Hydro One’s Earnings Surge on Rate Hikes and Cost Cuts

Date of Call: Feb 13, 2026

Financials Results

• EPS: Q4: $0.39 per share, up from $0.33 in Q4 2024; Full year: $2.23, up from $1.93 in 2024

Guidance:

• Earnings per share expected to grow between 6% and 8% annually for the rate period, using normalized 2022 EPS of $1.61 as a base.
• Effective tax rate expected to be between 13% to 16% for the remainder of the JRAP '23 period.

Business Commentary:

Earnings Performance:

• Hydro One Limited reported basic earnings per share of $0.39 for Q4 2025, compared to $0.33 in Q4 2024, representing an increase of 16.5%.
• The growth in earnings was driven by revenue growth from volume increases in transmission and distribution, OEB-approved 2025 rates, and lower OM&A costs, primarily reduced corporate support costs.

Capital Investment and Asset Deployment:

• The company invested $939 million in Q4 2025, a 17.5% increase over Q4 2024, and placed approximately $1.3 billion in assets in service, marking a 19.1% increase year-over-year.
• This increase was due to investments in transmission projects like the Waasigan and St. Clair transmission lines and higher spend on distribution customer connections.

Operational and Productivity Savings:

• Hydro One achieved approximately $254 million in productivity savings across capital and operating expenditures in 2025.
• This was attributed to enhanced focus on productivity, resulting in absolute reductions in spending, reduced unit costs, and greater non-customer revenue.

Debt and Financing Activities:

• Interest expenses increased by 10.8% year-over-year due to higher outstanding long-term debt following additional issuances, with Hydro One issuing $1.6 billion of medium-term notes in Q4.
• The increase in debt was to support the capital program and refinance maturing debt, with all issuances completed under a sustainable financing framework.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted a 'very strong finish to the year,' 'strong year for safety,' and 'another strong year for safety in 2025.' They reported 'strong customer satisfaction results' and noted 'meaningful progress towards positioning Hydro One as a trusted energy partner.' The tone was confident regarding growth opportunities and regulatory engagement.

Q&A:

• Question from Robert Hope (Scotiabank Global Banking and Markets): How do you think future large-scale transmission projects could fall under the new competitive procurement program? And how does Hydro One position itself in a competitive environment?
  Response: Management believes the competitive process likely excludes time-critical or existing right-of-way projects; it will focus on longer-runway, greenfield projects. Hydro One is providing feedback and awaits the IESO's final criteria.

• Question from Robert Hope (Scotiabank Global Banking and Markets): What would you like to see come out of the Ontario expert panel on local electric distribution? And do you think we could see increased consolidation?
  Response: Management expects the panel to ensure local distribution companies are adequately financed, which could lead to consolidation for some underfunded entities, but the government's intent is not consolidation. The outcome is expected to be positive for the industry.

• Question from Maurice Choy (RBC Capital Markets): Given the successful First Nations financing for the Chatham to Lakeshore line, is there any indication that the same outcome won't be achieved across all backlog projects?
  Response: Management sees no indication of challenges replicating the successful partnership model across other projects and is optimistic about future partnerships, citing a learned and expanded capital market for these low-risk projects.

• Question from Maurice Choy (RBC Capital Markets): What is the capacity of First Nations equity participation across the growing backlog, and is it capped?
  Response: Management notes a great expansion in the market willing to lend to First Nations for these projects and sees no current concerns about capacity, though it remains an item under watch.

• Question from Maurice Choy (RBC Capital Markets): Can you give color on early stakeholder engagement ahead of the JRAP filing and their sentiment on rate increases versus investment priorities?
  Response: Management reports strong customer support for the proposed investments in expanding capacity and improving reliability, with explicit communication of bill impacts. Support is consistent across customer segments and similar to prior engagement periods.

• Question from Mark Jarvi (CIBC Capital Markets): Given awarded transmission lines and urgency, what is the dialogue around deferring sustaining CapEx and the trade-off between growth and reliability investments?
  Response: Management focuses investments on reliability-critical or end-of-life assets, using monitoring, maintenance adjustments, and loading changes to extend asset life where possible, avoiding unnecessary spending.

• Question from Mark Jarvi (CIBC Capital Markets): How might incremental capital planned for 2026-2027 impact earnings, considering financing costs and potential recovery?
  Response: The impact is limited; incremental interest expense is offset by favorable bond coupons, and most capital will not go in service, so no significant drag on earnings. Previously published EPS guidance remains unchanged.

