April 8, 2021, the OEB rendered its decision and order (DTA Implementation Decision) regarding the recovery of the DTA amounts allocated to ratepayers for the 2017 to 2022 period. See Note 12 - Regulatory Assets and Liabilities for additional details.
Hydro One Remotes
On August 31, 2022, Hydro One Remotes filed its distribution rate application for 2023-2027. On March 2, 2023, the OEB approved Hydro One Remote Communities' 2023 revenue requirement of $128 million with a price cap escalator index for 2023-2027, and a 3.72% rate increase effective May 1, 2023.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Presentation
These unaudited condensed interim consolidated financial statements (Consolidated Financial Statements) include the accounts of the Company and its subsidiaries. Inter-company transactions and balances have been eliminated.
Basis of Accounting
These Consolidated Financial Statements are prepared and presented in accordance with United States (US) Generally Accepted Accounting Principles (GAAP) for interim financial statements and in Canadian dollars.
The accounting policies applied are consistent with those outlined in Hydro One's annual audited consolidated financial statements for the year ended December 31, 2022, with the exception of the adoption of new accounting standards as described in Note 3. These Consolidated Financial Statements reflect adjustments, that are, in the opinion of management, necessary to reflect fairly the financial position and results of operations for the respective periods. These Consolidated Financial Statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the annual audited consolidated financial statements for the year ended December 31, 2022.
5 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
3. NEW ACCOUNTING PRONOUNCEMENTS
The following table presents Accounting Standard Updates (ASUs) issued by the Financial Accounting Standards Board that are applicable to Hydro One:
Recently Adopted Accounting Guidance
| Guidance | Date issued | Description | Effective date | Impact on Hydro One | |||||||||||||
| ASU 2021-08 | October 2021 | The amendments address how to determine whether a contractual obligation represents a liability to be recognized by the acquirer in a business combination. | January 1, 2023 | No impact upon adoption | |||||||||||||
| ASU 2022-02 | March 2022 | The amendments eliminate the troubled debt restructuring (TDR) accounting model for entities that have adopted Topic 326 Financial Instrument – Credit Losses and modifies the guidance on vintage disclosure requirements to require disclosure of current-period gross write-offs by year of origination. | January 1, 2023 | No impact upon adoption | |||||||||||||
4. DEPRECIATION, AMORTIZATION AND ASSET REMOVAL COSTS
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||
(millions of dollars) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
| Depreciation of property, plant and equipment | 194 | 188 | 568 | 555 | ||||||||||||||||
| Amortization of intangible assets | 18 | 19 | 56 | 58 | ||||||||||||||||
| Amortization of regulatory assets | 3 | 5 | 27 | 24 | ||||||||||||||||
| Depreciation and amortization | 215 | 212 | 651 | 637 | ||||||||||||||||
| Asset removal costs | 33 | 28 | 96 | 98 | ||||||||||||||||
| 248 | 240 | 747 | 735 | |||||||||||||||||
5. FINANCING CHARGES
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||
(millions of dollars) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
| Interest on long-term debt | 144 | 125 | 426 | 373 | ||||||||||||||||
| Interest on short-term notes | 14 | 9 | 36 | 14 | ||||||||||||||||
| Interest on regulatory accounts | 4 | 3 | 13 | 5 | ||||||||||||||||
Realized (gain) loss on cash flow hedges (interest-rate swap agreements) (Notes 7, 17) | — | (2) | (2) | 2 | ||||||||||||||||
| Other | 3 | 4 | 12 | 12 | ||||||||||||||||
| Less: Interest capitalized on construction and development in progress | (20) | (16) | (53) | (47) | ||||||||||||||||
| Interest earned on cash and cash equivalents | (2) | (1) | (9) | (2) | ||||||||||||||||
| DTA carrying charges | — | — | — | 1 | ||||||||||||||||
| 143 | 122 | 423 | 358 | |||||||||||||||||
6 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
6. INCOME TAXES
As a rate regulated utility company, the Company recovers income taxes from its ratepayers based on estimated current income tax expense in respect of its regulated business. The amounts of deferred income taxes related to regulated operations which are considered to be more likely-than-not to be recoverable from, or refundable to, ratepayers in future periods are recognized as deferred income tax regulatory assets or liabilities, with an offset to deferred income tax recovery or expense, respectively. The Company’s consolidated tax expense or recovery for the period includes all current and deferred income tax expenses for the period net of the regulated accounting offset to deferred income tax expense arising from temporary differences to be recovered from, or refunded to, customers in future rates. Thus, the Company’s income tax expense or recovery differs from the amount that would have been recorded using the combined Canadian federal and Ontario statutory income tax rate.
The reconciliation between the statutory and the effective tax rates is provided as follows:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||
(millions of dollars) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
| Income before income tax expense | 396 | 410 | 1,076 | 1,126 | ||||||||||||||||
Income tax expense at statutory rate of 26.5% (2022 - 26.5%) | 105 | 108 | 285 | 298 | ||||||||||||||||
| Increase (decrease) resulting from: | ||||||||||||||||||||
| Net temporary differences recoverable in future rates charged to customers: | ||||||||||||||||||||
| Capital cost allowance in excess of depreciation and amortization | (42) | (22) | (103) | (74) | ||||||||||||||||
Impact of DTA Implementation Decision1 | — | 24 | 48 | 72 | ||||||||||||||||
| Overheads capitalized for accounting but deducted for tax purposes | (17) | (7) | (35) | (20) | ||||||||||||||||
| Interest capitalized for accounting but deducted for tax purposes | (7) | (5) | (16) | (14) | ||||||||||||||||
| Pension and post-retirement benefit contributions in excess of pension expense | 1 | 2 | (4) | (8) | ||||||||||||||||
| Environmental expenditures | (2) | — | (6) | (7) | ||||||||||||||||
| Other | (2) | — | (5) | (1) | ||||||||||||||||
| Net temporary differences attributable to regulated business | (69) | (8) | (121) | (52) | ||||||||||||||||
| Net permanent differences | — | — | 1 | 1 | ||||||||||||||||
| Total income tax expense | 36 | 100 | 165 | 247 | ||||||||||||||||
| Effective income tax rate | 9.1 | % | 24.4 | % | 15.3 | % | 21.9 | % | ||||||
1 Pursuant to the DTA Implementation Decision, the amounts represent the recovery of DTA amounts that were previously shared with ratepayers which ended June 30, 2023. See Note 12 - Regulatory Assets and Liabilities.
7. OTHER COMPREHENSIVE INCOME (LOSS)
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||
(millions of dollars) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
Gain (loss) on cash flow hedges (interest-rate swap agreements) (Notes 5, 17)1 | — | 2 | (4) | 12 | ||||||||||||||||
Gain (loss) on transfer of other post-employment benefits (OPEB) (Note 18) | — | — | (8) | 2 | ||||||||||||||||
| — | 2 | (12) | 14 | |||||||||||||||||
1 No realized gain for the three months ended September 30, 2023 (2022 - after-tax $1 million gain and before-tax $2 million gain), and $2 million after-tax realized gain (2022 - $1 million loss) and $2 million before-tax realized gain (2022 - $2 million loss) on cash flow hedges reclassified to financing charges for nine months ended September 30, 2023.
8. ACCOUNTS RECEIVABLE
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||
| Accounts receivable - billed | 388 | 357 | ||||||
| Accounts receivable - unbilled | 418 | 473 | ||||||
| Accounts receivable, gross | 806 | 830 | ||||||
| Allowance for doubtful accounts | (58) | (63) | ||||||
| Accounts receivable, net | 748 | 767 | ||||||
7 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
The following table shows the movements in the allowance for doubtful accounts for the nine months ended September 30, 2023 and the year ended December 31, 2022:
(millions of dollars) | September 30, 2023 | December 31, 2022 | |||||||||
| Allowance for doubtful accounts – beginning | (63) | (56) | |||||||||
| Write-offs | 14 | 25 | |||||||||
| Additions to allowance for doubtful accounts | (9) | (32) | |||||||||
| Allowance for doubtful accounts – ending | (58) | (63) | |||||||||
9. OTHER CURRENT ASSETS
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||
| Prepaid expenses and other assets | 82 | 62 | ||||||
Regulatory assets (Note 12) | 67 | 189 | ||||||
| Materials and supplies | 34 | 25 | ||||||
Derivative assets (Note 17) | — | 5 | ||||||
| 183 | 281 | |||||||
10. PROPERTY, PLANT AND EQUIPMENT
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||||||||
| Property, plant and equipment | 38,396 | 37,218 | ||||||||||||
| Less: accumulated depreciation | (13,821) | (13,371) | ||||||||||||
| 24,575 | 23,847 | |||||||||||||
| Construction in progress | 1,723 | 1,230 | ||||||||||||
| 26,298 | 25,077 | |||||||||||||
11. INTANGIBLE ASSETS
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||||||||
| Intangible assets | 1,344 | 1,184 | ||||||||||||
| Less: accumulated depreciation | (799) | (743) | ||||||||||||
| 545 | 441 | |||||||||||||
| Development in progress | 100 | 167 | ||||||||||||
| 645 | 608 | |||||||||||||
8 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
12. REGULATORY ASSETS AND LIABILITIES
Regulatory assets and liabilities arise as a result of the rate-setting process. Hydro One has recorded the following regulatory assets and liabilities:
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||
| Regulatory assets: | ||||||||
| Deferred income tax regulatory asset | 2,961 | 2,724 | ||||||
| Post-retirement and post-employment benefits - non-service cost | 105 | 141 | ||||||
| Environmental | 67 | 93 | ||||||
| Rural and Remote Rate Protection variance | 29 | 25 | ||||||
| Stock-based compensation | 28 | 34 | ||||||
| Conservation and Demand Management (CDM) variance | 5 | 25 | ||||||
| Deferred tax asset sharing | 5 | 73 | ||||||
| Other | 53 | 38 | ||||||
| Total regulatory assets | 3,253 | 3,153 | ||||||
| Less: current portion | (67) | (189) | ||||||
| 3,186 | 2,964 | |||||||
| Regulatory liabilities: | ||||||||
| Post-retirement and post-employment benefits | 506 | 506 | ||||||
| Pension benefit regulatory liability | 476 | 358 | ||||||
| Distribution rate riders | 112 | 2 | ||||||
| Earnings sharing mechanism deferral (ESM) | 62 | 75 | ||||||
| Retail settlement variance account (RSVA) | 57 | 53 | ||||||
| Tax rule changes variance | 38 | 100 | ||||||
| External revenue variance | 28 | 50 | ||||||
| Asset removal costs cumulative variance | 28 | 41 | ||||||
| Capitalized overhead tax variance | 26 | 16 | ||||||
| Pension cost differential | 9 | 26 | ||||||
| Deferred income tax regulatory liability | 4 | 4 | ||||||
| Green energy expenditure variance | — | 5 | ||||||
| Other | 34 | 26 | ||||||
| Total regulatory liabilities | 1,380 | 1,262 | ||||||
| Less: current portion | (73) | (139) | ||||||
| 1,307 | 1,123 | |||||||
Deferred Tax Asset Sharing
At September 30, 2023, Hydro One has a regulatory asset of $5 million (December 31, 2022 - $73 million) representing the interest accrued within the Transmission Business on the cumulative DTA amounts shared with ratepayers over the 2017 to 2021 period. At December 31, 2022, the regulatory asset of $73 million consists of $24 million and $49 million for Hydro One Networks’ distribution and transmission segments, respectively. The principal balance of this regulatory account was fully recovered as at June 30, 2023. The Company will seek recovery of the remaining interest balance in the next rate application.
Post-Retirement and Post-Employment Benefits - Non-Service Cost
This balance includes the rider established for the disposition of the approved balances from Hydro One Networks' JRAP for 2023-2027 rates.
Distribution Rate Riders
As part of the decision received in November 2022 for Hydro One Networks' JRAP, the OEB approved the disposition of certain deferral and variance account balances as at December 31, 2020, including accrued interest. These approved balances, including those for RSVA, tax rule changes variance, pension cost differential, and ESM were accumulated in distribution rate riders which makes up the majority of this balance. The amounts are being disposed of over a period of 36 months ending December 31, 2025.
9 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
13. OTHER LONG-TERM ASSETS
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||
Deferred pension assets (Note 18) | 476 | 358 | ||||||
| Right-of-Use assets | 49 | 56 | ||||||
| Investments | 41 | 35 | ||||||
| Other long-term assets | 13 | 12 | ||||||
| 579 | 461 | |||||||
14. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||
| Accrued liabilities | 835 | 683 | ||||||
| Accounts payable | 241 | 295 | ||||||
| Accrued interest | 147 | 120 | ||||||
Regulatory liabilities (Note 12) | 73 | 139 | ||||||
| Environmental liabilities | 20 | 25 | ||||||
| Lease obligations | 11 | 12 | ||||||
| 1,327 | 1,274 | |||||||
15. OTHER LONG-TERM LIABILITIES
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||
Post-retirement and post-employment benefit liability (Note 18) | 1,415 | 1,376 | ||||||
| Environmental liabilities | 47 | 68 | ||||||
| Lease obligations | 37 | 43 | ||||||
| Asset retirement obligations | 30 | 28 | ||||||
| Other long-term liabilities | 32 | 30 | ||||||
| 1,561 | 1,545 | |||||||
16. DEBT AND CREDIT AGREEMENTS
Short-Term Notes and Credit Facilities
Hydro One meets its short-term liquidity requirements in part through the issuance of commercial paper under Hydro One Inc.’s Commercial Paper Program which has a maximum authorized amount of $2,300 million. These short-term notes are denominated in Canadian dollars with varying maturities up to 365 days. The Commercial Paper Program is supported by Hydro One Inc.’s revolving standby credit facilities totalling $2,300 million.
At September 30, 2023, Hydro One’s consolidated committed, unsecured, and revolving credit facilities (Operating Credit Facilities) totalling $2,550 million included Hydro One's credit facilities of $250 million and Hydro One Inc.'s credit facilities of $2,300 million. In January 2022, Hydro One successfully amended its Operating Credit Facilities to incorporate environmental, social and governance targets. On June 1, 2023, the maturity date for the Operating Credit Facilities was extended from 2027 to 2028. At September 30, 2023, no amounts have been drawn on the Operating Credit Facilities.
The Company may use the Operating Credit Facilities for working capital and general corporate purposes. If used, interest on the Operating Credit Facilities would apply based on Canadian benchmark rates. The obligation of each lender to make any credit extension under its credit facility is subject to various conditions including that no event of default has occurred or would result from such credit extension.
Subsidiary Debt Guarantee
Hydro One Holdings Limited (HOHL) is an indirect wholly-owned subsidiary of Hydro One that may offer and sell debt securities. Any debt securities issued by HOHL are fully and unconditionally guaranteed by the Company. At September 30, 2023, no debt securities have been issued by HOHL.
10 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
Long-Term Debt
The following table presents long-term debt outstanding at September 30, 2023 and December 31, 2022:
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||
| Hydro One Inc. long-term debt (a) | 14,120 | 13,245 | ||||||
| Hydro One long-term debt (b) | 425 | 425 | ||||||
| HOSSM long-term debt (c) | — | 133 | ||||||
| 14,545 | 13,803 | |||||||
| Add: Net unamortized debt premiums | 8 | 8 | ||||||
| Less: Unamortized deferred debt issuance costs | (51) | (48) | ||||||
| Total long-term debt | 14,502 | 13,763 | ||||||
| Less: Long-term debt payable within one year | (700) | (733) | ||||||
| 13,802 | 13,030 | |||||||
(a) Hydro One Inc. long-term debt
At September 30, 2023, long-term debt of $14,120 million (December 31, 2022 - $13,245 million) was outstanding, the majority of which was issued under Hydro One Inc.’s Medium Term Note (MTN) Program. In June 2022, Hydro One Inc. filed a short form base shelf prospectus in connection with its MTN Program, which has a maximum authorized principal amount of notes issuable of $4,000 million and expires in July 2024. At September 30, 2023, $1,775 million remained available for issuance under the MTN Program prospectus. During the three and nine months ended September 30, 2023 $425 million and $1,475 million long-term debt was issued, respectively, (2022 - $nil) and $600 million long-term debt was repaid (2022 - $600 million).
See Note 28 - Subsequent Events for long-term debt issued under Hydro One Inc.'s MTN Program subsequent to September 30, 2023.
