Hydro One’s Strong Q1 Performance Drives National Bank to Raise Price Target to $47

Hydro One Limited (HYD.TO) has emerged as a resilient player in Ontario’s energy landscape, with its Q1 2025 results defying market expectations and prompting National Bank of Canada to raise its price target to $47 from $46. The utility’s ability to navigate operational headwinds while delivering 17.4% EPS upside to forecasts underscores its strategic growth trajectory and investor confidence.

Q1 Results: A Strategic Beat Amid Challenges

Hydro One reported Q1 EPS of $0.60, surpassing the $0.51 consensus estimate, driven by:
- Transmission revenue growth of 15%, fueled by higher Ontario Energy Board (OEB)-approved rates and peak demand.
- A $261 million acquisition of a 48% stake in the East West Tie transmission line, which became immediately accretive to earnings. This asset, spanning 450 km, strengthens Ontario’s grid capacity and supports northern electrification.

Revenue totaled $1.19 billion, slightly below the $1.2 billion estimate, but net revenue rose 11% year-over-year, reflecting robust demand and rate adjustments.

Operational Resilience and Cost Management

Despite facing severe winter storms—resulting in 1.1 million service restorations—Hydro One demonstrated financial discipline:
- Operating costs rose just 3.1%, with productivity initiatives offsetting inflationary pressures.
- A $10,000 per community recovery grant was launched for municipalities and Indigenous communities affected by the storms.
- Safety metrics improved, with a recordable injury rate of 0.55 per 200,000 hours, below the 1.0 world-class benchmark.

The company also applied for cost recovery via an OEB Z-factor adjustment, mitigating storm-related expenses.

Financial Health and Dividend Stability

Hydro One maintained a strong balance sheet:
- FFO-to-net-debt ratio of 13.4%, well above credit rating thresholds.
- Debt levels remain manageable at $25 billion, with $3.05 billion in undrawn credit facilities.
- The dividend was held steady at $0.3142 per share, supporting its 2.8% yield and signaling confidence in cash flow stability.

Strategic Growth and Regulatory Risks

Hydro One’s $11.8 billion 2023–2027 capital plan aims to grow its rate base by 6% annually, leveraging projects like the East West Tie line and cross-border grid partnerships. However, risks persist:
- OEB’s revised cost-of-capital framework (effective 2026) could pressure returns, though Hydro One plans to propose adjustments in its 2026 rate application.
- Supply chain disruptions and U.S. tariff impacts remain concerns, prompting diversification to Canadian and Indigenous suppliers.

Analyst View: A Hold with Upside Potential

National Bank’s $47 price target reflects optimism about Hydro One’s regulated cash flows and Ontario’s energy demand growth (projected to rise 120–135% by 2050 for net-zero goals). While the broader analyst consensus remains “Hold”, the stock’s 52-week high of $51.86 highlights investor optimism.

Conclusion: A Utility with Defensive Strength and Growth Catalysts

Hydro One’s Q1 results reinforce its position as a defensive utility play, benefiting from regulated rate hikes and infrastructure investments. The $47 price target aligns with its 6–8% annual EPS growth target through 2027, supported by:
- Strategic acquisitions like the East West Tie line, contributing $880 million to its rate base.
- Resilient financial metrics, including a 13.4% FFO-to-debt ratio and stable dividend.

However, risks—such as regulatory uncertainty and rising interest rates—require monitoring. For income-focused investors, Hydro One’s 2.8% yield and long-term growth pipeline make it a compelling pick, especially as Ontario’s energy needs expand.

In a sector defined by stability, Hydro One’s execution on capital projects and cost management positions it as a top-tier utility, justifying National Bank’s price target increase and warranting a closer look for conservative portfolios.