Hydro One Q3 2026 Earnings Call Transcript

Hydro One (TSX:H) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.

This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.

View the webcast at https://edge.media-server.com/mmc/p/sywgxwd5/

Summary

Hydro One Limited reported a slight decline in net income attributable to common shareholders by 1.9% for the third quarter of 2026, with basic earnings per share at $0.69 compared to $0.70 in the previous year.

The company filed a Joint Rate Application (JRAP) with the Ontario Energy Board for a comprehensive five-year investment plan, proposing $27 billion in capital expenditures to modernize infrastructure and support Ontario’s growth.

Revenue net of purchased power increased by 5.6% year-over-year, driven by higher OEB-approved rates and increased transmission peak demand.

Hydro One’s third quarter capital expenditures rose by 39.2% compared to the previous year, with significant investments in transmission lines and storm-related asset replacements.

The company plans to grow earnings per share by 6% to 8% annually over the JRAP period, with expectations of accelerated rate base and earnings growth through 2032.

Hydro One’s operational highlights include energizing the Etobicoke Greenway transmission line and submitting a construction application for the North Shore Line.

Management emphasized the importance of safety, customer service, and strategic partnerships, including potential collaborations with First Nations for future transmission projects.

The company maintains a strong balance sheet, with a FFO to net debt ratio of 13.9% and plans to use a mix of funds from operations, debt, and equity to support future investments.

Full Transcript

OPERATOR

Good morning, ladies and gentlemen, and welcome to Hydro One Limited’s third quarter 2026 analyst teleconference. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.

As a reminder, the call is being recorded. I would now like to introduce your host for today’s conference, Waseem Khalil, Director of Investor Relations at Hydro One. Please go ahead.

Waseem Khalil (Director of Investor Relations)

Good morning and thank you for joining us for our quarterly earnings call. Joining me on the call today are our President and CEO, Megan Telford, and our Chief Financial and Regulatory Officer, Harry Taylor. On the call today we will provide an overview of our quarterly results and then we will answer as many questions as time permits during our question-and-answer session. As a reminder, today’s discussion will likely touch on estimates and other forward-looking information.

Listeners should review the cautionary language in today’s earnings release and our MD&A, which we filed this morning, regarding the various factors, assumptions and risks that could cause our actual results to differ, as they all apply to this call. With that, I turn the call over to our President and CEO, Megan Telford.

Harry Taylor (Chief Financial Officer)

Thank you, Megan. Good morning and thank you for joining us today to review our third quarter results. Starting with net income attributable to common shareholders, in the quarter we saw a small decline of 1.9% compared to the same period from a year ago. The significant drivers behind the change this quarter include higher OM&A expenses largely attributable to increased work program spending including station maintenance and vegetation management activities, higher depreciation, amortization and asset removal costs reflecting increased storm-related asset removal activity and continued growth in the capital asset base, and higher interest expense primarily due to higher long-term debt balances, partially offset by lower average short-term borrowings.

These drivers were partially offset by higher revenues net of purchased power due to higher OEB-approved 2026 rates as well as higher average monthly transmission peak demand. This resulted in third quarter basic earnings per share of $0.69 compared to $0.70 in the third quarter of 2025. It also resulted in year-to-date earnings per share of $1.96 compared to $1.84 for the same period in 2025. Our third quarter revenue net of purchased power increased year over year by 5.6%. Transmission revenues increased by 7.6% primarily due to higher OEB-approved 2026 rates and a 2.8% increase in the average monthly peak demand compared to the same period last year. Distribution revenues net of purchased power increased by 2.5% mainly due to higher OEB-approved 2026 rates, a 2.5% increase in distributed energy and a 0.9% increase in the number of customers.

On the cost front, operating, maintenance and administration expenses in the quarter increased by approximately 9.8% year over year. In the transmission segment, costs were 19.3% higher year over year primarily due to increased work program spending, including station maintenance and vegetation management, along with higher asset write-offs. In the distribution segment, costs declined by 0.6% year over year, mainly reflecting lower corporate support costs and the recovery of third-party storm costs and cost deferrals.

