Hydro One Limited

Hydro One Limited (TSX: H) operates across regulated transmission and distribution assets in Ontario. The company is the largest electricity provider, which serves nearly 1.4 million customers. Transmission accounts for nearly 60% of the company's rate base, while the company derives the rest of the revenue from distribution.

Dividend update

The Board of Directors announced a quarterly dividend of CAD 0.2536 per share, payable on December 09, 2020.

Q3FY20 Financial Highlights:

• The group announced its quarterly results, wherein the company posted total revenue of CAD 1,903 million, as compared to CAD 1,593 million. The increase was primarily attributable to significantly higher distribution and an increase in transmission revenue.
• Increase in the transmission revenue was due to higher average monthly Ontario 60-minute peak demand supported by favorable weather. Increase in distribution revenue was on account of additional income from OEB-approved rates and stronger energy consumption.
• Total costs stood at CAD 1,475 million, as compared to CAD 1,215 million in the previous corresponding period (pcp).
• Income before financing charges and income tax expense stood at CAD 428 million, as compared to CAD 378 million, thanks to higher revenue, partially offset by higher expenses.

Financial Metrics (Source: Company Presentations)

• Net income stood at CAD 292 million, as compared to CAD 246 million in Q3FY19.
• The company ended the quarter with cash and cash equivalent of CAD 42 million, while total assets stood at CAD 28,615 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Adverse weather condition coupled with falling approved rates might lead to a lower income and would result in suppressed margins.

Valuation Methodology (Illustrative): Price to Earnings based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of H appreciated ~16% so far this year. The company has ample liquidity of undrawn credit facility of CAD 2,300 million and short-term notes payable amounting CAD 985 million. The current liquidity position seems sufficient enough to meet the near-term requirement. Moreover, the operation of the company’s offerings deemed as essential, which signifies stable income during the current economic cycles. Furthermore, the stock carries a decent dividend yield of ~3.53%, which is decent, considering the prevalent interest rate scenario. We have valued the stock using P/CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Emera Inc, Fortis Inc, Canadian Utilities Ltd. etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 28.7 on November 17, 2020.

H Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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