HYDRO ONE LIMITED | 2018 ANNUAL REPORT
Powering economies, connecting communities
Corporate Profile
Financial Highlights
We are Ontario’s largest electricity
transmission and distribution provider
with almost 1.4 million valued
customers, almost $25.7 billion in
assets and 2018 annual revenues
of almost $6.2 billion. Our team of
approximately 8,600 skilled and
dedicated employees proudly build
and maintain a safe and reliable
electricity system which is essential
to supporting strong and successful
communities. In 2018, Hydro One
invested almost $1.6 billion in its
30,000 circuit kilometres of high-
voltage transmission and 123,000
circuit kilometres of primary
distribution networks and injected
approximately $1.3 billion into
the economy by buying goods
and services in Ontario. We are
committed to the communities where
we live and work through community
investment, sustainability and diversity
initiatives. We are one of only six
utility companies in Canada to
achieve the Sustainable Electricity
Company designation from the
Canadian Electricity Association.
Through Hydro One Telecom Inc.’s
extensive fibre optic network, we
also provide advanced broadband
telecommunications services on a
wholesale basis. Hydro One Limited’s
common shares are listed on the
Toronto Stock Exchange (TSX: H).
Contents
Year in Review
Message from the Chair
Message from the
Acting President and CEO
Strategic Approach,
Our Business
Operational Review
Stretching Every Dollar
Sustainability
Why invest in Hydro One?
Corporate Governance
Financial Report
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2
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12
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15
16
Shareholder Information
IBC
Total Assets
$25.7b
Rate Base
$19.7b
Total Shareholder Return (TSR)1
January 1, 2018 to December 31, 2018
9%
55%
40%
60%
4.2%
36%
•Transmission
•Distribution
•Other
•Transmission
•Distribution
Revenues
$3,251m
(Net of purchased power costs)
Regulated Earnings
$1,368m
(Before financing charges
and income taxes)
1%
52%
38%
62%
-5.5%
-7.7%
-8.9%
-4.4%
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•Transmission
•Distribution
•Other
1 Source: Bloomberg
•Transmission
•Distribution
Year ended December 31 (millions of dollars, except as otherwise noted)
Revenues
Purchased power
Revenues, net of purchased power1
Operation, maintenance and administration (OM&A) costs
Depreciation, amortization and asset removal costs
Financing charges
Income tax expense
Net income (loss) attributable to common shareholders of Hydro One
Basic earnings per common share (EPS)
Diluted EPS
Basic adjusted non-GAAP EPS (Adjusted EPS)1
Diluted adjusted EPS1
Net cash from operating activities
Funds from operations (FFO)1
Capital investments
Assets placed in-service
Transmission: Average monthly Ontario 60-minute peak demand (MW)
Distribution: Electricity distributed to Hydro One customers (GWh)
Debt to capitalization ratio2
2018
6,150
2,899
3,251
1,105
837
459
915
(89)
($0.15)
($0.15)
$1.35
$1.35
1,575
1,572
1,575
1,813
20,485
27,338
55.6%
2017
5,990
2,875
3,115
1,066
817
439
111
658
$1.11
$1.10
$1.17
$1.16
1,716
1,579
1,567
1,592
19,587
25,876
52.9%
Note: All amounts are in Canadian dollars unless otherwise specified.
1
2
See section “Non-GAAP Measures” for description and reconciliation of basic and diluted Adjusted EPS, FFO and Revenues,
net of purchased power.
Debt to capitalization ratio has been presented at December 31, 2018 and 2017, and has been calculated as total debt (includes total
long-term debt, convertible debentures and short-term borrowings, net of cash and cash equivalents) divided by total debt plus total
shareholders’ equity, including preferred shares but excluding any amounts related to noncontrolling interest.
This report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about our
business and the industry in which we operate, and include beliefs and assumptions made by the management of our Company. Words
such as “expect” and “will” are intended to identify such forward-looking statements. These statements are not guarantees of future
performance and involve assumptions and risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed, implied or forecasted in such forward-looking statements. We do not intend, and we disclaim
any obligation, to update any forward-looking statements, except as required by law.