As these recoveries are offset in revenue, there is no impact on net income. These were partially offset by higher work program expenditures including emergency power restoration and lines maintenance. Of note, this year we have experienced more storm days than we did last year, which included the generational ice storm at the end of March 2025. Depreciation, amortization and asset removal costs during the quarter were higher by 10.7%. The increase was primarily attributable to higher asset removal costs stemming from increased storm restoration activity relative to the same quarter in 2025, higher spending on station construction projects and higher depreciation expense, reflecting continued growth in the capital asset base.

With respect to our financing activities, we saw a 9.3% increase in interest expense year over year. This was mainly due to the increase in our outstanding long-term debt following the additional issuances we executed in Q4 2025 and our inaugural US dollar issuance in Q2 2026, partially offset by lower average volume of short-term notes outstanding and higher capitalized interest. Our balance sheet continues to be in excellent shape along with our creditworthiness.

Our FFO to net debt ratio as at September 30, 2026 was 13.9% and remains well above the thresholds the rating agencies use to trigger a credit rating review. Turning to taxes, our income tax expense in the quarter was $60 million, which matched the same quarter last year. As a result, our effective tax rate this quarter was 12.6%, which was in line with the 12.4% achieved the same time last year. Looking at our capital expenditures, in the third quarter we invested $1.1 billion, which was an increase of 39.2% from the same period in 2025. The increase was due to investments in Ontario’s Broadband Initiative, investments in transmission line projects including the Northeast Power Line, North Shore Link and Longwood to Lakeshore, a higher spend on other major transmission development projects, investments in the Advanced Metering Infrastructure, or AMI 2.0 system, and a higher spend on storm-related distribution asset replacements in the quarter.

These were partially offset by a lower volume of transmission station refurbishments and equipment replacements. These were also lower due to the absence of investment in Sault Ste. Marie for SU3 circuit and a lower expenditure on specified distribution equipment to support long-term projects. As part of our ongoing disclosure practices and to enhance transparency, we have updated the future capital expenditure estimates included in the MD&A to extend the forecast period through 2032. The update reflects the filing of Hydro One Networks’ proposed transmission and distribution investment plan as part of the 2028–2032 Joint Rate Application, as well as the investment plan filed as part of the 2028–2032 rate application for Hydro One Sault Ste.

Marie. As a result of the extended forecast horizon, estimated future capital expenditures now include estimated capital expenditures and development costs for projects for which a Leave to Construct, Section 92 application has not yet been filed. Section 92 applications will contain more detailed project information and refined cost estimates, which will be incorporated into future disclosures once filed with the OEB. Outside of the Joint Rate Application, we expect to invest approximately $11 billion for new transmission lines that will ultimately be partnerships with First Nations and will have their own unique rate applications.

The projected capital expenditures and the timing of planned transmission and distribution investments for the 2028–2032 period remain subject to OEB approval. Looking at our assets placed in service, in the third quarter we placed $658 million in service for our customers, which was an increase of 14.0% compared to the prior year. In the transmission segment, we saw a decrease of 3.9% year over year, primarily due to timing of assets placed in service for station refurbishments and replacements. In the distribution segment, in-service additions increased by 28.3% from the prior year, mainly due to investments in the Broadband Initiative and a higher volume of storm-related asset replacements.

These were partially offset by the timing of investments placed in service for system capability reinforcement projects and lower investments in the AMI 2.0 system. Turning to our quarterly dividend, I’m pleased to report that our Board of Directors declared a dividend of 35.31 cents per share to common shareholders of record on December 9, 2026 and payable on December 31, 2026. Looking ahead, we continue to expect earnings per share to grow between 6% and 8% annually for the current JRAP period using the normalized 2022 EPS of $1.61 as a base. As Megan noted in her remarks, we recently filed our Joint Rate Application which outlines our proposed investment plan for our transmission and distribution for the 2028–2032 rate period. I am very excited about this application as it reflects Hydro One’s response to materially changing operating conditions while addressing the need to renew aging infrastructure, maintain safe and reliable service, strengthen system resilience and support economic growth across Ontario.