(b) Hydro One long-term debt
At September 30, 2023, long-term debt of $425 million (December 31, 2022 - $425 million) was outstanding under Hydro One's short form base shelf prospectus (Universal Base Shelf Prospectus). On August 15, 2022, Hydro One filed the Universal Base Shelf Prospectus with securities regulatory authorities in Canada. The Universal Base Shelf Prospectus allows Hydro One to offer, from time to time in one or more public offerings, up to $2,000 million of debt, equity or other securities, or any combination thereof, during the 25-month period ending on September 16, 2024. At September 30, 2023, no securities have been issued under the Universal Base Shelf Prospectus. During the three and nine months ended September 30, 2023 and 2022, no long-term debt was issued or repaid.
(c) HOSSM long-term debt
On June 16, 2023, the HOSSM long-term debt matured and was fully repaid, leaving no debt outstanding at September 30, 2023 (December 31, 2022 - $133 million). During the three months ended September 30, 2023 and 2022, no debt was issued or repaid. During the nine months ended September 30, 2023, $131 million of long-term debt was repaid (2022 - $1 million) and no long-term debt was issued.
Principal and Interest Payments
At September 30, 2023, future principal repayments, interest payments, and related weighted-average interest rates were as follows:
| Long-Term Debt Principal Repayments | Interest Payments | Weighted-Average Interest Rate | |||||||||
| (millions of dollars) | (millions of dollars) | (%) | |||||||||
| Year 1 | 700 | 589 | 2.5 | ||||||||
| Year 2 | 750 | 568 | 2.3 | ||||||||
| Year 3 | 925 | 547 | 4.0 | ||||||||
| Year 4 | — | 516 | — | ||||||||
| Year 5 | 1,175 | 495 | 3.6 | ||||||||
| 3,550 | 2,715 | 3.3 | |||||||||
| Years 6-10 | 3,450 | 2,061 | 4.0 | ||||||||
| Thereafter | 7,545 | 3,684 | 4.5 | ||||||||
| 14,545 | 8,460 | 4.0 | |||||||||
11 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
17. FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Non-Derivative Financial Assets and Liabilities
At September 30, 2023 and December 31, 2022, the Company’s carrying amounts of cash and cash equivalents, accounts receivable, due from related parties, short-term notes payable, accounts payable, and due to related parties are representative of fair value due to the short-term nature of these instruments.
Fair Value Measurements of Long-Term Debt
The fair values and carrying values of the Company’s long-term debt at September 30, 2023 and December 31, 2022 are as follows:
September 30, 2023 | December 31, 2022 | |||||||||||||
As at (millions of dollars) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||
| Long-term debt, including current portion | 14,502 | 13,190 | 13,763 | 13,026 | ||||||||||
Fair Value Measurements of Derivative Instruments
Fair Value Hedges
At September 30, 2023 and December 31, 2022, Hydro One Inc. had no fair value hedges.
Cash Flow Hedges
At September 30, 2023 and December 31, 2022, Hydro One Inc. had $nil and a total of $800 million, respectively, in pay-fixed, receive-floating interest-rate swap agreements designated as cash flow hedges. These cash flow hedges were intended to offset the variability of interest rates on the issuances of short-term commercial paper between January 9, 2020 and March 9, 2023.
At September 30, 2023 and December 31, 2022, the Company had no derivative instruments classified as undesignated contracts.
Fair Value Hierarchy
The fair value hierarchy of financial assets and liabilities at September 30, 2023 and December 31, 2022 is as follows:
As at September 30, 2023 (millions of dollars) | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Liabilities: | |||||||||||||||||
Long-term debt, including current portion | 14,502 | 13,190 | — | 13,190 | — | ||||||||||||
As at December 31, 2022 (millions of dollars) | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets: | |||||||||||||||||
Derivative instruments (Note 9) | |||||||||||||||||
| Cash flow hedges, including current portion | 5 | 5 | — | 5 | — | ||||||||||||
| Liabilities: | |||||||||||||||||
Long-term debt, including current portion | 13,763 | 13,026 | — | 13,026 | — | ||||||||||||
The fair value of the interest rate swaps designated as cash flow hedges is determined using a discounted cash flow method based on period-end swap yield curves.
The fair value of the long-term debt is based on unadjusted period-end market prices for the same or similar debt of the same remaining maturities.
There were no transfers between any of the fair value levels during the nine-months ended September 30, 2023 or the year ended December 31, 2022.
Risk Management
Exposure to market risk, credit risk and liquidity risk arises in the normal course of the Company’s business.
Market Risk
Market risk refers primarily to the risk of loss which results from changes in values, foreign exchange rates and interest rates. The Company is exposed to fluctuations in interest rates, as its regulated return on equity is derived using a formulaic approach that takes anticipated interest rates into account. The Company is not currently exposed to material commodity price risk or material foreign exchange risk.
12 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
The Company uses a combination of fixed and variable-rate debt to manage the mix of its debt portfolio. The Company also uses derivative financial instruments to manage interest-rate risk. The Company may utilize interest-rate swaps designated as fair value hedges as a means to manage its interest rate exposure to achieve a lower cost of debt. The Company may also utilize interest-rate derivative instruments, such as cash flow hedges, to manage its exposure to short-term interest rates or to lock in interest-rate levels on forecasted financing.
A hypothetical 100 basis points increase in interest rates associated with variable-rate debt would have resulted in an increase to financing charges for the three and nine months ended September 30, 2023 of $3 million and $7 million, respectively. There would have been no significant decrease in Hydro One’s net income for the three and nine months ended September 30, 2022.
For derivative instruments that are designated and qualify as cash flow hedges, the unrealized gain or loss, after tax, on the derivative instrument is recorded as OCI or OCL and is reclassified to results of operations in the same period during which the hedged transaction affects results of operations. During the three months ended September 30, 2023, there was a $nil after-tax change (2022 - $3 million gain), $nil before-tax change (2022 - $4 million gain), recorded in OCI, and a $nil after-tax realized gain (2022 - $1 million gain), $nil before-tax gain (2022 - $2 million gain), reclassified to financing charges. During the nine months ended September 30, 2023, a $2 million after-tax change (2022 - $11 million gain), $3 million before-tax change (2022 - $15 million gain), was recorded in OCI, and a $2 million after-tax realized gain (2022 - $1 million loss), $2 million before-tax gain (2022 - $2 million loss), was reclassified to financing charges. This resulted in an accumulated other comprehensive income (AOCI) of $nil related to cash flow hedges at September 30, 2023 (December 31, 2022 - $4 million).
The Pension Plan manages market risk by diversifying investments in accordance with the Pension Plan’s Statement of Investment Policies and Procedures. Interest rate risk arises from the possibility that changes in interest rates will affect the fair value of the Pension Plan’s financial instruments. In addition, changes in interest rates can also impact discount rates which impact the valuation of the pension and post-retirement and post-employment liabilities. Currency risk is the risk that the value of the Pension Plan’s financial instruments will fluctuate due to changes in foreign currencies relative to the Canadian dollar. Other price risk is the risk that the value of the Pension Plan’s investments in equity securities will fluctuate as a result of changes in market prices, other than those arising from interest risk or currency risk. All three factors may contribute to changes in values of the Pension Plan investments. See Note 18 - Pension and Post-Retirement and Post-Employment Benefits for further details.
Credit Risk
Financial assets create a risk that a counterparty will fail to discharge an obligation, causing a financial loss. At September 30, 2023 and 2022, there were no significant concentrations of credit risk with respect to any class of financial assets. The Company’s revenue is earned from a broad base of customers. As a result, Hydro One did not earn a material amount of revenue from any single customer. At September 30, 2023 and 2022, there was no material accounts receivable balance due from any single customer.
At September 30, 2023, the Company’s allowance for doubtful accounts was $58 million (December 31, 2022 - $63 million). The allowance for doubtful accounts reflects the Company's Current Expected Credit Loss (CECL) for all accounts receivable balances, which are based on historical overdue balances, customer payments and write-offs. At September 30, 2023, approximately 5% (December 31, 2022 - 4%) of the Company’s net accounts receivable were outstanding for more than 60 days.
Hydro One manages its counterparty credit risk through various techniques including (i) entering into transactions with highly rated counterparties, (ii) limiting total exposure levels with individual counterparties, (iii) entering into master agreements which enable net settlement and the contractual right of offset, and (iv) monitoring the financial condition of counterparties. The Company monitors current credit exposure to counterparties on both an individual and an aggregate basis. The Company’s credit risk for accounts receivable is limited to the carrying amounts on the consolidated balance sheets.
Derivative financial instruments result in exposure to credit risk since there is a risk of counterparty default. The maximum credit exposure of derivative contracts, before collateral, is represented by the fair value of contracts in an asset position at the reporting date. At September 30, 2023, there was no counterparty party risk. At September 30, 2022, the counterparty credit risk exposure on the fair value of these interest-rate swap contracts was not material.
The Pension Plan manages its counterparty credit risk with respect to bonds by investing in investment-grade corporate and government bonds and with respect to derivative instruments by transacting only with highly rated financial institutions and by ensuring that exposure is diversified across counterparties.
Liquidity Risk
Liquidity risk refers to the Company’s ability to meet its financial obligations as they come due. Hydro One meets its short-term operating liquidity requirements using cash and cash equivalents on hand, funds from operations, the issuance of commercial paper, and the Operating Credit Facilities. The short-term liquidity under the commercial paper program, the Operating Credit Facilities, and anticipated levels of funds from operations are expected to be sufficient to fund the Company’s operating requirements.
At September 30, 2023, $1,775 million remained available for issuance under the MTN Program prospectus, and $2,000 million remained available for issuance under the Universal Base Shelf Prospectus.
13 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
On November 22, 2022, HOHL filed a short form base shelf prospectus (US Debt Shelf Prospectus) with securities regulatory authorities in Canada and the US to replace a previous prospectus that would otherwise have expired in January 2023. The US Debt Shelf Prospectus allows HOHL to offer, from time to time in one or more public offerings, up to US$3,000 million of debt securities, unconditionally guaranteed by Hydro One, expiring in December 2024. At September 30, 2023, no securities have been issued under the US Debt Shelf Prospectus.
The Pension Plan’s short-term liquidity is provided through cash and cash equivalents, contributions, investment income and proceeds from investment transactions. In the event that investments must be sold quickly to meet current obligations, the majority of the Pension Plan’s assets are invested in securities that are traded in an active market and can be readily disposed of as liquidity needs arise.
18. PENSION AND POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
The following table provides the components of the net periodic benefit (recovery) costs for the three and nine months ended September 30, 2023 and 2022:
Pension Benefits | Post-Retirement and Post-Employment Benefits | |||||||||||||
Three months ended September 30 (millions of dollars) | 2023 | 2022 | 2023 | 2022 | ||||||||||
| Current service cost | 24 | 53 | 13 | 16 | ||||||||||
| Interest cost | 98 | 71 | 19 | 15 | ||||||||||
Expected return on plan assets, net of expenses1 | (141) | (127) | — | — | ||||||||||
| Amortization of prior service (credit) cost | (1) | 1 | 3 | 2 | ||||||||||
| Amortization of actuarial (gains) losses | (4) | 15 | (7) | — | ||||||||||
| Net periodic benefit (recovery) costs | (24) | 13 | 28 | 33 | ||||||||||
Charged to results of operations2 | 1 | 10 | 14 | 17 | ||||||||||
Pension Benefits | Post-Retirement and Post-Employment Benefits | |||||||||||||
Nine months ended September 30 (millions of dollars) | 2023 | 2022 | 2023 | 2022 | ||||||||||
| Current service cost | 74 | 161 | 39 | 48 | ||||||||||
| Interest cost | 296 | 213 | 56 | 45 | ||||||||||
Expected return on plan assets, net of expenses1 | (425) | (381) | — | — | ||||||||||
| Amortization of prior service (credit) cost | (2) | 2 | 7 | 9 | ||||||||||
| Amortization of actuarial (gains) losses | (14) | 45 | (21) | 1 | ||||||||||
| Net periodic benefit (recovery) costs | (71) | 40 | 81 | 103 | ||||||||||
Charged to results of operations2 | 14 | 26 | 50 | 58 | ||||||||||
1 The expected long-term rate of return on pension plan assets for the year ending December 31, 2023 is 7.00% (2022 - 6.00%).
2 The Company accounts for pension costs consistent with their inclusion in OEB-approved rates. During the three and nine months ended September 30, 2023, pension costs of $2 million (2022 - $27 million) and $48 million (2022 - $66 million), respectively, were attributed to labour, of which $1 million (2022 - $10 million) and $14 million (2022 - $26 million), respectively, was charged to operations, and $1 million (2022 - $17 million) and $34 million (2022 - $40 million), respectively, was capitalized as part of the cost of property, plant and equipment and intangible assets.
Transfers from Other Plans
Hydro One and Inergi LP agreed to transfer the employment of certain Inergi LP employees (Transferred Employees) to Hydro One Networks. Employees related to the Information Technology Operations, Finance and Accounting, Payroll, Source to Pay, Settlements and certain Shared Services functions transferred over a period ending January 1, 2022. The Transferred Employees who are participants in the Inergi LP Pension Plan (Inergi Plan) became participants in the Hydro One Pension Plan (the Plan) upon transfer to Hydro One Networks. On March 2, 2023, the assets and liabilities of the Inergi Plan were transferred to the Plan. The value of assets and liabilities of the Inergi Plan transferred to the Plan were approximately $378 million and $333 million, respectively, at the date of transfer. Inergi and Hydro One Networks also agreed to transfer OPEB liabilities related to the Transferred Employees to Hydro One’s post-retirement and post-employment benefit plans, which occurred on the date of transfer of each group of Transferred Employees.
The transfer of Finance and Accounting, Payroll and certain Shared Services functions occurred on January 1, 2022 and the transfer of the OPEB liability of $9 million related to these Employees was completed in the first quarter of 2022. The liability was recorded as a post-retirement and post-employment benefit liability with an offset to OCL, and cash totalling $10 million was transferred to Hydro One and recorded as an asset with an offset to OCI. Both the OCI resulting from the transfer of the cash asset and the OCL resulting from the transfer of the other post-retirement benefit liability are being recognized in net income over
14 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
the expected average remaining service lifetime (EARSL) of the Finance and Accounting, Payroll and certain Shared Services employees.
Eligible Inergi retirees were transferred to the Plan on June 1, 2023. The transfer of the OPEB liability of $15 million related to these retirees was completed in the second quarter of 2023. The liability was recorded as a post-retirement and post-employment benefit liability with an offset to OCL, and cash totalling $3 million was transferred to Hydro One, in accordance with the agreement. Both the OCI resulting from the transfer of the cash asset and the OCL resulting from the transfer of OPEB liabilities are being recognized in net income over the expected average remaining life expectancy of the Retirees and Other Former Members employees.
19. SHARE CAPITAL
Common Shares
The Company is authorized to issue an unlimited number of common shares. At September 30, 2023, the Company had 599,076,993 (December 31, 2022 - 598,714,704) common shares issued and outstanding.
Preferred Shares
The Company is authorized to issue an unlimited number of preferred shares, issuable in series. At September 30, 2023 and December 31, 2022, the Company had no preferred shares issued and outstanding.
20. DIVIDENDS
During the three months ended September 30, 2023, common share dividends in the amount of $177 million (2022 - $167 million) were declared and paid.
During the nine months ended September 30, 2023, common share dividends in the amount of $522 million (2022 - $494 million) were declared and paid. See Note 28 - Subsequent Events for dividends declared subsequent to September 30, 2023.
21. EARNINGS PER COMMON SHARE
Basic earnings per common share (EPS) is calculated by dividing net income attributable to common shareholders of Hydro One by the weighted-average number of common shares outstanding.
Diluted EPS is calculated by dividing net income attributable to common shareholders of Hydro One by the weighted-average number of common shares outstanding adjusted for the effects of potentially dilutive stock-based compensation plans, including the share grant plans and the Long-term Incentive Plan (LTIP), which are calculated using the treasury stock method.