POWERING ECONOMIES, CONNECTING COMMUNITIES
Year in Review
SAFETY COMES FIRST
• Through Hydro One’s Journey to Zero safety initiative, we achieved our
2018 performance target rate for recordable safety incidents of 1.1 per
200,000 hours worked – a 35% improvement since 2015.
DRIVING DOWN COSTS
• Productivity savings of $249.9 million since 2015.
• Annual operating costs have been reduced by 4% or $41 million
since 2015, resulting in savings1.
• New approach to storm preparation has reduced the time customers
are without power following a storm by one-third, compared to similar-
sized events five years ago.
DELIVERING CUSTOMER SATISFACTION
• Residential and small business customer satisfaction was the highest
in five years at 76%, while transmission customer satisfaction reached
an all-time high of 90%.
• Billing accuracy reached an all-time high of 99.4%, while overdue
accounts receivable fell to $73 million – less than half of 2015.
• Repatriating approximately 400 Customer Contact Centre employees
back into our business has improved customer service and reduced costs.
Powering Communities
$1.3b
IMPROVING THE GRID
Goods and services procured in Ontario
• Compared to 2017, we improved the overall reliability of our distribution
network by 14.2%.
• Clarington ($238 million in capital costs) and Leamington ($54 million
in capital costs) stations were placed into service with strong project
and cost discipline to support economic growth.
• More than $1.8 billion of assets placed in-service in 2018.
LEADERSHIP IN POWER RESTORATION
• Three Edison Electric Institute (EEI) Emergency Recovery Awards for
outstanding power restoration efforts in Ontario and one Emergency
Assistance Award for providing restoration support in the northeast U.S.
• Two teams of forestry technicians sent to Chico, California to support
electrical system restoration efforts following devastating wildfires2.
• Following a tornado that destroyed the company's Merivale transmission
station, Ottawa-area customers were restored within 48 hours with
a temporary solution. The facility was fully rebuilt in approximately
12 weeks, returning to normal operation.
1 Based on Hydro One Limited’s total Operation, Maintenance & Administration costs (OM&A) excluding
$31 million in OM&A costs for Avista in 2017 and 2018. No costs related to the Avista transaction or the
termination of the merger agreement have been paid for by Ontario ratepayers.
See section “Non-GAAP Measures” in the Management’s Discussion and Analysis for more information.
2 All costs incurred during mutual assistance operations are paid by the local utility receiving support.
63%
Increase in spending with Indigenous
businesses since 2017
8,600
Regular and non-regular employees
(approximate) across the province averaged
over 2018
$2.6m
In sponsorships and donations in communities
where our customers work and live
$1.3m
Donated by our employees and pensioners
to charitable organizations
1
Hydro One Limited | Annual Report 2018 A MESSAGE FROM THE CHAIR OF THE BOARD
Tom Woods
Hydro One’s mandate is to deliver exceptional
customer service and a safe and reliable source
of electricity to homes and businesses in every
community we serve.
The critical nature of our work directly translates
to jobs, economic development, confidence and
prosperity in cities and towns across the province.
In 2018, Hydro One transitioned
to a new Board of Directors and
I want to take this opportunity to
officially welcome its new members:
Cherie Brant, Blair Cowper-Smith,
Anne Giardini, David Hay, Timothy
Hodgson, Jessica McDonald, Russel
Robertson, William Sheffield and
Melissa Sonberg. This independent,
highly-qualified Board has strong
governance and industry experience
as well as significant electricity,
business and capital markets
expertise.
Guided by its executive team,
our introduction to Hydro One
was seamless, efficient and
comprehensive, enabling the
Board to fully engage in all areas
of the organization. We were
reassured and indeed energized
by the fundamental strength of
the organization, the depth of its
leadership and the resiliency of its
employees in staying focused on
the core business during a
transitional year.
One of the top priorities for the
Board is recruiting a new President
and CEO. We have strict criteria
for selecting this individual as they
will be expected to lead the business
to great heights.
Hydro One leadership will
be accountable for achieving
challenging performance targets
by remaining focused on delivering
exceptional customer service,
driving efficiencies, improving the
reliability of the electricity system
and delivering strong financial
performance for the benefit of
shareholders and all Ontarians.