The application will now proceed through the Ontario Energy Board’s regulatory review process. Following approval, we intend to host an investor day where we will provide additional detail on our outlook for the next rate period, including our growth expectations, capital investment plans and funding plan. With that, we will open the phone lines and be happy to take questions.

Waseem Khalil (Director of Investor Relations)

Thank you, Megan and Harry. We will now open the call for questions. The operator will explain the Q&A polling process. As always, we ask that you limit your questions to one question and one follow-up. If you have additional questions, we request you rejoin the queue in case we can’t address your questions today. My team and I are always available to respond to follow-up questions. Please go ahead, Shannon.

OPERATOR

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Lonigan with Barclays. Your line is now open.

Michael Lonigan (Analyst at Barclays)

Hi, good morning. Thanks for taking my questions. So the JRAP application calls for a 10% rate base CAGR, excludes some transmission capital based on transmission awards and expectations for more. What would you say the potential total consolidated rate base CAGR could go to? How much above that 10% could be possible?

Harry Taylor (Chief Financial Officer)

Good morning, Michael, and to all callers, I apologize for the technical difficulties. Michael, you’re asking about rate base guidance beyond what we’ve given. Based on the rate application, at this point we can’t give any more guidance. We will update once we have completed the rate application, had it approved and also updated any estimates that are included in the current plan outside the rate application.

Michael Lonigan (Analyst at Barclays)

Great, thank you. And then, you know, based on the application as filed, and, you know, your expected financing of it with First Nations in mind, do we expect rate base and EPS growth to accelerate over the course of the next JRAP period through 2032, or could there be more linearity to it? Anything you could share about the shape of that profile would be helpful. Thank you.

Harry Taylor (Chief Financial Officer)

I think it’s fair to say that rate base growth and earnings growth will accelerate. A lot of it is dependent on what is approved through the rate application process. And then, as you reference, our goal is to have a 50/50 partnership with First Nations in all of our future transmission lines. We will recycle the capital as we sell our equity in those lines to fund future projects that will create a growing non-controlling interest both in our balance sheet and in our P&L. So there will be a little divergence between rate base growth and earnings growth, but it shouldn’t be material the way we see it. But a lot of it is dependent for once things settle out. And so we will, at our investor day, give our best outlook once we’ve got the rate application approved so there is clear guidance in terms of on both those dimensions.

Michael Lonigan (Analyst at Barclays)

Great. Thanks for taking my questions.

OPERATOR

Thank you. Our next question comes from the line of Maurice Choi with RBC Capital Markets. Your line is now open.

Maurice Choi (Analyst at RBC Capital Markets)

Thanks and good morning everyone. Maybe just a very quick start to my questioning. Any early thoughts on what the interveners or the regulators who have reviewed your application—what are their early thoughts and responses so far?

Harry Taylor (Chief Financial Officer)

Good morning, Maurice. There’s no early thoughts. We’re too early in the administrative process. Our expectations are essentially, are what we’re proposing reasonable and prudent given the objectives we have in the environment that we’re operating. But we haven’t seen any specifics to know where their questions or pressure points will be at this point.

Maurice Choi (Analyst at RBC Capital Markets)

That makes sense. Maybe if I could then just zoom in a little bit into some of the elements of the application. I find that one of the most fascinating elements of your application was your proposal to calculate the long-term debt rate for each of the five test years rather than using the first test year consistently across the remaining test years. So maybe I could just ask you, if you could just share with me why you felt this proposal was made.

What does it mean for Hydro One shareholders and for your customers separately?

Harry Taylor (Chief Financial Officer)

There are, it’s more a technical piece than anything else. What we have seen with both volatility in markets and our funding needs as we move through the period that we wanted to have specific forecast, specific rates for each of the years to give a more realistic picture in terms of what we thought our financing and funding requirements would be at the time and therefore could be recovered in rates. So it’s trying to get more precise, for lack of a better term, and more accurate.