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||
Net income attributable to common shareholders (millions of dollars) | 357 | 307 | 904 | 872 | ||||||||||
| Weighted-average number of shares | ||||||||||||||
| Basic | 599,076,945 | 598,714,580 | 598,956,102 | 598,583,491 | ||||||||||
| Effect of dilutive stock-based compensation plans | 1,500,464 | 1,888,712 | 1,617,264 | 2,038,846 | ||||||||||
| Diluted | 600,577,409 | 600,603,292 | 600,573,366 | 600,622,337 | ||||||||||
| EPS | ||||||||||||||
| Basic | $0.60 | $0.51 | $1.51 | $1.46 | ||||||||||
| Diluted | $0.59 | $0.51 | $1.51 | $1.45 | ||||||||||
15 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
22. STOCK-BASED COMPENSATION
Share Grant Plans
Hydro One has two share grant plans (Share Grant Plans), one for the benefit of certain members of the Power Workers’ Union (the PWU Share Grant Plan) and one for the benefit of certain members of the Society of United Professionals (the Society Share Grant Plan). A summary of share grant activity under the Share Grant Plans during the three and nine months ended September 30, 2023 and 2022 is presented below:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||
| (number of share grants) | 2023 | 2022 | 2023 | 2022 | ||||||||||
| Share grants outstanding - beginning | 1,827,666 | 2,273,679 | 2,189,616 | 2,662,000 | ||||||||||
| Granted | 339 | — | 339 | — | ||||||||||
Vested and issued1 | (339) | — | (362,289) | (388,321) | ||||||||||
| Share grants outstanding - ending | 1,827,666 | 2,273,679 | 1,827,666 | 2,273,679 | ||||||||||
1 During the nine months ended September 30, 2023, Hydro One issued 362,289 (2022 - 388,321) common shares from treasury to eligible employees in accordance with provisions of the PWU and the Society Share Grant Plans.
Directors' Deferred Share Unit (DSU) Plan
A summary of DSU awards activity under the Directors' DSU Plan during the three and nine months ended September 30, 2023 and 2022 is presented below:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||
| (number of DSUs) | 2023 | 2022 | 2023 | 2022 | ||||||||||
| DSUs outstanding - beginning | 92,418 | 90,999 | 99,939 | 80,813 | ||||||||||
| Granted | 5,303 | 4,606 | 27,886 | 14,792 | ||||||||||
| Paid | — | — | (30,104) | — | ||||||||||
| DSUs outstanding - ending | 97,721 | 95,605 | 97,721 | 95,605 | ||||||||||
At September 30, 2023, a liability of $3 million (December 31, 2022 - $4 million) related to Directors' DSUs has been recorded at the closing price of the Company's common shares of $34.58 (December 31, 2022 - $36.27). This liability is included in other long-term liabilities on the consolidated balance sheets.
Management DSU Plan
A summary of DSU awards activity under the Management DSU Plan during the three and nine months ended September 30, 2023 and 2022 is presented below:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||
(number of DSUs) | 2023 | 2022 | 2023 | 2022 | ||||||||||
| DSUs outstanding - beginning | 138,081 | 125,866 | 118,505 | 90,240 | ||||||||||
| Granted | 1,063 | 1,013 | 20,639 | 36,639 | ||||||||||
| Paid | (5,778) | — | (5,778) | — | ||||||||||
| DSUs outstanding - ending | 133,366 | 126,879 | 133,366 | 126,879 | ||||||||||
At September 30, 2023, a liability of $5 million (December 31, 2022 - $4 million) related to Management DSUs has been recorded at the closing price of the Company's common shares of $34.58 (December 31, 2022 - $36.27). This liability is included in other long-term liabilities on the consolidated balance sheets.
16 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
Long-term Incentive Plan (LTIP)
Performance Share Units (PSU) and Restricted Share Units (RSU)
A summary of PSU and RSU awards activity under the LTIP during the three and nine months ended September 30, 2023 and 2022 is presented below:
Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||||||||
| PSUs | RSUs | PSUs | RSUs | |||||||||||||||||||||||
| (number of units) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||
| Units outstanding - beginning | 142,067 | — | 188,013 | — | — | — | — | — | ||||||||||||||||||
| Granted | 1,007 | — | 3,608 | — | 143,074 | — | 191,621 | — | ||||||||||||||||||
| Forfeited | (1,312) | — | (2,623) | — | (1,312) | — | (2,623) | — | ||||||||||||||||||
| Units outstanding - ending | 141,762 | — | 188,998 | — | 141,762 | — | 188,998 | — | ||||||||||||||||||
The grant date total fair value of the awards granted during the three and nine months ended September 30, 2023 was $nil and $12 million (2022 – $nil and $nil), respectively. The compensation expense related to these awards recognized by the Company during the three and nine months ended September 30, 2023 was $1 million and $2 million (2022 – $nil and $nil), respectively.
Society RSU Plan
A summary of RSU awards activity under the Society RSU Plan during the three and nine months ended September 30, 2023 and 2022 is presented below:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||
(number of RSUs) | 2023 | 2022 | 2023 | 2022 | ||||||||||
| RSUs outstanding - beginning | — | 36,556 | 36,124 | 71,053 | ||||||||||
| Granted | — | — | — | 1,667 | ||||||||||
| Vested and issued | — | — | (33,031) | (34,346) | ||||||||||
| Settled | — | — | (2,964) | (1,106) | ||||||||||
| Forfeited | — | — | (129) | (712) | ||||||||||
| RSUs outstanding - ending | — | 36,556 | — | 36,556 | ||||||||||
23. RELATED PARTY TRANSACTIONS
The Province is a shareholder of Hydro One with approximately 47.1% ownership at September 30, 2023. The IESO, Ontario Power Generation Inc. (OPG), Ontario Electricity Financial Corporation (OEFC), and the OEB are related parties to Hydro One because they are controlled or significantly influenced by the Ministry of Energy. Ontario Charging Network (OCN LP) is a joint-venture limited partnership between OPG and a subsidiary of Hydro One. The following is a summary of the Company’s related party transactions during the three and nine months ended September 30, 2023 and 2022:
(millions of dollars) | Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| Related Party | Transaction | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Province | Dividends paid | 83 | 79 | 246 | 233 | ||||||||||||
| IESO | Power purchased | 451 | 553 | 1,596 | 1,739 | ||||||||||||
| Revenues for transmission services | 589 | 558 | 1,694 | 1,586 | |||||||||||||
| Amounts related to electricity rebates | 199 | 259 | 628 | 803 | |||||||||||||
| Distribution revenues related to rural rate protection | 63 | 62 | 187 | 183 | |||||||||||||
| Distribution revenues related to supply of electricity to remote northern communities | 12 | 8 | 35 | 26 | |||||||||||||
| Distribution revenues related to Wataynikaneyap Power LP | 14 | — | 41 | — | |||||||||||||
| Funding received related to CDM programs | — | 2 | 1 | 2 | |||||||||||||
OPG1 | Power purchased | 5 | 1 | 12 | 12 | ||||||||||||
| Revenues related to provision of services and supply of electricity | 2 | 2 | 6 | 6 | |||||||||||||
| Capital contribution received from OPG | 1 | 3 | 4 | 5 | |||||||||||||
| Costs related to the purchase of services | — | 1 | 1 | 2 | |||||||||||||
| OEFC | Power purchased from power contracts administered by the OEFC | — | 1 | 1 | 2 | ||||||||||||
| OEB | OEB fees | 3 | 2 | 9 | 7 | ||||||||||||
OCN LP2 | Investment in OCN LP | — | 3 | — | 4 | ||||||||||||
1 OPG has provided a $2.5 million guarantee to Hydro One related to the OCN Guarantee. See Note 26 - Commitments for details related to the OCN Guarantee.
2 OCN LP owns and operates electric vehicle fast charging stations across Ontario, under the Ivy Charging Network brand.
Sales to and purchases from related parties are based on the requirements of the OEB’s Affiliate Relationships Code. Outstanding balances at period end are interest-free and settled in cash. Invoices are issued monthly, and amounts are due and paid on a monthly basis.
17 | | |||||||
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
24. CONSOLIDATED STATEMENTS OF CASH FLOWS
The changes in non-cash balances related to operations consist of the following:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||
(millions of dollars) | 2023 | 2022 | 2023 | 2022 | ||||||||||
| Accounts receivable | 2 | (59) | 19 | (45) | ||||||||||
| Due from related parties | (3) | 24 | (17) | 5 | ||||||||||
Materials and supplies (Note 9) | 8 | (2) | (9) | (3) | ||||||||||
Prepaid expenses and other assets (Note 9) | 1 | (2) | (20) | (15) | ||||||||||
Other long-term assets (Note 13) | 1 | (1) | (1) | (2) | ||||||||||
| Accounts payable | (53) | 15 | (77) | (37) | ||||||||||
Accrued liabilities (Note 14) | 37 | (34) | 152 | 54 | ||||||||||
| Due to related parties | (1) | 22 | (176) | (117) | ||||||||||
Accrued interest (Note 14) | 8 | 20 | 27 | 8 | ||||||||||
Long-term accounts payable and other long-term liabilities (Note 15) | 1 | (3) | 2 | 4 | ||||||||||
| Post-retirement and post-employment benefit liability | 17 | 7 | 60 | 41 | ||||||||||
| 18 | (13) | (40) | (107) | |||||||||||
Capital Expenditures
The following tables reconcile investments in property, plant and equipment and intangible assets and the amounts presented in the consolidated statements of cash flows for the three and nine months ended September 30, 2023 and 2022. The reconciling items include net change in accruals and capitalized depreciation.
| Three months ended September 30, 2023 | Nine months ended September 30, 2023 | ||||||||||||||||||||||
(millions of dollars) | Property, Plant and Equipment | Intangible Assets | Total | Property, Plant and Equipment | Intangible Assets | Total | |||||||||||||||||
| Capital investments | (599) | (39) | (638) | (1,690) | (96) | (1,786) | |||||||||||||||||
| Reconciling items | 18 | 3 | 21 | 47 | 1 | 48 | |||||||||||||||||
| Cash outflow for capital expenditures | (581) | (36) | (617) | (1,643) | (95) | (1,738) | |||||||||||||||||
| Three months ended September 30, 2022 | Nine months ended September 30, 2022 | ||||||||||||||||||||||
(millions of dollars) | Property, Plant and Equipment | Intangible Assets | Total | Property, Plant and Equipment | Intangible Assets | Total | |||||||||||||||||
| Capital investments | (473) | (28) | (501) | (1,474) | (88) | (1,562) | |||||||||||||||||
| Reconciling items | (5) | — | (5) | 22 | 7 | 29 | |||||||||||||||||
| Cash outflow for capital expenditures | (478) | (28) | (506) | (1,452) | (81) | (1,533) | |||||||||||||||||
Supplementary Information
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||
(millions of dollars) | 2023 | 2022 | 2023 | 2022 | ||||||||||
| Net interest paid | 149 | 110 | 421 | 374 | ||||||||||
| Income taxes paid | 10 | 4 | 43 | 26 | ||||||||||
25. CONTINGENCIES
Hydro One is involved in various lawsuits and claims in the normal course of business. In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
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HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
26. COMMITMENTS
The following table presents a summary of Hydro One’s commitments under outsourcing and other agreements due in the next five years and thereafter:
As at September 30, 2023 (millions of dollars) | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Thereafter | ||||||||||||||
| Outsourcing and other agreements | 84 | 56 | 25 | 6 | 6 | 13 | ||||||||||||||
| Capital agreements | 4 | 45 | 75 | — | — | — | ||||||||||||||
| Long-term software/meter agreement | 2 | 11 | 4 | 1 | 1 | 3 | ||||||||||||||
Outsourcing and other agreements
In February 2021, Hydro One entered into a three-year agreement for information technology services with Capgemini Canada Inc., which expires on February 29, 2024 and includes an option to extend for two additional one-year terms at Hydro One's discretion. In June 2023, Hydro One provided Capgemini Canada Inc. with notice to extend the agreement, effective March 1, 2024 and to expire March 1, 2026.
Capital Agreements
In the course of business, Hydro One has entered into agreements committing to the purchase of specified equipment from various suppliers upon successful completion of certain milestones. As at September 30, 2023, Hydro One has committed to future contingent payments of $124 million.
The following table presents a summary of Hydro One’s other commercial commitments by year of expiry in the next five years and thereafter:
As at September 30, 2023 (millions of dollars) | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Thereafter | ||||||||||||||
| Operating Credit Facilities | — | — | — | 2,550 | — | |||||||||||||||
Letters of credit1 | 171 | — | — | — | — | — | ||||||||||||||
Guarantees2 | 517 | — | — | — | — | — | ||||||||||||||
1 Letters of credit consist of $163 million letters of credit related to retirement compensation arrangements, a $7 million letter of credit provided to the IESO for prudential support, and $1 million in letters of credit for various operating purposes.
2 Guarantees consist of $475 million prudential support provided to the IESO by Hydro One Inc. on behalf of its subsidiaries, as well as guarantees provided by Hydro One to the Minister of Natural Resources (Canada) and ONroute of $7 million and $30 million, respectively, relating to OCN LP (OCN Guarantee) and $5 million relating to Aux Energy Inc., the Company's indirect subsidiary. OPG has provided a $3 million guarantee to Hydro One related to the OCN Guarantee.
27. SEGMENTED REPORTING
Hydro One has three reportable segments:
•The Transmission Segment, which comprises the transmission of high voltage electricity across the province, interconnecting local distribution companies and certain large directly connected industrial customers throughout the Ontario electricity grid;
•The Distribution Segment, which comprises the delivery of electricity to end customers and certain other municipal electricity distributors; and
•Other Segment, which includes certain corporate activities, investments including a joint venture that owns and operates electric vehicle fast charging stations across Ontario under the Ivy Charging Network brand, and the operations of the Company’s telecommunications business. The Other Segment includes a portion of the DTA which arose from the revaluation of the tax bases of Hydro One’s assets to fair market value when the Company transitioned from the provincial payments in lieu of tax regime to the federal tax regime at the time of Hydro One’s initial public offering in 2015. This DTA is not required to be shared with ratepayers, the Company considers it not to be part of the regulated transmission and distribution segment assets, and it is included in the other segment.
The designation of segments has been based on a combination of regulatory status and the nature of the services provided. Operating segments of the Company are determined based on information used by the chief operating decision-maker in deciding how to allocate resources and evaluate the performance of each of the segments. The Company evaluates segment performance based on income before financing charges and income tax expense from continuing operations (excluding certain allocated corporate governance costs).
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HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
Three months ended September 30, 2023 (millions of dollars) | Transmission | Distribution | Other | Consolidated | ||||||||||
| Revenues | 594 | 1,329 | 11 | 1,934 | ||||||||||
| Purchased power | — | 854 | — | 854 | ||||||||||
| Operation, maintenance and administration | 111 | 162 | 20 | 293 | ||||||||||
| Depreciation, amortization and asset removal costs | 132 | 114 | 2 | 248 | ||||||||||
| Income (loss) before financing charges and income tax expense | 351 | 199 | (11) | 539 | ||||||||||
| Capital investments | 384 | 249 | 5 | 638 | ||||||||||
Three months ended September 30, 2022 (millions of dollars) | Transmission | Distribution | Other | Consolidated | ||||||||||
| Revenues | 562 | 1,458 | 11 | 2,031 | ||||||||||
| Purchased power | — | 963 | — | 963 | ||||||||||
| Operation, maintenance and administration | 106 | 173 | 17 | 296 | ||||||||||
| Depreciation, amortization and asset removal costs | 130 | 107 | 3 | 240 | ||||||||||
| Income (loss) before financing charges and income tax expense | 326 | 215 | (9) | 532 | ||||||||||
| Capital investments | 311 | 185 | 5 | 501 | ||||||||||
Nine months ended September 30, 2023 (millions of dollars) | Transmission | Distribution | Other | Consolidated | ||||||||||
| Revenues | 1,708 | 4,123 | 34 | 5,865 | ||||||||||
| Purchased power | — | 2,662 | — | 2,662 | ||||||||||
| Operation, maintenance and administration | 358 | 535 | 64 | 957 | ||||||||||
| Depreciation, amortization and asset removal costs | 386 | 354 | 7 | 747 | ||||||||||
| Income (loss) before financing charges and income tax expense | 964 | 572 | (37) | 1,499 | ||||||||||
| Capital investments | 1,055 | 714 | 17 | 1,786 | ||||||||||
Nine months ended September 30, 2022 (millions of dollars) | Transmission | Distribution | Other | Consolidated | ||||||||||
| Revenues | 1,597 | 4,289 | 32 | 5,918 | ||||||||||
| Purchased power | — | 2,829 | — | 2,829 | ||||||||||
| Operation, maintenance and administration | 302 | 517 | 51 | 870 | ||||||||||
| Depreciation, amortization and asset removal costs | 385 | 343 | 7 | 735 | ||||||||||
| Income (loss) before financing charges and income tax expense | 910 | 600 | (26) | 1,484 | ||||||||||
| Capital investments | 899 | 646 | 17 | 1,562 | ||||||||||
Total Assets by Segment:
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||
| Transmission | 19,683 | 18,778 | ||||||
| Distribution | 12,491 | 11,893 | ||||||
| Other | 313 | 786 | ||||||
| Total assets | 32,487 | 31,457 | ||||||
Total Goodwill by Segment:
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||
| Transmission | 157 | 157 | ||||||
| Distribution | 216 | 216 | ||||||
| Total goodwill | 373 | 373 | ||||||
All revenues, assets and substantially all costs, as the case may be, are earned, held or incurred in Canada.