The Board will continue to provide
strong oversight, guide forward-
looking business strategies and
commit to pursuing sustainability
to secure the long-term viability
of a well-run Hydro One. The
company has a proud 100-plus
year history, a dedicated team, and
a solid foundation built with robust
business fundamentals.
2
Tom Woods
Chair of the Board
of Directors
As we transform our business to meet
the challenges of tomorrow, we will
nurture Hydro One’s results-oriented
culture and pursue opportunities to
innovate, be more efficient and
provide exceptional customer service
every day. We will be guided in these
pursuits by Hydro One’s commitment
to continuous improvement, our
“customer comes first” philosophy
and the strength of our employees
at all levels of the organization.
I want to thank our employees for
their hard work and coming together
through this period of leadership
transition. Your commitment and
willingness to go the extra mile to
meet the needs of our customers
have helped us build a stronger and
better company.
Hydro One Limited | Annual Report 2018 Hydro One will continue to play a
critical role in powering economies
and connecting communities across
this province. We remain dedicated
to delivering greater value for our
customers, employees, communities
and all shareholders.
On behalf of the entire Board
of Directors, thank you for your
investment and ongoing support
of Hydro One.
With best regards,
Tom Woods
Chair of the Board of Directors
33
Hydro One Limited | Annual Report 2018 A MESSAGE FROM THE ACTING PRESIDENT & CEO
Paul Dobson
Hydro One seeks excellence in every facet of our
business, to the benefit of our customers, employees,
communities and all shareholders. This approach
became immediately clear to me after joining
the organization in early 2018 and was further
driven home in the sense of pride I felt being a part
of a high-performance team that accomplished
tremendous feats in a challenging year.
Safety
Hydro One’s safety performance
was a top priority for management
in 2018. Following the tragic loss in
late 2017 of four Hydro One team
members, we heightened our resolve
to realize a vision of an injury-free
workplace through our Journey to
Zero initiative.
Operational Excellence
Driving improvements in network
reliability last year resulted in a
14.2% improvement in total average
power outage duration for our
distribution system over 2017. This
is attributed to our application of
modern technology to the grid, new
storm prediction tools that allow
for improved restoration response
and our state-of-the-art vegetation
management program.
In fact, this new vegetation process
is an example of how the company is
increasing productivity, driving costs
down and generating efficiencies to
improve our service to customers. In
2018, our forestry teams completed
approximately 30,000 kilometres of
work along power lines, nearly three
times the work they did in 2017, with
only a marginal increase in cost.
While we saw results drop for
transmission reliability due mainly to
highly abnormal weather, the quick,
effective and innovative responses
deployed by our crews to these
events was laudable. For example,
after our Merivale transmission
station was destroyed by a tornado in
late September, a temporary solution
was implemented within 48 hours to
return service to customers and the
facility was rebuilt in just 12 weeks.
Customer
Due to a renewed effort to improve
customer service and reliability
in addition to other initiatives,
residential and small business
customer satisfaction, as well as
transmission customer satisfaction
reached the highest in five years
and company history, respectively,
in surveys last year. These results
demonstrate a consistent dedication
to putting customers first at all levels
of the organization.
We actively seek to learn what is
important to our customers and take
action. For example, we repatriated
approximately 400 employees in our
Customer Contact Centre to provide
better service and we conducted
countless face-to-face meetings with
customers to identify ways we can
facilitate growth and strengthen
local economies. Our First Nations
outreach efforts also demonstrated
ongoing efforts to support all
customers’ needs. In 2018, we met
with the 88 Indigenous communities
we serve and held over 700 one-on-
one customer sessions.
4
Paul Dobson
Acting President
and CEO
Economy
Our transmission system serves as
the backbone for the economy,
and our business plays a critical
role in communities across the
province. In 2018 alone, we injected
approximately $1.3 billion into the
Ontario economy by buying goods
and services from businesses across
the province, including a 63%
increase in spend with Indigenous
businesses, as well as directly
providing approximately 8,600
highly skilled jobs through the year.
Avista
While we were naturally
disappointed in the outcome of the
Avista transaction, we will continue
to pursue opportunities that make
sense for our business and add value
for all stakeholders.