Maurice Choi (Analyst at RBC Capital Markets)

And maybe as a quick follow-up and final one for me, based on how you just justified the need to change the cost of debt to be customized every single test year, how do you plan on reconciling this justification with your interveners and regulators, given that the ROE is going to be fixed for all five years?

Harry Taylor (Chief Financial Officer)

I think, well, at this point I expect there may be more realism to it and it will give us a chance to recover what we actually will fund. The reconciliation with ROE being fixed for the period is part of the overall construct that we operate in and it uses the best information at the time that the ROE is set. And so I don’t know that we can reconcile the two. The formulaic approach has, I think, served the industry and the customers of utilities in Ontario well and don’t see any need to change it.

Maurice Choi (Analyst at RBC Capital Markets)

Thank you very much.

OPERATOR

Thank you. Our next question comes from the line of Mark Jarvi with CIBC. Your line is now open.

Mark Jarvi (Analyst at CIBC Capital Markets)

Thanks. Good morning everyone. Appreciate all the details in sharing the capex plan into 2032. I’m curious how much flexibility is there on the transmission lines and I guess maybe even the overall scope of work on the joint rate application just to manage CapEx, because it’s a pretty substantial ramp. Just curious about being able to manage contractors, but also the funding requirements.

Harry Taylor (Chief Financial Officer)

Good morning, Mark. In terms of flexibility to manage the transmission lines will have their own rate applications as partnerships with the First Nations. What we tried to do with the disclosure is give the full picture with the gross amount that will be spent. We haven’t built the, this is in our disclosure in MD&A. We haven’t built in the funding, if you will, that we will ultimately receive from the First Nations at this point. And that will be something that’s important for us to take you through at Investor Day.

In terms of flexibility and funding, we are building our financing plan to support that level of expenditure right through the period. And as I think we’ve said before, it’s going to be a combination of funds from operations, senior secured debt, hybrid debt and equity as well. We will be raising equity, we expect, in the next rate period. The first step is to successfully achieve approval of the rate application. The funding plan will be working behind the scenes.

We’ll bring them together and then determine. We don’t anticipate any challenges in funding which would cause us to replace some of the spending we know that customers in Ontario want and need, the improvements in reliability, resiliency, the growth that our plan is going to deliver, and we don’t see any challenges from a funding point of view. Both procurement teams, our capital projects delivery team, are working with our EPC contractors on the transmission side to ensure that the availability of resources and materials will be there. We engage in some pretty long-term planning and long-term commitments after following a competitive process to ensure we’re bringing value our customers to each of these projects. And at this point we do not anticipate any issues that would cause us to replace things, but we will be vigilant in monitoring trends to make sure that that remains the case.

Mark Jarvi (Analyst at CIBC Capital Markets)

Given you don’t know exactly what would be the outcome of the joint rate application in terms of what’s approved, how do you think about planning even just for the first year in 2028, given you know you won’t finalize the plan until, you know, nine months from now and then you got to start to execute it in short order thereafter. Just any challenges in terms of just moving in the first year of the plan?

Harry Taylor (Chief Financial Officer)

We’re already planning, looking ahead to 2028, say what do we need and when do we need it or them? Human resources are as critical as materials, so we’re moving on that already. We’re not waiting for January 1st to start. We’re confident we have put together a compelling proposal in terms of what we’ve laid out. If we need to make some changes, then we’ll make those changes. But we are planning for full implementation as of January 1, 2028 and doing a lot to get our organization, our vendors, partners and our funders, if you will, ready to help support us in this.

Mark Jarvi (Analyst at CIBC Capital Markets)

Sounds good. Thanks for the time this morning.

OPERATOR

Thank you. As a reminder to ask a question at this time, please press star 11 on your touchtone telephone. Our next question comes from the line of Robert Hope with Scotiabank. Your line is now open.

Robert Hope (Analyst at Scotiabank)

Good morning everyone. Appreciate all the JRAP conversations and I understand it is early days and discussions with stakeholders about what you have filed. But as we look forward and if there is a path towards a settlement here, what milestones should we be looking for and what timeline should we be looking for?