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HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and nine months ended September 30, 2023 and 2022
28. SUBSEQUENT EVENTS
Debt Issuance
On October 20, 2023, Hydro One Inc. issued $400 million of green bonds (Series 57 notes) under its MTN Program with a maturity date of October 20, 2025 and a coupon rate of 5.54%. Concurrently, Hydro One Inc. executed a $400 million fixed-to-floating interest rate swap agreement to convert these notes into daily compounded variable rate debt.
Dividends
On November 7, 2023, common share dividends of $178 million ($0.2964 per common share) were declared.
21 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three and nine months ended September 30, 2023 and 2022
The following Management’s Discussion and Analysis (MD&A) of the financial condition and results of operations should be read together with the unaudited condensed interim consolidated financial statements and accompanying notes thereto (Consolidated Financial Statements) of Hydro One Limited (Hydro One or the Company) for the three and nine months ended September 30, 2023, as well as the Company’s audited consolidated financial statements and MD&A for the year ended December 31, 2022. The Consolidated Financial Statements have been prepared in accordance with United States (US) Generally Accepted Accounting Principles (GAAP). All financial information in this MD&A is presented in Canadian dollars, unless otherwise indicated.
The Company has prepared this MD&A in accordance with National Instrument 51-102 - Continuous Disclosure Obligations of the Canadian Securities Administrators. Under the US/Canada Multijurisdictional Disclosure System, the Company is permitted to prepare this MD&A in accordance with the disclosure requirements of Canadian securities laws and regulations, which can vary from those of the US. This MD&A provides information as at and for the three and nine months ended September 30, 2023, based on information available to management as of November 7, 2023.
CONSOLIDATED FINANCIAL HIGHLIGHTS AND STATISTICS
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
(millions of dollars, except as otherwise noted) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||
| Revenues | 1,934 | 2,031 | (4.8 | %) | 5,865 | 5,918 | (0.9 | %) | |||||||||||||||
| Purchased power | 854 | 963 | (11.3 | %) | 2,662 | 2,829 | (5.9 | %) | |||||||||||||||
Revenues, net of purchased power1 | 1,080 | 1,068 | 1.1 | % | 3,203 | 3,089 | 3.7 | % | |||||||||||||||
| Operation, maintenance and administration (OM&A) costs | 293 | 296 | (1.0 | %) | 957 | 870 | 10.0 | % | |||||||||||||||
| Depreciation, amortization and asset removal costs | 248 | 240 | 3.3 | % | 747 | 735 | 1.6 | % | |||||||||||||||
| Financing charges | 143 | 122 | 17.2 | % | 423 | 358 | 18.2 | % | |||||||||||||||
| Income tax expense | 36 | 100 | (64.0 | %) | 165 | 247 | (33.2 | %) | |||||||||||||||
| Net income to common shareholders of Hydro One | 357 | 307 | 16.3 | % | 904 | 872 | 3.7 | % | |||||||||||||||
| Basic earnings per common share (EPS) | $0.60 | $0.51 | 17.6 | % | $1.51 | $1.46 | 3.4 | % | |||||||||||||||
| Diluted EPS | $0.59 | $0.51 | 15.7 | % | $1.51 | $1.45 | 4.1 | % | |||||||||||||||
| Net cash from operating activities | 642 | 594 | 8.1 | % | 1,644 | 1,658 | (0.8 | %) | |||||||||||||||
Funds from operations (FFO)1 | 622 | 605 | 2.8 | % | 1,676 | 1,757 | (4.6 | %) | |||||||||||||||
| Capital investments | 638 | 501 | 27.3 | % | 1,786 | 1,562 | 14.3 | % | |||||||||||||||
| Assets placed in-service | 699 | 401 | 74.3 | % | 1,349 | 1,177 | 14.6 | % | |||||||||||||||
Transmission: Average monthly Ontario 60-minute peak demand (MW) | 22,588 | 21,609 | 4.5 | % | 20,916 | 20,818 | 0.5 | % | |||||||||||||||
Distribution: Electricity distributed to Hydro One customers (GWh) | 7,225 | 7,328 | (1.4 | %) | 22,579 | 22,977 | (1.7 | %) | |||||||||||||||
As at | September 30, 2023 | December 31, 2022 | ||||||
Debt to capitalization ratio2 | 56.8 | % | 56.4 | % | ||||
1 The Company prepares and presents its financial statements in accordance with US GAAP. The Company also utilizes non-GAAP financial measures to assess its business and measure overall underlying business performance. Revenues, net of purchased power, and FFO are non-GAAP financial measures. Non-GAAP financial measures do not have a standardized meaning under GAAP, which is used to prepare the Company’s Consolidated Financial Statements and might not be comparable to similar financial measures presented by other entities. See section “Non-GAAP Financial Measures” for a discussion of these non-GAAP financial measures and a reconciliation of such measures to the most directly comparable GAAP measure.
2 Debt to capitalization ratio is a non-GAAP ratio. Non-GAAP ratios do not have a standardized meaning under GAAP, which is used to prepare the Company’s Consolidated Financial Statements and might not be comparable to similar financial measures presented by other entities. See section “Non-GAAP Financial Measures” for a discussion of this non-GAAP ratio and its component elements.
OVERVIEW
The Company's transmission business consists of the transmission system operated by subsidiaries of Hydro One Inc. (a wholly-owned subsidiary of the Company), which includes Hydro One Networks Inc. (Hydro One Networks) and Hydro One Sault Ste. Marie LP, as well as an approximately 66% interest in B2M Limited Partnership, and an approximately 55% interest in Niagara Reinforcement Limited Partnership.
Hydro One’s distribution business consists of the distribution system operated by Hydro One Inc.'s subsidiaries, Hydro One Networks and Hydro One Remote Communities Inc. (Hydro One Remotes).
1 |  | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
The other segment consists primarily of Hydro One's subsidiary, Acronym Solutions Inc. (Acronym), which provides telecommunications support for the Company’s transmission and distribution businesses, as well as a comprehensive suite of Information Communication Technology solutions. The other segment also consists of other investments, including a joint venture that owns and operates electric vehicle fast charging stations across Ontario under the Ivy Charging Network brand, as well as certain corporate activities, and is not rate-regulated.
For the nine months ended September 30, 2023 and 2022, Hydro One's segments accounted for the Company's total revenues, as follows:
Nine months ended September 30 | 2023 | 2022 | ||||||
| Transmission | 29 | % | 27 | % | ||||
| Distribution | 70 | % | 72 | % | ||||
| Other | 1 | % | 1 | % | ||||
When adjusted for the recovery of purchased power costs, Hydro One’s segments accounted for the Company’s total revenues, net of purchased power,1 for the nine months ended September 30, 2023 and 2022 as follows:
Nine months ended September 30 | 2023 | 2022 | ||||||
| Transmission | 53 | % | 52 | % | ||||
| Distribution | 46 | % | 47 | % | ||||
| Other | 1 | % | 1 | % | ||||
At September 30, 2023 and December 31, 2022, Hydro One’s segments accounted for the Company’s total assets as follows:
As at | September 30, 2023 | December 31, 2022 | ||||||
| Transmission | 60 | % | 60 | % | ||||
| Distribution | 39 | % | 38 | % | ||||
| Other | 1 | % | 2 | % | ||||
RESULTS OF OPERATIONS
Net Income
Net income attributable to common shareholders of Hydro One for the quarter ended September 30, 2023 of $357 million is an increase of $50 million, or 16.3%, compared to the same period in 2022. Significant influences on the change in net income attributable to common shareholders of Hydro One included:
•higher revenues, net of purchased power,1 resulting from an increase in transmission revenues due to Ontario Energy Board (OEB)-approved 2023 transmission rates and higher monthly average demand.
•higher depreciation, amortization and asset removal costs primarily due to growth in capital assets as the Company continues to place new assets in-service, consistent with its ongoing capital investment program.
•higher financing charges attributable to higher weighted-average interest rates on long-term debt and short-term notes, partially offset by higher capitalized interest due to a higher average balance of assets under construction.
•lower income tax expense primarily attributable to higher deductible timing differences compared to the prior year, partially offset by higher pre-tax earnings when adjusted for net income neutral items.
Revenue during the third quarter was also impacted by the cessation of the OEB approved recovery of deferred tax asset (DTA) amounts previously shared with ratepayers. On April 8, 2021, the OEB approved recovery of the DTA amounts allocated to ratepayers and included in customer rates for the 2017 to 2021 period plus carrying charges over a two-year recovery period from July 1, 2021, to June 30, 2023 (“DTA Recovery Amounts”). The cessation of the recovery period resulted in lower revenues in the third quarter of the current year, as compared to the same quarter of 2022, and is offset by a lower tax expense and net income neutral in the period.
Net income attributable to common shareholders of Hydro One for the nine months ended September 30, 2023 of $904 million is $32 million, or 3.7%, higher compared to the same period in 2022. Year-to-date results were impacted by similar factors as noted above, as well as higher OM&A costs resulting from higher corporate support costs and work program expenditures, partially offset by lower allowance for doubtful accounts.
EPS
EPS of $0.60 and $1.51 for the three and nine months ended September 30, 2023, compares to EPS of $0.51 and $1.46 in the same periods of 2022. The increase in EPS was primarily driven by the impact of higher earnings year over year, as discussed above.
1 Revenues, net of purchased power, is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”.
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HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Revenues
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
(millions of dollars, except as otherwise noted) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||
| Transmission | 594 | 562 | 5.7 | % | 1,708 | 1,597 | 7.0 | % | |||||||||||||||
| Distribution | 1,329 | 1,458 | (8.8 | %) | 4,123 | 4,289 | (3.9 | %) | |||||||||||||||
| Other | 11 | 11 | — | % | 34 | 32 | 6.3 | % | |||||||||||||||
| Total revenues | 1,934 | 2,031 | (4.8 | %) | 5,865 | 5,918 | (0.9 | %) | |||||||||||||||
| Transmission | 594 | 562 | 5.7 | % | 1,708 | 1,597 | 7.0 | % | |||||||||||||||
Distribution revenues, net of purchased power1 | 475 | 495 | (4.0 | %) | 1,461 | 1,460 | 0.1 | % | |||||||||||||||
| Other | 11 | 11 | — | % | 34 | 32 | 6.3 | % | |||||||||||||||
Total revenues, net of purchased power1 | 1,080 | 1,068 | 1.1 | % | 3,203 | 3,089 | 3.7 | % | |||||||||||||||
Transmission: Average monthly Ontario 60-minute peak demand (MW) | 22,588 | 21,609 | 4.5 | % | 20,916 | 20,818 | 0.5 | % | |||||||||||||||
Distribution: Electricity distributed to Hydro One customers (GWh) | 7,225 | 7,328 | (1.4 | %) | 22,579 | 22,977 | (1.7 | %) | |||||||||||||||
1 Revenues, net of purchased power, is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”.
Transmission Revenues
Transmission revenues increased by 5.7% compared to the quarter ended September 30, 2022, primarily due to the following:
•higher revenues resulting from OEB-approved 2023 rates; and
•higher average monthly peak demand; partially offset by
•net income neutral items, including lower revenues associated with the cessation of the DTA Recovery period, partially offset by the OEB-approved recovery of historical cost deferrals recognized as regulatory assets in prior periods, which are offset in income tax and OM&A.
Transmission revenues increased by 7.0% compared to the nine months ended September 30, 2022, primarily due to similar factors as noted above.
Distribution revenues
Distribution revenues decreased by 8.8% compared to the quarter ended September 30, 2022, primarily due to the following:
•lower purchased power costs, which are fully recovered from ratepayers and thus net income neutral; and
•net income neutral items, including lower revenues associated with the cessation of the DTA Recovery period, partially offset by higher revenues related to the OEB-approved recovery of historical cost deferrals recognized as regulatory assets in prior periods which are offset in income tax and OM&A.
Distribution revenues decreased by 3.9% compared to the nine months ended September 30, 2022, primarily due to similar factors noted above.
Distribution revenues, net of purchased power,2 decreased by 4.0% compared to the three months ended September 30, 2022, primarily due to the reasons noted above, adjusted for the recovery of purchased power costs.
Distribution revenues, net of purchased power,2 remained in-line with the same period in the prior year largely due to similar factors noted above.
2 Revenues, net of purchased power, is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”.
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HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
OM&A Costs
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
(millions of dollars) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||
| Transmission | 111 | 106 | 4.7 | % | 358 | 302 | 18.5 | % | |||||||||||||||
| Distribution | 162 | 173 | (6.4 | %) | 535 | 517 | 3.5 | % | |||||||||||||||
| Other | 20 | 17 | 17.6 | % | 64 | 51 | 25.5 | % | |||||||||||||||
| 293 | 296 | (1.0 | %) | 957 | 870 | 10.0 | % | ||||||||||||||||
Transmission OM&A Costs
Transmission OM&A costs were 4.7% higher than the quarter ended September 30, 2022, primarily due to higher OM&A associated with the OEB-approved recovery of historical cost deferrals, which are offset in revenue and therefore net income neutral.
Transmission OM&A costs were 18.5% higher than the nine months ended September 30, 2022, primarily due to the factor noted above, as well as:
•higher corporate support costs mainly attributable to lower capitalized overheads associated with the timing and volume of capital activity; and
•higher work program expenditures including information technology initiatives, vegetation management, and station maintenance work.
Distribution OM&A Costs
Distribution OM&A costs were 6.4% lower than the quarter ended September 30, 2022, primarily due to:
•storm restoration costs incurred in the prior year, which were recovered from third parties and offset in revenue, therefore net income neutral; and
•lower work program expenditures including vegetation management; partially offset by
•higher OM&A associated with the OEB-approved recovery of historical cost deferrals, which are offset in revenue and therefore net income neutral.
Distribution OM&A costs were 3.5% higher than the nine months ended September 30, 2022, primarily due to similar factors as noted above, as well as:
•higher corporate support costs mainly attributable to lower capitalized overheads associated with the timing and volume of capital activity; and
•higher work program expenditures including emergency power restoration and information technology initiatives, partially offset by environmental management and vegetation management expenditures; partially offset by
•lower allowance for doubtful accounts.
Depreciation, Amortization and Asset Removal Costs
Depreciation, amortization and asset removal costs increased by $8 million for the quarter ended September 30, 2023, compared to the same period in 2022, primarily due to growth in capital assets as the Company continues to place new assets in-service, consistent with its ongoing capital investment program, as well as higher asset removal costs.
Depreciation, amortization and asset removal costs increased by $12 million for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to similar factors as noted above as well as higher environmental expenditures in the first quarter of 2023.
Financing Charges
Financing charges increased by $21 million and $65 million for the three and nine months ended September 30, 2023, respectively, primarily due to higher weighted-average interest rates on long-term debt and short-term notes, partially offset by higher capitalized interest due to a higher average balance of assets under construction.
4 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Income Tax Expense
Income tax expense was $36 million for the quarter ended September 30, 2023, compared to $100 million for the same period in 2022. The $64 million year-over-year decrease in income tax expense was primarily due to the following:
•lower tax expense associated with the cessation of the DTA recovery period on June 30, 2023 and regulatory adjustments associated with the Capitalized Overhead Tax Variance, which are offset by a corresponding decrease in revenue and are therefore net income neutral; and
•higher deductible timing differences compared to the prior year; partially offset by
•higher pre-tax earnings, adjusted for the net income neutral items.