Hydro One Limited | Annual Report 2018 Key Achievements
$249.9m
14.2%
Productivity savings since 2015
4% or
$41m¹
Reduction in annual operating
costs since 2015
Improvement in the overall
reliability of our distribution
network since 2017
$1.3b
Injected into the Ontario
economy through purchases
of local goods and services
90%
4
Highest-ever satisfaction rating
from transmission customers
Edison Electric Institute Awards
earned in 2018 for emergency
power restoration
76%
Residential and small business
customer satisfaction,
highest in 5 years
Addressing Ontario’s Aging Power
Infrastructure
A safe and reliable high-voltage transmission system is necessary to
run and grow the large industrial companies, mines and manufacturing
facilities that create job opportunities in Ontario.
Much of our system was built in the 1950s. One in four transformers
are at the end of their expected service life, and nearly 10,000 of our
steel towers are over 80 years old. To keep the public safe and reduce
the number of power outages that can impact the economy and our
customers’ lives, we must invest in replacing, repairing and upgrading
equipment in almost every community.
1 Based on Hydro One Limited’s total Operation, Maintenance & Administration costs (OM&A) excluding
$31 million in OM&A costs for Avista in 2017 and 2018. No costs related to the Avista transaction or the
termination of the merger agreement will be paid for by Ontario ratepayers. See section “Non-GAAP
Measures” in the Management’s Discussion and Analysis for more information.
5
Employees
In January, we were honoured to
be recognized by Forbes in its list
of Canada’s Best Employers for
2019. Based on a survey of over
8,000 people working at Canadian
businesses with over 500 employees,
our performance demonstrates efforts
to create an engaged workforce and
positive working environment.
In 2019, we will maintain our focus
on continuous improvement and
operational excellence, delivering
efficiencies and exceptional customer
service.
Finally, I would like to thank all
teammates for their resilience and
support during the leadership
transition and for their dedication
to driving improvements across the
Hydro One business. I would like
to thank the Board for their efforts
during the transition.
Sincerely,
Paul Dobson
Acting President and CEO
Hydro One Limited | Annual Report 2018
POWERING ECONOMIES, CONNECTING COMMUNITIES
Strategic Approach
We aim to continue strengthening our core business
in order to deliver greater value for our customers,
employees, communities and shareholders.
OUR STRATEGIC PILLARS:
Customers First:
Exceeding our customers’ needs and expectations is at
the core of everything we do. We are focused on improving
our customers’ experience through fast, flexible and
convenient service.
Cost Efficiency:
We are committed to investing carefully, reducing costs
and stretching every dollar we spend to efficiently help the
most customers.
Operational Excellence:
A continuous drive to improve our transmission and
distribution networks means we are constantly raising
performance and standards.
Our Business: At-a-Glance
Investing in our Future:
Invest in innovation to improve service
reliability, the efficiency of our business
and the long-term viability of the
company. We will expand our rate
base, pursue organic growth and
innovate for the benefit of stakeholders.
Sustainability:
We understand that improving our
performance depends on incorporating
sustainability into all aspects of our
business.
Revenues (net of Purchased Power)
Segmented Assets
$42m
1%
$2,359m
9%
$1,523m
47%
$3,251m
52%
$1,686m
$9,325m
36%
$25,657m
55%
$13,973m
Transmission
(Regulated)
Distribution
(Regulated)
Other and
Telecom
(Unregulated)
Business
Description
Transmission
Our transmission system transmits
high-voltage electricity from nuclear,
hydroelectric, natural gas, wind and solar
sources to our distribution company and
industrial customers across Ontario. Hydro
One owns and operates approximately
30,000 circuit kilometres of high-voltage
transmission lines.
Distribution
The Hydro One distribution system
is the largest in Ontario. It consists of
approximately 123,000 circuit kilometres
of primary low-voltage power lines
serving almost 1.4 million customers.
As well, Hydro One Remote Communities
serves customers in one grid-connected
and 21 off grid communities in Ontario’s
far north.
Customer
Segments
• Large directly connected
industrial customers
• Local distribution companies
•Large generators
•Residential and business customers
•Municipal utility customers
•Small or micro generators
Other and Telecom
Consists of a telecommunications business
and certain corporate activities. Hydro
One Telecom offers organizations a
diverse, secure and highly reliable
broadband connectivity solution.