• Question from John Mould (TD Cowen): Can you provide more color on the lower OM&A costs year-over-year and the expected run rate going forward?
  Response: The reduction was driven by a severance accrual payoff and capitalization of corporate overhead. The OM&A run rate is sustainable and can be proxied by the OEB-approved envelopes in the Joint Rate Application '23 filing.

• Question from John Mould (TD Cowen): What are you seeing in the M&A market outside Ontario, particularly in neighboring jurisdictions?
  Response: Management is not actively looking for M&A opportunities outside Ontario due to current focus on building 14 transmission lines and running the distribution system, but would consider a non-distracting, right opportunity.

Contradiction Point 1

Competitive Transmission Procurement Process

Contradiction on whether the competitive process is a new opportunity or a threat to existing projects.

Can you provide an overview of the company's financial performance for the quarter? - Robert Hope (Scotiabank Global Banking and Markets)

2025Q4: The competitive process is still in its early stages... It is unlikely to include time-critical projects or those on Hydro One's existing right-of-ways. The process will likely focus on 'greenfield' projects... - David Lebeter

How will future large-scale transmission projects align with the IESO's new competitive procurement, and how is Hydro One positioning itself in this competitive environment? - Pito Chickering (Deutsche Bank)

20260127-2025 Q4: The company is pleased with the strength and momentum and believes it will perform within its long-term plan over time. The impact of potential DFL approvals is not yet sized... - Mike Marks(CFO)

Contradiction Point 2

JRAP Filing and Customer Engagement

Contradiction on the level of customer support for rate increases, shifting from strong support to an implied pressure point.

What are your key takeaways from the earnings results? - Maurice Choy (RBC Capital Markets)

2025Q4: Customer engagement has been very positive. Over 100,000 customers were reached for JRAP '28, showing strong support for proposed investments... - Henry Taylor & David Lebeter

Ahead of the next JRAP filing, can you provide insights on early stakeholder engagement, including their sentiment, willingness to accept rate increases, and priorities? - Ann Hynes (Mizuho)

20260127-2025 Q4: The $400 million resiliency program... The resiliency plan is reflected in the guidance to offset exchange headwinds... - Mike Marks(CFO)

Contradiction Point 3

Purpose and Potential Outcomes of the Pulse Panel Review

Contradiction on whether the panel's primary goal is to ensure investment capacity or to drive consolidation.

Robert Hope (Scotiabank Global Banking and Markets), what are your key insights on the earnings report? - Robert Hope (Scotiabank Global Banking and Markets)

2025Q4: The panel's primary goal is to ensure all local distribution companies (LDCs) are adequately financed to make necessary investments. While increased consolidation is a potential outcome for some underfunded LDCs, it is not the government's intent. - David Lebeter(CFO)

What outcomes do you hope for from the Ontario Pulse Panel on local electric distribution, and could it drive increased consolidation? - Maurice Choy (RBC Capital Markets)

2025Q3: This Pulse Panel is not focused on driving consolidation. Its aim is to ensure Ontario’s electricity sector can support the massive growth in demand over the next 25 years. The focus is on financing and investment readiness, not structural changes like consolidation. - David Lebeter(CFO)

Contradiction Point 4

Impact of Incremental Capital on Near-Term Earnings

Contradiction on whether incremental capital expenditure will create a financial drag on earnings.

What is your question, Mark Jarvi? - Mark Jarvi (CIBC Capital Markets)

2025Q4: The impact will be limited... Most of the incremental capital will not be placed in service in the near term, so it will not generate earnings. Therefore, it is not expected to create a drag, and previous earnings guidance remains unchanged. - Henry Taylor(CFO)

How will the incremental capital planned for 2026 and 2027 impact earnings, particularly regarding higher financing costs? - Benjamin Pham (BMO Capital Markets)

2025Q3: To avoid raising expectations and then disappointing if load normalizes, Hydro One is sticking with the 6–8% long-term guidance. - Henry Taylor(CFO)

Contradiction Point 5

Growth Outlook and Volume Drivers

Confidence in achieving volume growth targets shifts from being conditional to being firmly based on execution.

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2025Q4: Confidence stems from 18 consecutive quarters of volume growth, a growing population in markets, more outpatient capacity (and capital coming online), and strong physician relationships. - Samuel Hazen(CEO)

How do you plan to achieve the long-term volume range by 2026 without relying on exchange growth, especially if exchanges are flat or declining? - Stephen Baxter (Wells Fargo Securities, LLC)

2025Q3: Confidence stems from 18 consecutive quarters of volume growth, a growing population in markets, more outpatient capacity (and capital coming online), and strong physician relationships. - Samuel Hazen(CEO)