Income tax expense was $165 million for the nine months ended September 30, 2023, compared to $247 million for the same period in 2022. The $82 million year-over-year decrease in income tax expense was primarily due to similar factors as noted above, as well as lower pre-tax earnings on a year-to-date basis compared to the prior year.
The Company realized an effective tax rate of approximately 9.1% and 15.3% for the three and nine months ended September 30, 2023, respectively, compared to approximately 24.4% and 21.9% realized in the same periods in 2022. The decrease of 15.3% and 6.6%, respectively, was primarily attributable to the factors noted above.
Common Share Dividends
In 2023, the Company declared and paid cash dividends to common shareholders as follows:
Date Declared | Record Date | Payment Date | Amount per Share | Total Amount (millions of dollars) | ||||||||||
| February 13, 2023 | March 15, 2023 | March 31, 2023 | $0.2796 | 167 | ||||||||||
| May 4, 2023 | June 7, 2023 | June 30, 2023 | $0.2964 | 178 | ||||||||||
| August 8, 2023 | September 13, 2023 | September 29, 2023 | $0.2964 | 177 | ||||||||||
| 522 | ||||||||||||||
Following the conclusion of the third quarter of 2023, the Company declared a cash dividend to common shareholders as follows:
Date Declared | Record Date | Payment Date | Amount per Share | Total Amount (millions of dollars) | ||||||||||
| November 7, 2023 | December 13, 2023 | December 29, 2023 | $0.2964 | 178 | ||||||||||
QUARTERLY RESULTS OF OPERATIONS
Quarter ended (millions of dollars, except EPS and ratio) | Sep 30, 2023 | Jun 30, 2023 | Mar 31, 2023 | Dec 31, 2022 | Sep 30, 2022 | Jun 30, 2022 | Mar 31, 2022 | Dec 31, 2021 | |||||||||||||||||||||
| Revenues | 1,934 | 1,857 | 2,074 | 1,862 | 2,031 | 1,840 | 2,047 | 1,779 | |||||||||||||||||||||
| Purchased power | 854 | 798 | 1,010 | 895 | 963 | 852 | 1,014 | 914 | |||||||||||||||||||||
Revenues, net of purchased power1 | 1,080 | 1,059 | 1,064 | 967 | 1,068 | 988 | 1,033 | 865 | |||||||||||||||||||||
| Net income to common shareholders | 357 | 265 | 282 | 178 | 307 | 255 | 310 | 159 | |||||||||||||||||||||
| Basic EPS | $0.60 | $0.44 | $0.47 | $0.30 | $0.51 | $0.43 | $0.52 | $0.27 | |||||||||||||||||||||
| Diluted EPS | $0.59 | $0.44 | $0.47 | $0.30 | $0.51 | $0.42 | $0.52 | $0.26 | |||||||||||||||||||||
Earnings coverage ratio2 | 3.0 | 3.1 | 3.2 | 3.3 | 3.3 | 3.3 | 3.2 | 3.1 | |||||||||||||||||||||
1 Revenues, net of purchased power, is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”.
2 Earnings coverage ratio is a non-GAAP ratio. Non-GAAP ratios do not have a standardized meaning under GAAP, which is used to prepare the Company’s Consolidated Financial Statements and might not be comparable to similar financial measures presented by other entities. See section “Non-GAAP Financial Measures” for a discussion of this non-GAAP ratio and its component elements.
Variations in revenues and net income over the quarters are primarily due to the impact of seasonal weather conditions on customer demand and market pricing, as well as timing of regulatory decisions.
CAPITAL INVESTMENTS
The Company makes capital investments to maintain the safety, reliability and integrity of its transmission and distribution system assets and to provide for the ongoing growth and modernization required to meet the expanding and evolving needs of its customers and the electricity market. This is achieved through a combination of sustaining capital investments, which are required to support the continued operation of Hydro One’s existing assets, and development capital investments, which involve additions to both existing assets and large-scale projects such as new transmission lines and transmission stations.
5 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Assets Placed In-Service
The following table presents Hydro One’s assets placed in-service during the three and nine months ended September 30, 2023 and 2022:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
(millions of dollars) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||
| Transmission | 331 | 229 | 44.5 | % | 659 | 644 | 2.3 | % | |||||||||||||||
| Distribution | 350 | 171 | 104.7 | % | 665 | 527 | 26.2 | % | |||||||||||||||
| Other | 18 | 1 | 1,700.0 | % | 25 | 6 | 316.7 | % | |||||||||||||||
| Total assets placed in-service | 699 | 401 | 74.3 | % | 1,349 | 1,177 | 14.6 | % | |||||||||||||||
Transmission Assets Placed In-Service
Transmission assets placed in-service increased by $102 million, or 44.5%, for the quarter ended September 30, 2023, compared to the same period in 2022, primarily due to the following:
•timing of investments placed in-service for station equipment refurbishments and replacements primarily at the Lambton Transformer Station, Bridgman Transformer Station, Keith Transformer Station and Cherrywood Transformer Station;
•timing of assets placed in-service related to information technology initiatives; and
•higher investments placed in-service for transmission line refurbishments and replacements; partially offset by
•major development projects put in service in the prior year, primarily the new Lakeshore Transformer Station.
Transmission assets placed in-service increased by $15 million, or 2.3%, for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to similar factors noted above, as well as the timing of in-service additions earlier this year, including the Arnprior Transformer Station and the Nanticoke Transformer Station. In addition, the year-to-date period was impacted by lower investments placed in-service for transmission line refurbishments.
Distribution Assets Placed In-Service
Distribution assets placed in-service increased by $179 million, or 104.7%, for the quarter ended September 30, 2023, compared to the same period in 2022, primarily due to the following:
•timing of assets placed in-service related to information technology initiatives;
•investment placed in-service for the feeder development work at South Middle Road Transformer Station;
•higher volume of storm-related asset replacements; and
•higher volume of work associated with customer connections, line refurbishments, and wood pole replacements; partially offset by
•lower volume of station refurbishments and replacements; and
•completion of the Dunnville Operation Centre in 2022.
Distribution assets placed in-service increased by $138 million, or 26.2%, for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to similar factors noted above, partially offset by lower storm-related asset replacements placed in-service on a year-to-date basis.
Other Assets Placed in-Service
Other assets placed in-service increased by $17 million and $19 million, for the quarter and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, primarily as a result of the replacement of Acronym’s information technology equipment.
6 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Capital Investments
The following table presents Hydro One’s capital investments during the three and nine months ended September 30, 2023 and 2022:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
(millions of dollars) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||
| Transmission | |||||||||||||||||||||||
| Sustaining | 293 | 229 | 27.9 | % | 761 | 674 | 12.9 | % | |||||||||||||||
| Development | 65 | 59 | 10.2 | % | 232 | 157 | 47.8 | % | |||||||||||||||
| Other | 26 | 23 | 13.0 | % | 62 | 68 | (8.8 | %) | |||||||||||||||
| 384 | 311 | 23.5 | % | 1,055 | 899 | 17.4 | % | ||||||||||||||||
| Distribution | |||||||||||||||||||||||
| Sustaining | 96 | 62 | 54.8 | % | 289 | 313 | (7.7 | %) | |||||||||||||||
| Development | 121 | 103 | 17.5 | % | 351 | 275 | 27.6 | % | |||||||||||||||
| Other | 32 | 20 | 60.0 | % | 74 | 58 | 27.6 | % | |||||||||||||||
| 249 | 185 | 34.6 | % | 714 | 646 | 10.5 | % | ||||||||||||||||
| Other | 5 | 5 | — | % | 17 | 17 | — | % | |||||||||||||||
| Total capital investments | 638 | 501 | 27.3 | % | 1,786 | 1,562 | 14.3 | % | |||||||||||||||
Transmission Capital Investments
Transmission capital investments increased by $73 million, or 23.5%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to a higher volume of station refurbishments and equipment replacements.
Transmission capital investments increased by $156 million, or 17.4%, in the nine months ended September 30, 2023, primarily due to the same factor noted above, as well as investments in the new Chatham to Lakeshore and Waasigan Transmission Line projects in the current year.
Distribution Capital Investments
Distribution capital investments increased by $64 million, or 34.6%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to the following:
•higher spend on storm-related asset replacements;
•higher volume of line refurbishments and wood pole replacements;
•investment in the Advanced Metering Infrastructure System 2.0 project;
•higher spend on information technology initiatives;
•higher volume of work on customer connections; and
•higher spend on minor fixed assets.
Distribution capital investments increased by $68 million, or 10.5%, in the nine months ended September 30, 2023, primarily due to similar factors noted above, as well as timing of work on system capability reinforcement projects and higher volume of externally driven work attributable to joint use assets and line relocations. In addition, the year-to-date period was impacted by lower spend on storm-related asset replacements.
7 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Major Transmission Capital Investment Projects
The following table summarizes the status of significant transmission projects at September 30, 2023:
Project Name | Location | Type | Anticipated In-Service Date | Estimated Cost | Capital Cost To Date | ||||||||||||
| (year) | (millions of dollars) | ||||||||||||||||
| Development Projects: | |||||||||||||||||
| Barrie Area Transmission Upgrade | Barrie-Innisfil Southern Ontario | Upgraded transmission line and stations | 2023 | 125 | 88 | ||||||||||||
Chatham to Lakeshore Transmission Line1 | Southwestern Ontario | New transmission line and station expansion | 2024 | 253 | 111 | ||||||||||||
East-West Tie Station Expansion2 | Northern Ontario | New transmission connection and station expansion | 2024 | 191 | 186 | ||||||||||||
| Islington Transmission Station | Toronto Southern Ontario | New transmission station and connection | 2025 | 109 | 5 | ||||||||||||
St. Clair Transmission Line3 | Southwestern Ontario | New transmission line and station expansion | 2025 | 38 | 15 | ||||||||||||
Waasigan Transmission Line4 | Thunder Bay-Atikokan-Dryden Northwestern Ontario | New transmission line and station expansion | 2027 | 1,200 | 53 | ||||||||||||
Longwood to Lakeshore Transmission Line5 | Southwestern Ontario | New transmission line and station expansion | TBD | TBD | TBD | ||||||||||||
Second Longwood to Lakeshore Transmission Line5 | Southwestern Ontario | New transmission line and station expansion | TBD | TBD | TBD | ||||||||||||
Lakeshore to Windsor Transmission Line5 | Southwestern Ontario | New transmission line and station expansion | TBD | TBD | TBD | ||||||||||||
Mississagi to Third Line Line6 | Northeastern Ontario | New transmission line and station expansion | TBD | TBD | TBD | ||||||||||||
Hanmer to Mississagi Line6 | Northeastern Ontario | New transmission line and station expansion | TBD | TBD | TBD | ||||||||||||
Greater Toronto Area East Line6 | Eastern Ontario | New transmission line and station expansion | TBD | TBD | TBD | ||||||||||||
| Sustainment Projects: | |||||||||||||||||
| Beck #2 Transmission Station Circuit Breaker Replacement | Niagara area Southwestern Ontario | Station sustainment | 2023 | 135 | 121 | ||||||||||||
| Cherrywood Transmission Station Circuit Breaker Replacement | Pickering Central Ontario | Station sustainment | 2023 | 115 | 96 | ||||||||||||
| Bruce B Switching Station Circuit Breaker Replacement | Tiverton Southwestern Ontario | Station sustainment | 2024 | 185 | 170 | ||||||||||||
| Middleport Transmission Station Circuit Breaker Replacement | Middleport Southwestern Ontario | Station sustainment | 2025 | 184 | 134 | ||||||||||||
| Lennox Transmission Station Circuit Breaker Replacement | Napanee Southeastern Ontario | Station sustainment | 2026 | 152 | 126 | ||||||||||||
| Esplanade x Terauley Underground Cable Replacement | Toronto Southern Ontario | Line sustainment | 2026 | 117 | 31 | ||||||||||||
| Bridgman Transmission Station Refurbishment | Toronto Southern Ontario | Station sustainment | 2026 | 108 | 60 | ||||||||||||
| Bruce A Transmission Station Switchyard Replacement | Tiverton Southwestern Ontario | Station sustainment | 2027 | 555 | 78 | ||||||||||||
1 The Chatham to Lakeshore Transmission Line project includes the line and associated facilities and is further discussed in the section “Other Developments - Supporting Critical Infrastructure in Southwestern Ontario.”
2 The East-West Tie Station Expansion project has been placed in-service in phases, with significant portions of the project placed in-service over the 2021-22 period, and final project in-service expected in 2024.
3 The estimated cost of the St. Clair Transmission Line relates to the development phase of the project and the anticipated in-service date reflects the anticipated completion date of the development phase only. Completion of the line remains subject to stakeholder consultation and regulatory approvals.
4 The Waasigan Transmission Line Project includes both phase 1 and phase 2, inclusive of necessary stations enhancements to support energization of the new lines. The estimated cost relates to the development and construction phases of the project and the anticipated in-service date reflects the anticipated completion of Phase 2 by the end of 2027. The first phase of the project is expected to be in-serviced as close to the end of 2025 as possible. On May 4, 2022 and November 18, 2022, under Hydro One’s equity partnership model, Hydro One entered into agreements with First Nations communities that provide them the opportunity to acquire a 50% equity stake in the transmission line component of the project. Completion of the project remains subject to stakeholder consultation and regulatory approvals. See section "Other Developments - Supporting Critical Infrastructure in Northwestern Ontario" for further details.
5 The scope and timing of these Southwestern Ontario transmission reinforcements are currently under review.
6 The scope and timing of these Northeastern and Eastern Ontario transmission reinforcements are currently under review.
8 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Future Capital Investments
The Company estimates future capital investments based on management’s expectations of the amount of capital expenditures that will be required to provide transmission and distribution services that are efficient, reliable, and provide value for customers, consistent with the OEB’s Renewed Regulatory Framework.
The 2023 to 2027 capital estimates have been updated during the nine months ended September 30, 2023 to reflect the estimated impact of the Waasigan Transmission Line Project that was filed with the OEB on July 31, 2023 through a leave-to-construct application (see section "Other Developments - Supporting Critical Infrastructure in Northwestern Ontario" for further details), as well as the revised cost and anticipated in-service date estimates of the Chatham to Lakeshore Transmission Line Project (see “Other Developments - Supporting Critical Infrastructure in Southwestern Ontario” for further details). The following tables summarize Hydro One’s annual projected capital investments for 2023 to 2027 by business segment and by category:
By business segment: (millions of dollars) | 2023 | 2024 | 2025 | 2026 | 2027 | |||||||||||||||
Transmission1 | 1,636 | 1,807 | 1,778 | 1,692 | 1,772 | |||||||||||||||
| Distribution | 924 | 1,027 | 1,043 | 1,001 | 989 | |||||||||||||||
| Other | 23 | 18 | 15 | 11 | 10 | |||||||||||||||
Total capital investments2 | 2,583 | 2,852 | 2,836 | 2,704 | 2,771 | |||||||||||||||
By category: (millions of dollars) | 2023 | 2024 | 2025 | 2026 | 2027 | |||||||||||||||
| Sustainment | 1,534 | 1,658 | 1,629 | 1,548 | 1,480 | |||||||||||||||
Development1 | 764 | 971 | 1,001 | 947 | 1,124 | |||||||||||||||
Other3 | 285 | 223 | 206 | 209 | 167 | |||||||||||||||
Total capital investments2 | 2,583 | 2,852 | 2,836 | 2,704 | 2,771 | |||||||||||||||
1 Figures include investments in certain development projects of Hydro One Networks not included in the investment plan approved by the OEB in the Joint Rate Application (JRAP) decision.
2 On March 29, 2021, the Independent Electricity Service Operator (IESO) requested Hydro One to initiate work to develop and construct a new transmission line between Chatham and Lambton (the St. Clair Line) to support agricultural growth in Southwestern Ontario. On March 31, 2022, the Minister of Energy directed the OEB to amend Hydro One Networks' transmission licence to require it to develop and seek approvals for this and three other priority transmission lines to meet growing demand in Southwestern Ontario (see section “Other Developments”). On October 23, 2023, the Minister of Energy further directed the OEB to amend Hydro One Networks' licence to require it to develop and seek approvals for three priority transmission line projects to meet growing electricity demand in Northeastern and Eastern Ontario. The future capital investments presented do not include capital expenditures of the six additional lines, as Hydro One is currently evaluating the scope and timing of this work.