•Data centres
•Cloud service providers
• Telecommunications services
and public sector entities
•Internet service providers
•Enterprises
6
Hydro One Limited | Annual Report 2018 Hydro One’s Role in the Ontario Electric Power System
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(increased to
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Transmission
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Transformer
(decreased to
medium voltage)
Transformer
(decreased to
lower voltage)
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Transmission
(98% of capacity)
Distribution
(75% of geography and 25% of end-use customers)
Our transmission and distribution systems safely and reliably serve communities throughout Ontario. Our customers are suburban, rural and
remote homes and businesses across the province. We own and operate nearly $25.7 billion in assets and have annual revenues of almost
$6.2 billion. Our communities are proudly and safely serviced by a team of skilled and dedicated employees.
Major Projects
Niagara Reinforcement Project
Richview Transmission Station
East-West Tie Station Expansion
A new 76 kilometre transmission line in
southwestern Ontario to serve the growing
Niagara area.
Replacement of 50-year-old equipment to ensure
reliable power supply to the City of Toronto and
surrounding communities.
Hydro One is performing station upgrades to
our Lakehead, Marathon and Wawa transmission
stations. The upgrades are necessary to support
the East-West Tie Line project, a priority project in
the Province of Ontario’s Long-Term Energy Plan.
Estimated Total Project Cost ($ millions)
$130
$102
Capital Cost to-date ($ millions)
$121
Anticipated In-service Date
2019
$99
2020
$157
$16
2022¹
1 The majority of the project will be in-service in 2021, enabling the connection and energization of the new East-West Tie transmission line. Additional work to complete the upgrades will be in-service in 2022.
7
Hydro One Limited | Annual Report 2018
POWERING ECONOMIES, CONNECTING COMMUNITIES
Operational
Review
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Putting our Customers First
We delivered a number of
far-reaching initiatives that
focused on what is best for
our customers.
Insourcing approximately 400
employees to our Customer Contact
Centre has improved customer
service and reduced costs, while
our redesigned bill is easier for
customers to understand.
Proactive measures to help customers
who are behind on their bills, while
avoiding disconnections wherever
possible, have reduced overdue
accounts receivable by half – down to
$73 million from $148 million in 2015.
Our customer care team also
increased Hydro One’s presence in
First Nation communities across the
province, conducting face-to-face
meetings with customers and offering
measures to address affordability.
A relentless focus on customer service
resulted in improved satisfaction survey
scores. Residential and small business
customer satisfaction was the highest
in five years at 76%, while transmission
customer satisfaction reached an
all-time high of 90%, reflecting a
company-wide dedication to improving
customer service.
Billing Accuracy (%)
2015
2016
2017
2018
98.5%
99.0%
99.3%
99.4%
Energy Conservation
Overdue Accounts Receivable ($ millions)
$148
$117
$77
$73
We achieved 92% of our six-year
energy conservation target in only four
years. Our energy conservation team
conducted over 1,250 visits with our
medium to large commercial and
industrial customers and supported over
800 energy efficiency projects during
the year.
2015
2016
2017
2018
Right:
Hydro One’s redesigned residential bill has
improved customer comprehension and reduced
calls to the company’s Customer Contact Centre.
Stretching Every Dollar
We strive to do more for less
Streamlining our Work
In 2018, we completed the transition
of our vegetation management program
from a 10-year to a 3-year cycle,
focusing on trimming problem trees
and vegetation more often to improve
the overall safety and reliability of the
system. Our forestry teams completed
approximately 30,000 kilometres of
work along power lines, nearly three
times the work they did in 2017, with
only a marginal increase in cost.
Since 2015, Hydro One has
cut operation, maintenance and
administrative (OM&A) costs by
4% – or $41 million1 – through
efficiencies, new technology and
other cost-saving initiatives.
Productivity savings of $135.5 million in
2018 brings the total saved since 2015
to $249.9 million. The top productivity
savings in 2018 are from procurement
initiatives, fleet rationalization, contract
negotiations in information solutions
and cable locate outsourcing.