Harry Taylor (Chief Financial Officer)

Good morning Rob. We’re in the administrative phase right now. Interrogatories, technical conference, et cetera. Settlement discussions will begin February timeframe and could, depending how they go, could proceed right through almost to June. So as we’re thinking about this, administration and interrogatories technical through into January, Feb to May, June settlement discussions. And then if we fail to come to a settlement on everything, we move to oral hearing which will take place over the summer.

And then once we complete the oral hearing process, the commissioners have up to 90, a maximum 90 days to issue the approved rate application.

Robert Hope (Analyst at Scotiabank)

Great. Appreciate that. Maybe switching gears here. So the Ontario government has proposed significant changes to LDC government and kind of planning. You know, what are your initial takes on this and, you know, could this spur increased LDC consolidation in the province? Also acknowledging new mayoral terms.

Megan Telford (President and CEO)

Hi Rob, it’s Megan. So thanks for your question. So I would say what’s really interesting about LDC consolidation is for us, as you know, we’re already the largest distributor and we’re very supportive of what the government has done. The reforms that you can see are mainly governance reforms in terms of who can sit on the boards and really asking municipalities to work with their utility to file a 10-year capital plan. And that’s really very in line with what we talk about, right?

This need for long-term planning in the province and ensuring the growth. So we’re very supportive of that. I think whether it actually leads to consolidation is really in the hands of the municipality. I mean obviously they’ll have new boards that need to discuss whether they can meet those capital plans and if there is consolidation, we’re always very, very prudent about what we would look at and make sure it’s in the best interest of the community and our shareholders.

So we’re obviously interested, but we would be very thoughtful about which acquisitions we would do.

OPERATOR

Thank you. Thank you. Our next question comes from the line of Benjamin Pham with BMO. Your line is now open.

Benjamin Pham (Analyst at BMO Capital Markets)

Hi. Thanks. Good morning. I want to go back to the JRAP application. Your prepared remarks and the press release that came out when you filed had a really good summary of the compare and contrast of the current JRAP versus the upcoming. Can you perhaps add a bit more detail to the compare-contrast situation when you think about the outcome of the last JRAP? I’m just thinking about what did you achieve in terms of percent of revenues or what was approved in the CapEx plan and then also the timeline in terms of application to OEB decision.

Harry Taylor (Chief Financial Officer)

Good morning, Ben. If looking back, if you will, now we’re not through the rate period, we will have spent all that we had proposed and as we agreed to in the settlement, if you will, for our Hydro One Networks Inc. business. But we have not accomplished everything that was in the rate filing at the time. As we dealt with the extraordinary inflation in the industry, we deferred some of the work that we had planned on doing to stay within the envelopes.

The spending envelopes had been approved. So we didn’t end up generating a backdoor price increase, rate increase to our customers. And so while we will have spent everything that we were approved to have spent, we won’t have accomplished everything that we had initially proposed to be accomplished or at least agreed to accomplish in the settlement. And so that’s not something that we like. But we made the decision that it was better not to jam our customers with an unexpected rate increase that the ultimate excess spending could have resulted in in the next rate period and stick within our envelopes. We did a lot of work to go through the work plan, the work program, and defer the least, if you will, risky or the most discretionary items that there were, where we never want to put either resiliency or reliability at any greater risk.

We’re working to improve it all and the asset health is the other piece we look. So we deferred work that would have the least impact on either asset health, reliability or resiliency. We do want to make that up. That’s part of what we’re doing. And we can reset everything for the next rate period and have some pretty high objectives in terms of what we’ll achieve for resiliency, improving resiliency, making up some of the things that we weren’t able to do in the last period so that the system is able to enable the growth but also be more resilient as climate change inflicts some of the damage that it’s done on our system.

Benjamin Pham (Analyst at BMO Capital Markets)

Okay. And just to clarify on the expectation on this JRAP timeline, you’ve laid out some of the scenarios about one year or so to decision. Was that the timeline of the last JRAP? It took about a year to get a decision from OEB.