3 “Other” capital expenditures include investments in fleet, real estate, IT, and operations technology and related functions.
SUMMARY OF SOURCES AND USES OF CASH
Hydro One’s primary sources of cash flows are funds generated from operations, capital market debt issuances and bank credit facilities that are used to satisfy Hydro One’s capital resource requirements, including the Company’s capital expenditures, servicing and repayment of debt, and dividend payments.
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||
(millions of dollars) | 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net cash from operating activities | 642 | 594 | 1,644 | 1,658 | |||||||||||||
| Net cash from (used in) financing activities | 70 | (90) | (243) | (635) | |||||||||||||
| Net cash used in investing activities | (677) | (510) | (1,872) | (1,538) | |||||||||||||
| Increase (decrease) in cash and cash equivalents | 35 | (6) | (471) | (515) | |||||||||||||
Net cash from operating activities
Net cash from operating activities increased by $48 million for the three months ended September 30, 2023, compared to the same period in 2022. The increase was impacted by various factors, including the following:
•increase in net working capital deficiency primarily attributable to a lower cost of power payable to the IESO, driven by lower commodity rates charged, and higher receivables from the IESO due to higher transmission revenues, partially offset by higher accrued liabilities;
•changes in regulatory account balances; and
•higher pre-tax earnings.
Net cash from operating activities decreased by $14 million for the nine months ended September 30, 2023, compared to the same period in 2022. The decrease was mainly attributable to lower pre-tax earnings, partially offset by an increase in net working capital deficiency primarily attributable to higher receivables from the IESO due to higher transmission revenues, partially offset by higher accrued liabilities.
9 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Net cash from (used in) financing activities
Net cash provided by financing activities increased by $160 million and cash used in financing activities decreased by $392 million, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. This was impacted by various factors, including the following:
Sources of cash
•the Company received proceeds of $2,120 million and $5,480 million from the issuance of short-term notes in the three and nine month periods ended September 30, 2023, respectively, compared to $1,730 million and $4,590 million received in the same periods last year.
•the Company issued $425 million and $1,475 million of long-term debt in the three and nine months ended September 30, 2023, respectively, compared to no long-term debt issued in either period of 2022.
Uses of cash
•the Company repaid $2,295 million and $5,930 million of short-term notes in the three and nine month periods ended September 30, 2023, respectively, compared to $1,650 million and $4,120 million repaid in the same periods last year.
•the Company repaid $nil and $731 million of long-term debt in the three and nine month periods ended September 30, 2023, respectively, compared to $nil and $601 million in the same periods of 2022.
•common share dividends paid in the three and nine month periods ended September 30, 2023 were $177 million and $522 million, respectively, compared to dividends of $167 million and $494 million paid in the same periods last year.
Net cash used in investing activities
Net cash used in investing activities increased by $167 million and $334 million, for the three and nine months ended September 30, 2023, respectively, compared to the same period in 2022 primarily due to higher capital investments as well as higher spend on future use assets associated with designated broadband projects. See section “Capital Investments” for comparability of capital investments made by the Company during the three and nine months ended September 30, 2023 compared to the prior year, and section “Building Broadband Faster Act, 2021” for further details on broadband projects.
LIQUIDITY AND FINANCING STRATEGY
Short-term liquidity is provided through FFO,3 Hydro One Inc.’s commercial paper program, and the Company’s consolidated bank credit facilities. Under the commercial paper program, Hydro One Inc. is authorized to issue up to $2,300 million in short-term notes with a term to maturity of up to 365 days.
At September 30, 2023, Hydro One Inc. had $927 million in commercial paper borrowings outstanding, compared to $1,374 million outstanding at December 31, 2022. The Company also has revolving bank credit facilities (Operating Credit Facilities) with a total available balance of $2,550 million at September 30, 2023. In January 2022, Hydro One successfully amended its Operating Credit Facilities to incorporate environmental, social and governance targets. The facilities now include a pricing adjustment which can increase or decrease Hydro One’s cost of funding based on its performance on certain Sustainability Performance Measures, which are related to Hydro One's sustainability goals. On June 1, 2023, the maturity date for the Operating Credit Facilities was extended from 2027 to 2028. No amounts were drawn on the Operating Credit Facilities at September 30, 2023 or December 31, 2022. The Company may use the Operating Credit Facilities for working capital and general corporate purposes. The short-term liquidity under the commercial paper program, the Operating Credit Facilities, available cash on hand and anticipated levels of FFO3 are expected to be sufficient to fund the Company’s operating requirements.
At September 30, 2023, the Company had long-term debt outstanding in the principal amount of $14,545 million, which included $425 million of long-term debt issued by Hydro One and $14,120 million of long-term debt issued by Hydro One Inc. The long-term debt issued by Hydro One was issued under its short form base shelf prospectus (Universal Base Shelf Prospectus), as further described below. The majority of long-term debt issued by Hydro One Inc. has been issued under its Medium-Term Note (MTN) Program, as further described below. On January 12, 2023, Hydro One published a Sustainable Financing Framework, which allows the Company and its subsidiaries to issue sustainable financing instruments and allocate the net proceeds to investments in eligible green and social project categories. The Company's total long-term debt consists of notes and debentures that mature between 2024 and 2064, and at September 30, 2023, had a weighted-average term to maturity of approximately 13.7 years (December 31, 2022 - 14.0 years) and a weighted-average coupon rate of 4.0% (December 31, 2022 - 3.9%).
In June 2022, Hydro One Inc. filed a short form base shelf prospectus in connection with its MTN Program, which has a maximum authorized principal amount of notes issuable of $4,000 million and expires in July 2024. At September 30, 2023, $1,775 million remained available for issuance under the MTN Program prospectus. On October 20, 2023, Hydro One Inc. issued $400 million of green bonds (Series 57 notes) under its MTN Program with a maturity date of October 20, 2025 and a
3 FFO is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”.
10 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
coupon rate of 5.54%. Concurrently, Hydro One Inc. executed a $400 million fixed-to-floating interest rate swap agreement to convert these notes into daily compounded variable rate debt.
On August 15, 2022, Hydro One filed the Universal Base Shelf Prospectus with securities regulatory authorities in Canada. The Universal Base Shelf Prospectus allows Hydro One to offer, from time to time in one or more public offerings, up to $2,000 million of debt, equity or other securities, or any combination thereof, during the 25-month period ending on September 16, 2024. At September 30, 2023, no securities have been issued under the Universal Base Shelf Prospectus.
On November 22, 2022, Hydro One Holdings Limited (HOHL) filed a short form base shelf prospectus (US Debt Shelf Prospectus) with securities regulatory authorities in Canada and the US to replace a previous prospectus that would otherwise have expired in January 2023. The US Debt Shelf Prospectus allows HOHL to offer, from time to time in one or more public offerings, up to US$3,000 million of debt securities, unconditionally guaranteed by Hydro One, expiring in December 2024. At September 30, 2023, no securities have been issued under the US Debt Shelf Prospectus.
Compliance
At September 30, 2023, the Company was in compliance with all financial covenants and limitations associated with the outstanding borrowings and credit facilities.
Credit Ratings
On August 18, 2023, S&P Global Ratings revised its outlooks on the Company and Hydro One Inc. to positive from stable and affirmed the companies' existing issuer and issue-level ratings.
OTHER OBLIGATIONS
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Summary of Contractual Obligations and Other Commercial Commitments
The following table presents a summary of Hydro One’s debt and other major contractual obligations and commercial commitments:
As at September 30, 2023 (millions of dollars) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||
Contractual obligations (due by year) | |||||||||||||||||
| Long-term debt - principal repayments | 14,545 | 700 | 1,675 | 1,175 | 10,995 | ||||||||||||
| Long-term debt - interest payments | 8,460 | 589 | 1,115 | 1,011 | 5,745 | ||||||||||||
| Short-term notes payable | 927 | 927 | — | — | — | ||||||||||||
Pension contributions1 | 476 | 71 | 147 | 155 | 103 | ||||||||||||
| Environmental and asset retirement obligations | 97 | 19 | 21 | 4 | 53 | ||||||||||||
Outsourcing and other agreements | 190 | 84 | 81 | 12 | 13 | ||||||||||||
| Capital agreements | 124 | 4 | 120 | — | — | ||||||||||||
| Lease obligations | 55 | 13 | 22 | 16 | 4 | ||||||||||||
| Long-term software/meter agreement | 22 | 2 | 15 | 2 | 3 | ||||||||||||
| Total contractual obligations | 24,896 | 2,409 | 3,196 | 2,375 | 16,916 | ||||||||||||
Other commercial commitments (by year of expiry) | |||||||||||||||||
| Operating Credit Facilities | 2,550 | — | — | 2,550 | — | ||||||||||||
Letters of credit2 | 171 | 171 | — | — | — | ||||||||||||
Guarantees3 | 517 | 517 | — | — | — | ||||||||||||
| Total other commercial commitments | 3,238 | 688 | — | 2,550 | — | ||||||||||||
1 Contributions to the Hydro One Pension Plan are based on actuarial reports, including valuations performed at least every three years, and actual or projected levels of pensionable earnings, as applicable. The most recent actuarial valuation was performed effective December 31, 2022 and filed on September 26, 2023.
2 Letters of credit consist of $163 million letters of credit related to retirement compensation arrangements, a $7 million letter of credit provided to the IESO for prudential support, and $1 million in letters of credit for various operating purposes.
3 Guarantees consist of $475 million prudential support provided to the IESO by Hydro One Inc. on behalf of its subsidiaries, as well as guarantees provided by Hydro One to the Minister of Natural Resources (Canada) and ONroute of $7 million and $30 million, respectively, relating to OCN LP (OCN Guarantee) and $5 million relating to Aux Energy Inc., the Company's indirect subsidiary. Ontario Power Generation Inc. (OPG) has provided a $2.5 million guarantee to Hydro One related to the OCN Guarantee.
11 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
SHARE CAPITAL
The common shares of Hydro One are publicly traded on the Toronto Stock Exchange (TSX) under the trading symbol "H". Hydro One is authorized to issue an unlimited number of common shares. The amount and timing of any dividends payable by Hydro One is at the discretion of the Hydro One's Board of Directors (Board) and is established on the basis of Hydro One’s results of operations, maintenance of its deemed regulatory capital structure, financial condition, cash requirements, the satisfaction of solvency tests imposed by corporate laws for the declaration and payment of dividends and other factors that the Board may consider relevant. As at November 7, 2023, Hydro One had 599,076,993 issued and outstanding common shares.
The Company is authorized to issue an unlimited number of preferred shares, issuable in series. At November 7, 2023, the Company had no preferred shares issued and outstanding.
The number of additional common shares of Hydro One that would be issued if all outstanding awards under the share grant plans and the Long-term Incentive Plan (LTIP) were vested and exercised at November 7, 2023 was 1,969,428.
REGULATION
Hydro One Networks
On November 29, 2022 the OEB issued a Decision and Order approving Hydro One Networks' JRAP for distribution rates and transmission revenue requirement for the period 2023-2027. The following table lists the rate base and revenue requirements arising from the approved rate application:
| Hydro One Networks - Transmission | Hydro One Networks - Distribution | |||||||||||||
Year | Rate Base | Revenue Requirement1 | Rate Base | Revenue Requirement1 | ||||||||||
| 2023 | $14,534 million | $1,952 million | $9,460 million | $1,727 million | ||||||||||
| 2024 | $15,342 million | $2,073 million | $9,979 million | $1,813 million | ||||||||||
| 2025 | $16,271 million | $2,168 million | $10,573 million | $1,886 million | ||||||||||
| 2026 | $17,148 million | $2,277 million | $11,153 million | $1,985 million | ||||||||||
| 2027 | $17,940 million | $2,362 million | $11,656 million | $2,071 million | ||||||||||
1 Revenue requirements for 2024 to 2027 are updated annually as part of an annual application process to reflect latest inflation factors.
Following the OEB approval of the JRAP Settlement and the completion of the recovery of DTA amounts previously shared with ratepayers in 2023, Hydro One's effective tax rate over the JRAP period is expected to be between 13% and 16%.
Deferred Tax Asset
On April 8, 2021, the OEB rendered its DTA Implementation Decision, approving the recovery of the DTA amounts allocated to ratepayers and included in customer rates for the 2017 to 2021 period, plus carrying charges, over a two-year recovery period from July 1, 2021 to June 30, 2023.
The recovery of the previously shared DTA amounts plus carrying charges resulted in a $67 million contribution to FFO4 for the nine months ended September 30, 2023 (2022 - $132 million). In addition, the DTA Implementation Decision required that Hydro One adjust the transmission revenue requirement and the base distribution rates beginning January 1, 2022 to eliminate any further tax savings flowing to customers. This is expected to result in additional FFO4 of approximately $46 million for 2023, but is anticipated to decline annually thereafter.
Hydro One Remotes
On August 31, 2022, Hydro One Remotes filed its distribution rate application for 2023-2027. On March 2, 2023, the OEB approved Hydro One Remote Communities' 2023 revenue requirement of $128 million with a price cap escalator index for 2023-2027, and a 3.72% rate increase effective May 1, 2023.
Getting Ontario Connected Act Variance Account
On October 31, 2023 the OEB established an industry-wide generic variance account, effective April 1, 2023, which allows rate-regulated electricity distributors to record incremental costs of locating underground infrastructure resulting from the implementation of Bill 93, in a regulatory account for future recovery subject to the approval of the OEB. The Company will continue to assess the impact as more details become available.
4 FFO is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”.
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HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Cloud Computing Arrangement Implementation Costs
On November 2, 2023, the OEB established an industry-wide generic deferral account, effective December 1, 2023, which allows rate-regulated entities, including electricity distributors and transmitters, to record incremental cloud computing implementation costs incurred and any related offsetting savings, if applicable, in a regulatory account for future recovery subject to the approval of the OEB. The Company is currently assessing the potential impact of establishing the account.
OTHER DEVELOPMENTS
Collective Agreements
On June 23, 2023, Hydro One Inc. reached a tentative renewal agreement for the collective agreement with the Power Workers’ Union (PWU) for Customer Service Operations (CSO), which had expired on September 30, 2022. On the same date, Hydro One Inc. also reached a tentative renewal agreement with the PWU for the main collective agreement that had expired on March 31, 2023. The main agreement was ratified by the PWU membership on August 16, 2023, while the CSO agreement was ratified on August 21, 2023. Both agreements will expire on September 30, 2025.
The collective agreement with the Society of United Professionals expired on March 31, 2023. Negotiations to renew this agreement commenced on January 16, 2023 and resulted in a tentative renewal agreement on August 15, 2023. The Society membership ratified the new agreement on September 11, 2023. This agreement will also expire on September 30, 2025.
Chapleau Hydro Purchase Agreement
On November 6, 2023, Hydro One Networks and Chapleau Public Utilities Corporation (Chapleau Hydro) signed a definitive agreement for Hydro One Networks to acquire Chapleau Hydro’s distribution business to serve electricity customers within the Township of Chapleau. The agreement includes purchasing substantially all of Chapleau Hydro’s electricity distribution assets. Chapleau Hydro is owned by the Township of Chapleau. Hydro One Networks is expected to pay approximately $2.3 million for the transaction, subject to adjustments. The acquisition is conditional upon the satisfaction of customary closing conditions and approval by the OEB. Hydro One Networks intends to file an application with the OEB by the end of 2023 for approval of the acquisition.
Building Broadband Faster Act, 2021
In March 2021, the Province introduced Bill 257, Supporting Broadband and Infrastructure Expansion Act, 2021, to create a new act entitled the Building Broadband Faster Act, 2021 (BBFA) that is aimed at supporting the timely deployment of broadband infrastructure within unserved and underserved rural Ontario communities. Bill 257 received Royal Assent on April 12, 2021. Bill 257 amended the Ontario Energy Board Act, 1998 (OEB Act) to provide the Province with regulation-making authority regarding the development of, access to, or use of electricity infrastructure for non-electricity purposes including to reduce or fix the annual rental charge that telecommunications service providers must pay to attach their wireline broadband telecommunications attachments to utility poles, establish performance standards and timelines for how utilities must respond to attachment requests and require utilities to consider joint use of poles during planning processes. The Building Broadband Faster Act Guideline and two regulations informing the legislative changes were published on November 2021.
