Hydro One is the largest electricity transmission and distribution company headquartered in Ontario. It is one of the leading electrical utilities in North America with a century-old experience in the power industry.
According to its website, Hydro One has enough distribution lines to wrap the Earth thrice. Hydro One also provides broadband telecommunications services through its extensive fiber optic network.
The utility owns and operates 98% of Ontario’s transmission capacity with ~30,000 circuit kilometers of transmission lines and 25 cross-border interconnections with neighboring provinces and the U.S. Its distribution business comprises 123,000 circuit kilometers of low-voltage power lines serving ~1.4 million customers.
The company has a stable source of growing cash flows as about 99% of its revenues are derived from regulated businesses. Hydro One enjoys a significant scale and leadership position in the rate-regulated environment. The company’s combined transmission and distribution rate base stood at $22.6 billion in 2020.
Key Investment Data
- Opportunity Score: 54
- Ticker: TSE:H
- Sector: Utilities
- Industry: Utilities - Regulated Electric
- Market Cap: 18.43B
- P/E: 10.19
- Dividend Yield: 3.46%
- Payout Ratio (TTM): 33.50%
- Canadian Dividend Aristocrat: NO
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 4/10
- Dividend Income Fit: 6/10
Revenue Growth & Market Exposure
Hydro One’s transmission system transmits high-voltage electricity from nuclear, hydroelectric, natural gas, wind, and solar sources to distribution companies and industrial customers across Ontario. Its distribution system is the largest in Ontario.
The company derived 51% of 2020 revenue from transmission, 49% from distribution, and 1% from other businesses. The other segment consists of telecommunications business, Hydro One Telecom, which provides telecommunications support for its transmission and distribution businesses.
Hydro one caters to suburban, rural, and remote homes and businesses across Ontario. Customers trust Hydro One for safe and reliable transmission and distribution.
As a large power distribution company, Hydro One caters to 26% of the total number of customers in Ontario or 75% of the geographic area of Ontario. With a history dating back over 110 years, Hydro One’s service territory covers ~90% of the province including Northern Ontario.
It generates and distributes electricity to 22 remote communities in the most northern parts of the province. Over the years, the business has evolved to meet the changing needs of its customers and communities across Ontario.
FY 2020 results were also positively impacted by higher transmission revenues primarily resulting from OEB-approved transmission rates. The company operates in a stable and collaborative rate-regulated environment. The transition from the cost of service to incentive based regulatory model and transformation of business will create value for both customers and shareholders.
Trends like emerging industries and system requirements, rate base expansion, and productivity improvements should drive future growth.
Hydro One’s dividends are supported by stable, regulated cash flows and planned rate base growth. The company has a dividend yield of 3.6% and a very reasonable payout ratio of 33%.
The company last raised its dividend by more than 6% annually and sports a dividend CAGR of 4% over the three-year period. In 2019, the company achieved a total return to shareholders of 29%. The company has an attractive dividend yield with a 70%-80% target payout ratio.
Hydro One has rendered total productivity savings of over $738 million since 2015. It achieved annual productivity savings of $286 million in the latest quarter, representing a ~41% YoY increase. In 2019, Hydro One invested ~$1.7 billion in capital investments to expand the electricity grid and renew and modernize existing infrastructure. The company also made capital investments of $577 million during the fourth quarter of 2020 and placed $878 million of new assets in service.
Hydro One enjoys stable and growing cash flows with 99% of business fully rate-regulated in a constructive regulatory environment. The company has a strong investment grade balance sheet and also benefits from a unique combination of electrical transmission and local distribution with no power generation assets.
This saves the utility from huge upfront investments and reduces any exposure to commodity price volatility. The company is estimating a ~5% rate base CAGR and dividend growth of 5% in the future. Hydro One is also expecting EPS growth of 4%-7% during 2019-2022.
Hydro One competes with several utility companies having a huge presence in Canada. It competes with the likes of Alta Gas, Superior Plus, Fortis, etc. Fortis is a leading utility company in North America with virtually 100% regulated utility assets.
The company engages in regulated power generation, electric transmission, and energy distribution across North America. AltaGas is a North American diversified energy infrastructure company.
|TSE:ACO.X||ACO.X||Atco||Utilities||Utilities - Diversified||0.61||45.08||5.16||24.04||24.04||3.28||0.0398||0.9440||4||1.79||0.1390||6||7||Tollbooth - Regulated||YES||YES||YES||NO||Canada||1||3.98|
|TSE:BIP.UN||BIP.UN||Brookfield Infrastructure Partners||Utilities||Utilities - Diversified||0.43||67.50||28.14||0.00||0.00||0.58||0.0377||3.3980||4||2.04||0.0746||4||2||Tollbooth - Regulated||NO||NO||NO||NO||Canada||1||3.77|
|TSE:CU||CU||Canadian Utilities||Utilities||Utilities - Diversified||0.54||36.55||9.81||36.42||36.42||2.09||0.0481||1.9890||4||1.76||0.1157||5||7||Tollbooth - Regulated||NO||YES||YES||NO||Canada||1||4.81|
|TSE:EMA||EMA||Emera||Utilities||Utilities - Diversified||0.62||58.19||14.90||21.32||21.32||2.86||0.0438||0.9010||4||2.55||0.0954||6||8||Tollbooth - Regulated||NO||YES||YES||NO||Canada||1||4.38|
|TSE:FTS||FTS||Fortis||Utilities||Utilities - Regulated Electric||0.60||56.58||26.56||21.49||21.49||2.66||0.0357||0.7550||4||2.02||0.0922||5||7||Tollbooth - Regulated||NO||YES||YES||NO||Canada||1||3.57|
|TSE:H||H||Hydro One||Utilities||Utilities - Regulated Electric||0.54||30.80||18.43||10.19||10.19||1.58||0.0346||0.3350||4||1.07||0.0821||4||6||Tollbooth - Regulated||NO||NO||NO||NO||Canada||1||3.46|
Hydro One is one of the largest regulated electric utilities in North America with a significant scale and leadership position in Ontario. The company should gain from Ontario’s emerging incentive-based regulation and grow with rate base expansion.
Hydro One is expected to deliver consistent rate base growth driven by its multi-year capital investment program.