Harry Taylor (Chief Financial Officer)

I think we were a little faster. The year timeline in this case would take us right out to the end of the oral hearing phase. We settled last time so we were about nine months from start to finish. But we want to be clear what the process could look like if we go the whole way.

Benjamin Pham (Analyst at BMO Capital Markets)

I gotcha. I think there was some sort of refiling with inflation as well in the last one.

Harry Taylor (Chief Financial Officer)

We did have that. You’re right. We had a refiling, an inflation update filing, which extended the period a little bit.

Benjamin Pham (Analyst at BMO Capital Markets)

Can I ask, you have a higher CapEx program in the next JRAP. Your last growth guidance included placeholders for broadband and rate base and a little bit of LDC, which played out a little bit. How do you think about that going forward through 2032 and is that more maybe a bit of, I don’t know. Megan touched on LDC in some of her response there. Is that a lever perhaps for Hydro One if maybe the JRAP CapEx doesn’t get fully approved?

Harry Taylor (Chief Financial Officer)

On the broadband file, it’ll be complete. So that project will be done and it’ll be in our rate base. We aren’t building any LDC acquisitions into our business plans or the guidance that we give. If something does come that is sufficiently attractive and isn’t overpriced in terms of valuation expectations and we can create some value through the acquisition, we will bring that in and then we will adjust our guidance accordingly.

OPERATOR

Thank you. Our next question comes from the line of Patrick Henny with National Bank Capital Markets. Your line is now open.

Patrick Henny (Analyst at National Bank Capital Markets)

Thank you. Good morning everyone. Just on the ask to increase the equity thickness to 45%. Curious if, Harry, you’ve had any preliminary discussions with the rating agencies with respect to, you know, if approved, how this new deemed capital structure might call for, say, resetting the deck on the corporate capital stack or perhaps shift the goal posts on you with respect to the FFO to debt threshold.

Harry Taylor (Chief Financial Officer)

Pat, we meet with the rating agencies annually and both review the business, but also look ahead. We spent time with each of the agencies who rate us going through what our proposal and what the implications were. At this point, we are not planning or expecting to see any change in downgrade rating thresholds. I think rightly the rating agencies are saying we certainly like what you’re proposing. We understand your argument in terms of it meets the fair return standard and against your comparators, you’re even at the low end, 45%.

But they’re taking a wait and see approach. And so once we have got a successfully received approval of the application, we will then work with them as we work with you and issue the guidance and work through that to see if there are any upsides, if you will, in terms of rating and thresholds.

Patrick Henny (Analyst at National Bank Capital Markets)

Got it. Okay, thanks for that. And then I guess looking at the significant increase in capital budget as you’ve outlined, the expected increase to average residential rates looks to be relatively nominal. But I’m just wondering if you could confirm, if you include the all 15 ATP projects, what the total impact on customer affordability might look like, and I guess what levers you might still be able to pull outside of, say, you know, peak demand or other factors outside of your control.

Harry Taylor (Chief Financial Officer)

The 15 ATP projects, a lot of them, more than half, we don’t have even Section 92 estimates. So rate impacts are not included in anything that we have included in our joint rate application. They’ll have their own rate application. Transmission by its nature doesn’t result in significant increases for customers over time. The transmission portion of the bill in Ontario is much lower than distribution and certainly much lower than generation. But each rate application will have that in there and goes through the approval process.

So we don’t expect anything more than a modest increase in all-in transmission rates in Ontario. It’s pooled across all transmitters.

Patrick Henny (Analyst at National Bank Capital Markets)

Okay, that’s perfect. I’ll leave it there. Thank you.

OPERATOR

Thank you. And that does conclude our Q and A session for today. I’d like to turn the call back over to Waseem Khalil for any further remarks.

Waseem Khalil (Director of Investor Relations)

Thank you, Shannon. The management team at Hydro One thanks everyone for their time with us this morning. We appreciate your interest and your continued support. If you have any follow up questions that weren’t addressed on the call, please feel free to reach out and we’ll get them answered for you. We look forward to seeing everyone at our fourth quarter and year end conference call in February. Thank you again and enjoy the rest of your day.

OPERATOR

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Have a great day.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.