A third regulation mandating a reduction in the annual wireline attachment rate for telecommunications carriers was issued on December 10, 2021. The OEB issued an Order and Decision on December 16, 2021 that lowered the annual wireline attachment rate for Telecommunications Carriers per the Telecommunications Act from $44.50 per attacher per pole to $34.76 per attacher per pole. The OEB subsequently issued another Order and Decision on November 3, 2022 to adjust the annual wireline attachment rate to $36.05 per attacher per pole. On March 7, 2022, the Province introduced Bill 93 (Getting Ontario Connected Act, 2022). Bill 93 received Royal Assent on April 14, 2022. Bill 93 amends the BBFA to ensure that organizations that own underground utility infrastructure near a designated high-speed internet project provide timely access to their infrastructure data, which would allow internet service providers to quickly start work on laying down underground high-speed internet infrastructure.
The regulation regarding electricity infrastructure and designated broadband projects under the OEB Act (O.Reg. 410/22) came into force on April 21, 2022. On July 7, 2022, the OEB established a deferral account for rate-regulated distributors to record incremental costs associated with carrying out activities pertaining to designated broadband projects. $1.7 million was recorded in this account as of Q4 2022. On September 6, 2022, the Company launched its choice-based operating model to provide internet service providers with choices on how to access the Company’s infrastructure in order to effectively execute designated broadband projects. As part of the project, a contract was signed with Anixter Power Solutions Canada Inc. (Wesco) in support of this project. In December 2022, Hydro One committed to purchases in the amount of $61 million. On March 28 2023, the Province amended the OEB Act (O.Reg. 410/22) updating portions of the previous regulation established on April 21 2022. Key updates focus on amendments to performance timelines associated with designated broadband projects.
On August 14, 2023, the BBFA was further amended to provide additional guidance to support the implementation of legislative and regulatory requirements, including a framework to support cost sharing for pole attachments and make-ready work. .
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HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Supporting Critical Transmission Infrastructure in Southwestern Ontario
On May 9, 2022, Hydro One Networks filed a leave-to-construct application seeking OEB approval for the Chatham to Lakeshore Transmission Line project in Southwestern Ontario. On November 24, 2022, the OEB issued its Decision and Order granting leave to construct as requested in the application, with standard conditions of approval. On December 28, 2022, the Haudenosaunee Development Institute (HDI) filed an appeal to the Divisional Court, under s.22 of the Ontario Energy Board Act, 1998 (OEBA), of this decision. The appeal, among other items, asked to set aside the OEB's decision granting Hydro One approval to construct the Chatham to Lakeshore Transmission Line project and to deny the application. The HDI filed their appeal materials on March 1, 2023. The OEB and Hydro One filed their responding materials on May 1, 2023.
On June 8, 2023, all parties mutually agreed to a dismissal of the appeal without costs, and the appeal was dismissed by the Divisional Court on June 12, 2023. On June 15, 2023, Hydro One commenced construction of the Chatham to Lakeshore Transmission Line Project, which was expected to be in-service by the end of 2025.
On November 3, 2023, the Company announced a revision to the anticipated in-service date and estimated cost of the project. The Chatham to Lakeshore Transmission Line project is now expected to be in-service by December 2024 and completed for a total cost of $253 million.
Supporting Critical Transmission Infrastructure in Northwestern Ontario
In 2013, the Province issued an Order in Council with a directive from the Minister of Energy to the OEB, requiring Hydro One Networks to develop and seek approvals for the Northwest Bulk Transmission Line (now the Waasigan Transmission Line). In response to the 2013 directive, the OEB amended Hydro One Networks’ transmission license in 2014 to develop and seek approval for the project. Hydro One is currently undertaking an environmental assessment which includes both phases of the project (see section “Major Transmission Capital Investment Projects”). Hydro One has agreements with nine First Nation communities providing them the opportunity to acquire 50% ownership in the transmission line component of the project.
On April 25, 2023, the Company received a letter from the IESO confirming the need for reliable electricity in Northwestern Ontario. In this letter, the IESO recommends that Phase 2 of the Waasigan Transmission Line project, a single-circuit 230 kilovolt transmission line between Mackenzie Transformer Station in the Town of Atikokan and Dryden Transformer Station in the City of Dryden, should be in-serviced as soon as practically possible following Phase 1 of the project. This follows an IESO letter received in May 2022 in which it recommended construction of Phase 1 to proceed with an in-service date as close to the end of 2025 as possible.
On July 31, 2023, Hydro One Networks filed a leave-to-construct application seeking OEB approval for the Waasigan Transmission Line Project. See section "Major Transmission Capital Investment Projects".
Supporting Critical Transmission Infrastructure in Northeastern and Eastern Ontario
On July 10, 2023, the Ministry of Energy (Ministry) announced a proposal to take certain actions to facilitate the timely development of three transmission projects across Northeastern and Eastern Ontario. The Ministry proposed to bring forward an Order in Council that would, if approved, declare the following transmission projects, recommended to be in-service by 2029, to be priority projects under s. 96.1 (1) of the OEBA:
•The Mississagi to Third Line – a 230-kilovolt transmission line that is expected to run approximately 75 kilometers from Mississagi Transformer Station (west of Sudbury) to Third Line Transformer Station (Sault Ste Marie);
•The Greater Toronto Area East Line – a 230-kilovolt transmission line that is expected to run approximately 50 kilometers from either Cherrywood Transformer Station (Pickering) or Clarington Transformer Station (Oshawa) into Dobbin Transformer Station (Peterborough); and
•The Hanmer to Mississagi Line – a 500-kilovolt transmission line that is expected to run approximately 205 kilometers from Hanmer Transformer Station (Greater Sudbury) to Mississagi Transformer Station (west of Sudbury).
At the same time, the Ministry also proposed to bring forward an Order in Council and companion Directive, pursuant to s. 28.6.1 of the OEBA that would, if approved, direct the OEB to amend Hydro One Networks’ transmission licence to require it to undertake development work and seek all necessary approvals to construct the three projects listed above. The 60-day consultation period ended on September 8, 2023.
On October 23, 2023, the Minister of Energy directed the OEB to amend Hydro One Networks’ licence to require it to develop and seek approvals for the three priority transmission line projects noted above.
Sustainability Report
The Hydro One 2022 Sustainability Report entitled “Enabling Ontario's Clean Energy Future” is available on the Company’s website at www.hydroone.com/sustainability.
The 2022 Sustainability Report discloses the Company’s environmental, social and governance performance and provides a better understanding of how Hydro One manages the opportunities and challenges associated with its business. The report also includes disclosure relating to the Company’s current efforts in its priority areas of People, Planet and Community.
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HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
HYDRO ONE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
Board of Directors
On June 2, 2023, Mitch Panciuk, Helga Reidel and Brian Vaasjo were appointed by the Board of Hydro One. Their appointments replaced William (Bill) Sheffield, Blair Cowper-Smith and Russel Robertson who did not stand for re-election.
Executive Officers
On January 10, 2023, the Board of Hydro One announced the appointment of David Lebeter as President and Chief Executive Officer effective February 1, 2023. On February 1, 2023, Bill Sheffield stepped down from his role as Interim President and Chief Executive Officer, however, continued in his role as a director of Hydro One until the Annual General Meeting on June 2, 2023 where he did not stand for re-election.
On April 13, 2023, Hydro One announced the appointment of Teri French as Executive Vice President (EVP), Operations and Customer Experience and Andrew Spencer as EVP, Capital Portfolio Delivery. On the same day, the Company announced expanded mandates for Megan Telford as EVP, Strategy, Energy Transition, Human Resources and Safety and Chris Lopez as EVP, Chief Financial and Regulatory Officer.
On April 13, 2023, Paul Harricks announced his intention to retire and stepped down from his role as EVP, Chief Legal Officer. On the same day, Cassidy McFarlane was named General Counsel of Hydro One. Paul Harricks is remaining with Hydro One as a Senior Advisor to the Chief Executive Officer until the end of the year.
Effective June 30, 2023, Brad Bowness resigned as Chief Information Officer of Hydro One.
NON-GAAP FINANCIAL MEASURES
Hydro One uses a number of financial measures to assess its performance. The Company presents FFO or “funds from operations” to reflect a measure of the Company’s cash flow; and revenues, net of purchased power, to reflect revenues net of the cost of purchased power. FFO and revenues, net of purchased power, are non-GAAP financial measures which do not have a standardized meaning prescribed by GAAP and might not be comparable to similar measures presented by other entities. They should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under GAAP.
Hydro One also uses financial ratios that are non-GAAP ratios such as debt to capitalization ratio and earnings coverage ratio. Non-GAAP ratios do not have a standardized meaning prescribed by GAAP and might not be comparable to similar measures presented by other entities. They should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under US GAAP.
FFO
FFO is defined as net cash from operating activities, adjusted for (i) changes in non-cash balances related to operations, (ii) dividends paid on preferred shares, and (iii) distributions to noncontrolling interest. Management believes that FFO is helpful as a supplemental measure of the Company’s operating cash flows as it excludes timing-related fluctuations in non-cash operating working capital and cash flows not attributable to common shareholders. As such, management believes that FFO provides a consistent measure of the cash generating performance of the Company’s assets.
The following table provides a reconciliation of GAAP (reported) results to non-GAAP (adjusted) results on a consolidated basis.
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| (millions of dollars) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net cash from operating activities | 642 | 594 | 1,644 | 1,658 | |||||||||||||||||||
| Changes in non-cash balances related to operations | (18) | 13 | 40 | 107 | |||||||||||||||||||
| Distributions to noncontrolling interest | (2) | (2) | (8) | (8) | |||||||||||||||||||
| FFO | 622 | 605 | 1,676 | 1,757 | |||||||||||||||||||
15 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Revenues, Net of Purchased Power
Revenues, net of purchased power, is defined as revenues less the cost of purchased power; distribution revenues, net of purchased power, is defined as distribution revenues less the cost of purchased power. These measures are used internally by management to assess the impacts of revenue on net income and are considered useful because they exclude the cost of power that is fully recovered through revenues and therefore net income neutral.
The following tables provide a reconciliation of GAAP (reported) revenues to non-GAAP (adjusted) revenues, net of purchased power, on a consolidated basis.
Quarter ended (millions of dollars) | Sep 30, 2023 | Jun 30, 2023 | Mar 31, 2023 | Dec 31, 2022 | Sep 30, 2022 | Jun 30, 2022 | Mar 31, 2022 | Dec 31, 2021 | ||||||||||||||||||
| Revenues | 1,934 | 1,857 | 2,074 | 1,862 | 2,031 | 1,840 | 2,047 | 1,779 | ||||||||||||||||||
| Less: Purchased power | 854 | 798 | 1,010 | 895 | 963 | 852 | 1,014 | 914 | ||||||||||||||||||
| Revenues, net of purchased power | 1,080 | 1,059 | 1,064 | 967 | 1,068 | 988 | 1,033 | 865 | ||||||||||||||||||
Quarter ended (millions of dollars) | Sep 30, 2023 | Jun 30, 2023 | Mar 31, 2023 | Dec 31, 2022 | Sep 30, 2022 | Jun 30, 2022 | Mar 31, 2022 | Dec 31, 2021 | ||||||||||||||||||
| Distribution revenues | 1,329 | 1,285 | 1,509 | 1,371 | 1,458 | 1,314 | 1,517 | 1,347 | ||||||||||||||||||
| Less: Purchased power | 854 | 798 | 1,010 | 895 | 963 | 852 | 1,014 | 914 | ||||||||||||||||||
| Distribution revenues, net of purchased power | 475 | 487 | 499 | 476 | 495 | 462 | 503 | 433 | ||||||||||||||||||
Debt to Capitalization Ratio
The Company believes that the debt to capitalization ratio is an important non-GAAP ratio in the management of its debt levels. This non-GAAP ratio does not have a standardized meaning under US GAAP and may not be comparable to similar measures presented by other entities. Debt to capitalization ratio has been calculated as total debt (including total long-term debt and short-term borrowings, net of cash and cash equivalents) divided by total debt plus total shareholders’ equity, but excluding any amounts related to noncontrolling interest. Management believes that the debt to capitalization ratio is helpful as a measure of the proportion of debt in the Company's capital structure.
As at (millions of dollars) | September 30, 2023 | December 31, 2022 | ||||||||||||
| Short-term notes payable | 927 | 1,374 | ||||||||||||
| Less: cash and cash equivalents | (59) | (530) | ||||||||||||
| Long-term debt (current portion) | 700 | 733 | ||||||||||||
| Long-term debt (long-term portion) | 13,802 | 13,030 | ||||||||||||
| Total debt (A) | 15,370 | 14,607 | ||||||||||||
| Shareholders' equity (excluding noncontrolling interest) | 11,678 | 11,306 | ||||||||||||
| Total debt plus shareholders' equity (B) | 27,048 | 25,913 | ||||||||||||
| Debt-to-capitalization ratio (A/B) | 56.8 | % | 56.4 | % | ||||||||||
16 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Earnings Coverage Ratio
Earnings coverage ratio is defined as earnings before income taxes and financing charges attributable to shareholders, divided by the sum of financing charges and capitalized interest, and is calculated on a rolling twelve-month basis. The Company believes that the earnings coverage ratio is an important non-GAAP measure in the management of its liquidity. This non-GAAP ratio does not have a standardized meaning under US GAAP and may not be comparable to similar measures presented by other entities.
Quarter ended (millions of dollars) | Sep 30, 2023 | Jun 30, 2023 | Mar 31, 2023 | Dec 31, 2022 | Sep 30, 2022 | Jun 30, 2022 | Mar 31, 2022 | Dec 31, 2021 | ||||||||||||||||||
| Net income to common shareholders | 357 | 265 | 282 | 178 | 307 | 255 | 310 | 159 | ||||||||||||||||||
| Income tax expense | 36 | 65 | 64 | 41 | 100 | 68 | 79 | 55 | ||||||||||||||||||
| Financing charges | 143 | 144 | 136 | 128 | 122 | 119 | 117 | 123 | ||||||||||||||||||
| Earnings before income taxes and financing charges attributable to common shareholders | 536 | 474 | 482 | 347 | 529 | 442 | 506 | 337 | ||||||||||||||||||
Twelve months ended (millions of dollars) | Sep 30, 2023 | Jun 30, 2023 | Mar 31, 2023 | Dec 31, 2022 | Sep 30, 2022 | Jun 30, 2022 | Mar 31, 2022 | Dec 31, 2021 | ||||||||||||||||||
| Earnings before income taxes and financing charges attributable to common shareholders (A) | 1,839 | 1,832 | 1,800 | 1,824 | 1,814 | 1,774 | 1,700 | 1,604 | ||||||||||||||||||
Quarter ended (millions of dollars) | Sep 30, 2023 | Jun 30, 2023 | Mar 31, 2023 | Dec 31, 2022 | Sep 30, 2022 | Jun 30, 2022 | Mar 31, 2022 | Dec 31, 2021 | ||||||||||||||||||
| Financing charges | 143 | 144 | 136 | 128 | 122 | 119 | 117 | 123 | ||||||||||||||||||
| Capitalized interest | 20 | 18 | 15 | 16 | 16 | 16 | 15 | 16 | ||||||||||||||||||
| Financing charges and capitalized interest | 163 | 162 | 151 | 144 | 138 | 135 | 132 | 139 | ||||||||||||||||||
Twelve months ended (millions of dollars) | Sep 30, 2023 | Jun 30, 2023 | Mar 31, 2023 | Dec 31, 2022 | Sep 30, 2022 | Jun 30, 2022 | Mar 31, 2022 | Dec 31, 2021 | ||||||||||||||||||
| Financing charges and capitalized interest (B) | 620 | 595 | 568 | 549 | 544 | 539 | 524 | 521 | ||||||||||||||||||
| Earnings coverage ratio = A/B | 3.0 | 3.1 | 3.2 | 3.3 | 3.3 | 3.3 | 3.2 | 3.1 | ||||||||||||||||||
RELATED PARTY TRANSACTIONS
The Province is a shareholder of Hydro One with approximately 47.1% ownership at September 30, 2023. The IESO, OPG, Ontario Electricity Financial Corporation (OEFC), and the OEB are related parties to Hydro One because they are controlled or significantly influenced by the Ministry. OCN LP is a joint-venture limited partnership between a subsidiary of Hydro One and OPG. The following is a summary of the Company’s related party transactions during the three and nine months ended September 30, 2023 and 2022:
(millions of dollars) | Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| Related Party | Transaction | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Province | Dividends paid | 83 | 79 | 246 | 233 | ||||||||||||
| IESO | Power purchased | 451 | 553 | 1,596 | 1,739 | ||||||||||||
| Revenues for transmission services | 589 | 558 | 1,694 | 1,586 | |||||||||||||
| Amounts related to electricity rebates | 199 | 259 | 628 | 803 | |||||||||||||
| Distribution revenues related to rural rate protection | 63 | 62 | 187 | 183 | |||||||||||||
| Distribution revenues related to supply of electricity to remote northern communities | 12 | 8 | 35 | 26 | |||||||||||||
| Distribution revenues related to Wataynikaneyap Power LP | 14 | — | 41 | — | |||||||||||||
| Funding received related to Conservation and Demand Management programs | — | 2 | 1 | 2 | |||||||||||||
OPG1 | Power purchased | 5 | 1 | 12 | 12 | ||||||||||||
| Revenues related to provision of services and supply of electricity | 2 | 2 | 6 | 6 | |||||||||||||
| Capital contribution received from OPG | 1 | 3 | 4 | 5 | |||||||||||||
| Costs related to the purchase of services | — | 1 | 1 | 2 | |||||||||||||
| OEFC | Power purchased from power contracts administered by the OEFC | — | 1 | 1 | 2 | ||||||||||||
| OEB | OEB fees | 3 | 2 | 9 | 7 | ||||||||||||
OCN LP2 | Investment in OCN LP | — | 3 | — | 4 | ||||||||||||
1 OPG has provided a $2.5 million guarantee to Hydro One related to the OCN Guarantee. See section “Other Obligations - Summary of Contractual Obligations and Other Commercial Commitments” for details related to the OCN Guarantee.
2 OCN LP owns and operates electric vehicle fast charging stations across Ontario, under the Ivy Charging Network brand.
17 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
RISK MANAGEMENT AND RISK FACTORS
Hydro One is subject to numerous risks and uncertainties. Critical to Hydro One’s success is the identification, management, and to the extent possible, mitigation of these risks. Hydro One’s Enterprise Risk Management program assists decision-makers throughout the organization with the management of key business risks, including new and emerging risks and opportunities.
A discussion of the material risks relating to Hydro One and its business that the Company believes would be the most likely to influence an investor’s decision to purchase Hydro One’s securities can be found under the heading “Risk Management and Risk Factors” in the 2022 MD&A.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over financial reporting as defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings. Internal control, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and due to its inherent limitations, may not prevent or detect all misrepresentations.
There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, the Company’s disclosure controls and procedures and internal control over financial reporting.
NEW ACCOUNTING PRONOUNCEMENTS
The following table presents Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) that are applicable to Hydro One:
Recently Adopted Accounting Guidance
| Guidance | Date issued | Description | Effective date | Impact on Hydro One | |||||||||||||
| ASU 2021-08 | October 2021 | The amendments address how to determine whether a contractual obligation represents a liability to be recognized by the acquirer in a business combination. | January 1, 2023 | No impact upon adoption | |||||||||||||
| ASU 2022-02 | March 2022 | The amendments eliminate the troubled debt restructuring (TDR) accounting model for entities that have adopted Topic 326 Financial Instrument – Credit Losses and modifies the guidance on vintage disclosure requirements to require disclosure of current-period gross write-offs by year of origination. | January 1, 2023 | No impact upon adoption | |||||||||||||
HYDRO ONE HOLDINGS LIMITED - CONSOLIDATING SUMMARY FINANCIAL INFORMATION
Hydro One Limited fully and unconditionally guarantees the payment obligations of its wholly-owned subsidiary, HOHL, issuable under the short form base shelf prospectus dated November 22, 2022. Accordingly, the following consolidating summary financial information is provided in compliance with the requirements of section 13.4 of National Instrument 51-102 - Continuous Disclosure Obligations providing for an exemption for certain credit support issuers. The tables below contain consolidating summary financial information at September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and September 30, 2022 for: (i) Hydro One Limited; (ii) HOHL; (iii) the subsidiaries of Hydro One Limited, other than HOHL, on a combined basis, (iv) consolidating adjustments, and (v) Hydro One Limited and all of its subsidiaries on a consolidated basis, in each case for the periods indicated. Such summary financial information is intended to provide investors with meaningful and comparable financial information about Hydro One Limited and its subsidiaries. This summary financial information should be read in conjunction with Hydro One Limited's most recently issued annual and interim financial statements. This summary financial information has been prepared in accordance with US GAAP, as issued by the FASB.
Three months ended September 30 (millions of dollars) | Hydro One Limited | HOHL | Subsidiaries of Hydro One Limited, other than HOHL | Consolidating Adjustments | Total Consolidated Amounts of Hydro One Limited | |||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Revenue | $ | 178 | $ | 167 | $ | — | $ | — | $ | 2,132 | $ | 2,230 | $ | (376) | $ | (366) | $ | 1,934 | $ | 2,031 | ||||||||||||
| Net Income (Loss) Attributable to Common Shareholders | $ | 178 | $ | 167 | $ | — | $ | — | $ | 549 | $ | 486 | $ | (370) | $ | (346) | $ | 357 | $ | 307 | ||||||||||||
18 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Nine months ended September 30 (millions of dollars) | Hydro One Limited | HOHL | Subsidiaries of Hydro One Limited, other than HOHL | Consolidating Adjustments | Total Consolidated Amounts of Hydro One Limited | |||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Revenue | $ | 523 | 494 | $ | — | $ | — | $ | 6,496 | 6,503 | $ | (1,154) | (1,079) | $ | 5,865 | $ | 5,918 | |||||||||||||||
| Net Income (Loss) Attributable to Common Shareholders | $ | 521 | 493 | $ | — | $ | — | $ | 1,456 | 1,406 | $ | (1,073) | (1,027) | $ | 904 | $ | 872 | |||||||||||||||
As at September 30, 2023 and December 31, 2022 (millions of dollars) | Hydro One Limited | HOHL | Subsidiaries of Hydro One Limited, other than HOHL | Consolidating Adjustments | Total Consolidated Amounts of Hydro One Limited | |||||||||||||||||||||||||||
| Sept. 2023 | Dec. 2022 | Sept. 2023 | Dec. 2022 | Sept. 2023 | Dec. 2022 | Sept. 2023 | Dec. 2022 | Sept. 2023 | Dec. 2022 | |||||||||||||||||||||||
| Current Assets | $ | 128 | $ | 117 | $ | — | $ | — | $ | 2,778 | $ | 3,067 | $ | (1,617) | $ | (1,324) | $ | 1,289 | $ | 1,860 | ||||||||||||
| Non-Current Assets | $ | 3,478 | $ | 3,469 | $ | — | $ | — | $ | 48,341 | $ | 45,973 | $ | (20,621) | $ | (19,845) | $ | 31,198 | $ | 29,597 | ||||||||||||
| Current Liabilities | $ | 527 | $ | 509 | $ | — | $ | — | $ | 4,131 | $ | 4,455 | $ | (1,609) | $ | (1,312) | $ | 3,049 | $ | 3,652 | ||||||||||||
| Non-Current Liabilities | $ | 425 | $ | 425 | $ | — | $ | — | $ | 30,830 | $ | 28,801 | $ | (13,580) | $ | (12,813) | $ | 17,675 | $ | 16,413 | ||||||||||||
FORWARD-LOOKING STATEMENTS AND INFORMATION
The Company’s oral and written public communications, including this document, often contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the Company’s business, the industry, regulatory and economic environments in which it operates, and includes beliefs and assumptions made by the management of the Company. Such statements include, but are not limited to, statements regarding: the Company’s transmission and distribution rate applications including the JRAP and its proposed investment plan, resulting and related decisions including the DTA Implementation Decision, as well as resulting rates, recovery and expected impacts and timing; expected timing of the Company's update to its transmission and distribution rate base and revenue requirements; expectations about the Company’s liquidity and capital resources and operational requirements; sustainability goals; the Operating Credit Facilities; expectations regarding the Company’s financing activities; the Company’s maturing debt; the Company’s ongoing and planned projects, initiatives and expected capital investments, including expected approvals, results, costs and in-service and completion dates; contractual obligations and other commercial commitments; the number of Hydro One common shares issuable in connection with outstanding awards under the share grant plans; collective agreements; BBFA and expected impacts; the Company’s assessment of impacts related to the OEB-established generic variance and deferral accounts; future pension plan and contributions; dividends; non-GAAP financial measures; internal controls over financial reporting and disclosure; the MTN Program; the Universal Base Shelf Prospectus; the US Debt Shelf Prospectus; and the Company’s acquisitions, including CPUC. Words such as “expect”, “anticipate”, “intend”, “attempt”, “may”, “plan”, “will”, “would”, “believe”, “seek”, “estimate”, “goal”, “aim”, “target”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve assumptions and risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed, implied or forecasted in such forward-looking statements. Hydro One does not intend, and it disclaims any obligation, to update any forward-looking statements, except as required by law.
These forward-looking statements are based on a variety of factors and assumptions including, but not limited to, the following: the scope of the COVID-19 pandemic and duration thereof as well as the effect and severity of corporate and other mitigation measures on the Company’s operations, supply chain or employees; no unforeseen changes in the legislative and operating framework for Ontario’s electricity market or for Hydro One specifically; favourable decisions from the OEB and other regulatory bodies concerning outstanding and future rate and other applications; no unexpected delays in obtaining required regulatory approvals; no unforeseen changes in rate orders or rate setting methodologies for the Company’s distribution and transmission businesses; no unfavourable changes in environmental regulation; continued use of US GAAP; a stable regulatory environment; no significant changes to the Company's current credit ratings; no unforeseen impacts of new accounting pronouncements; no changes to expectations regarding electricity consumption; no unforeseen changes to economic and market conditions; recoverability of costs and expenses related to the COVID-19 pandemic, including the costs of customer defaults resulting from the pandemic; completion of operating and capital projects that have been deferred; and no significant event occurring outside the ordinary course of business. These assumptions are based on information currently available to the Company, including information obtained from third-party sources. Actual results may differ materially from those predicted by such forward-looking statements. While Hydro One does not know what impact any of these differences may have, the Company’s business, results of operations, financial condition and credit stability may be materially adversely affected if any such differences occur. Factors that could cause actual results or outcomes to differ materially from the results expressed or implied by forward-looking statements include, among other things:
•regulatory risks and risks relating to Hydro One’s revenues, including risks relating to actual performance against forecasts, competition with other transmitters and other applications to the OEB, the rate-setting models for transmission and distribution, the recoverability of capital expenditures, obtaining rate orders or recoverability of total compensation costs;
•risks associated with the Province’s share ownership of Hydro One and other relationships with the Province, including potential conflicts of interest that may arise between Hydro One, the Province and related parties, risks associated with the
19 | | |||||||
HYDRO ONE LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and nine months ended September 30, 2023 and 2022
Province’s exercise of further legislative and regulatory powers, risks relating to the ability of the Company to attract and retain qualified executive talent or the risk of a credit rating downgrade for the Company and its impact on the Company’s funding and liquidity;
•risks relating to the location of the Company’s assets on Reserve lands, that the company’s operations and activities may give rise to the Crown’s duty to consult and potentially accommodate Indigenous communities, and the risk that Hydro One may incur significant costs associated with transferring assets located on Reserves;
•the risk that the Company may be unable to comply with regulatory and legislative requirements or that the Company may incur additional costs for compliance that are not recoverable through rates;
•the risk of exposure of the Company’s facilities to the effects of severe weather conditions, natural disasters, man-made events or other unexpected occurrences for which the Company is uninsured or for which the Company could be subject to claims for damage;
•the risk of non-compliance with environmental regulations and inability to recover environmental expenditures in rate applications and the risk that assumptions that form the basis of the Company’s recorded environmental liabilities and related regulatory assets may change;
•risks associated with information system security and maintaining complex information technology and operational technology system infrastructure, including system failures or risks of cyber-attacks or unauthorized access to corporate information technology and operational technology systems;
•the risk that the Company may not be able to execute plans for capital projects necessary to maintain the performance of the Company’s assets or to carry out projects in a timely manner or the risk of increased competition for the development of large transmission projects or legislative changes affecting the selection of transmitters;
•risks relating to an outbreak of infectious disease, including the COVID-19 pandemic (including a significant expansion in length or severity of the COVID-19 pandemic, including the spread of its variants, restricting or prohibiting the Company’s operations or significantly impacting the Company’s supply chain or workforce; severity of mitigation measures relating to the COVID-19 pandemic and delays in completion of and increases in costs of operating and capital projects; and the regulatory and accounting treatment of incremental costs and lost revenues of the Company related to the COVID-19 pandemic);
•the risk of labour disputes and inability to negotiate or renew appropriate collective agreements on acceptable terms consistent with the Company’s rate decisions;
•risks related to the Company’s work force demographic and its potential inability to attract and retain qualified personnel;
•the risk that the Company is not able to arrange sufficient cost-effective financing to repay maturing debt and to fund capital expenditures or the risk of a downgrade in the Company’s credit ratings;
•risks associated with fluctuations in interest rates and failure to manage exposure to credit and financial instrument risk;
•risks associated with economic uncertainty and financial market volatility;
•risks associated with asset condition, capital projects and innovation, including public opposition to or delays or denials of the requisite approvals and accommodations for the Company’s planned projects;
•the risk of failure to mitigate significant health and safety risks;
•the risk of not being able to recover the Company’s pension expenditures in future rates and uncertainty regarding the future regulatory treatment of pension, other post-employment benefits and post-retirement benefits costs;
•the impact of the ownership by the Province of lands underlying the Company’s transmission system;
•the risk associated with legal proceedings that could be costly, time-consuming or divert the attention of management and key personnel from the Company’s business operations;
•the impact if the Company does not have valid occupational rights on third-party owned or controlled lands and the risks associated with occupational rights of the Company that may be subject to expiry;
•risks relating to adverse reputational events or political actions;
•the potential that Hydro One may incur significant expenses to replace functions currently outsourced if agreements are terminated or expire before a new service provider is selected;
•risks relating to acquisitions, including the failure to realize the anticipated benefits of such transactions at all, or within the time periods anticipated, and unexpected costs incurred in relation thereto;
•the inability to continue to prepare financial statements using U.S. GAAP; and
•the risk related to the impact of any new accounting pronouncements.
Hydro One cautions the reader that the above list of factors is not exhaustive. Some of these and other factors are discussed in more detail in the section entitled “Risk Management and Risk Factors” in this MD&A.
In addition, Hydro One cautions the reader that information provided in this MD&A regarding the Company’s outlook on certain matters, including potential future investments, is provided in order to give context to the nature of some of the Company’s future plans and may not be appropriate for other purposes.
Additional information about Hydro One, including the Company’s Annual Information Form, is available on SEDAR+ at www.sedarplus.com, the US Securities and Exchange Commission’s EDGAR website at www.sec.gov/edgar.shtml, and the Company’s website at www.HydroOne.com/Investors.
20 | | |||||||
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS – FULL CERTIFICATE
I, David Lebeter, President and Chief Executive Officer, Hydro One Limited, certify the following:
1.Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hydro One Limited (the “issuer”) for the interim period ended September 30, 2023.
2.No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4.Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5.Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a)designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i)material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii)information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
5.2 N/A
5.3 N/A
6.Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2023 and ended on September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
| Date: | November 8, 2023 | |||||||
/s/ David Lebeter | ||||||||
| President and Chief Executive Officer | ||||||||
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS – FULL CERTIFICATE
I, Christopher Lopez, Executive Vice President, Chief Financial and Regulatory Officer, Hydro One Limited, certify the following:
1.Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hydro One Limited (the “issuer”) for the interim period ended September 30, 2023.
2.No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4.Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5.Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a)designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i)material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii)information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
5.2 N/A
5.3 N/A
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2023 and ended on September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
| Date: | November 8, 2023 | |||||||
| /s/ Christopher Lopez | ||||||||
| Executive Vice President, Chief Financial and Regulatory Officer | ||||||||