Productivity Savings ($ millions)
2016
$24.9
2017
2018
$89.5
$135.5
Cumulative: $249.9 million
4%
reduction in
operating costs
since becoming
a publicly
traded company
in 20151
3x
In 2018, our
forestry teams
completed
nearly three
times the work
done in 2017, with
only a marginal
increase in cost
1 Based on Hydro One Limited’s total Operation, Maintenance & Administration costs (OM&A) excluding $31 million in OM&A costs for Avista in 2017 and 2018. No costs related to the Avista
transaction or the termination of the merger agreement will be paid for by Ontario ratepayers. See section “Non-GAAP Measures” in the Management’s Discussion and Analysis for more information.
9
Hydro One Limited | Annual Report 2018 POWERING ECONOMIES, CONNECTING COMMUNITIES
Operating with Excellence
We made significant progress in
improving Hydro One’s safety
performance, achieving our 2018
target of 1.1 recordable injuries per
200,000 hours worked – a 35%
improvement since 2015. We have
a commitment to an injury-free
workplace through our Journey to
Zero initiative, which focuses on
enhancing personal leadership in
order to reduce workplace hazards.
The large number of severe weather
events in 2018 resulted in five Force
Majeure incidents1. Three incidents were
within six weeks of each other, requiring
crews to restore power to over 1.4 million
customers in aggregate – more than all
of 2017.
Our Distribution Network
We improved the overall reliability of our
distribution network by 14.2% compared
to 2017. These improvements included
more system oversight, our new vegetation
management program, modernizing
equipment, being more proactive in
preparing for storms and targeting
equipment upgrades to circuits that
were causing the most power outages.
Our Transmission Network
While transmission reliability and outage
duration results dropped slightly during
the year, mainly due to major equipment
failures and severe weather, crews
worked tirelessly to quickly and safely
restore power.
We experienced significant events
at our Gerrard, Minden and Finch
stations. Further, our Merivale station
was destroyed by a tornado in late
September. While customers were
restored within 48 hours with a temporary
solution, the facility required 12 weeks of
extensive work to rebuild.
Merivale Transmission Station near Ottawa after a
tornado destroyed the facility on September 21, 2018.
WORKPLACE SAFETY
35%
Improvement in recordable workplace
injuries since 2015.
2015
2018
131
85
CUSTOMER SERVICE
Improved Restoration
Time
• We have reduced
the time customers
are without power
following a storm
by one-third since
a similar-sized event
five years ago.
• The overall reliability
of our distribution
network improved
by 14.2% compared
to 2017.
/¹ 3
reduced
14.2%
10
1 Hydro One deems a Force Majeure to have occurred when electricity service to 10% or more of our distribution customers has been interrupted by an event.
Hydro One Limited | Annual Report 2018 Investing in our Future
We invest in technology and
infrastructure modernization
to ensure our business evolves
and grows to meet the needs
of our customers.
In 2018, we made total capital
investments of approximately
$1.6 billion to ensure the long-term
reliability of Ontario’s electricity system
and placed more than $1.8 billion
worth of new assets in-service. We
completed one of the largest-ever
station builds in company history,
bringing the flagship Clarington
Station into service on-time and under
budget. The Leamington station was
also brought into service as planned.
Pursuing Organic Growth
In 2018, we successfully integrated
Hydro One Sault Ste. Marie LP into
our Hydro One Networks operations.
As well, we announced an agreement
to acquire the business and distribution
assets of Peterborough Distribution
Inc. and have submitted a new
application with the Ontario Energy
Board to acquire Orillia Power
Distribution Corporation.
200+
new apprentices
hired in 2018
$6.5b
of assets placed
in-service over
the last 4 years
Investing for Tomorrow
Not only do our investments maintain
the safety and integrity of our
system, they also contribute to local
communities by creating jobs, new
skills and new opportunities. In 2018,
we hired over 200 apprentices into
skilled trades, representing a renewal
of our workforce.
11
Hydro One Limited | Annual Report 2018 POWERING ECONOMIES, CONNECTING COMMUNITIES
Sustainability
At Hydro One, we understand that our long-term
performance depends on incorporating sustainability
into all aspects of our business. In 2018, we continued
building our sustainability strategy, and remain
committed to setting up a corporate-wide vision
and program that builds value for all stakeholders.
3 hectares
Approximate
size of new
pollinator planting
established to help
restore monarch
butterfly habitats
Environmental
Management
Hydro One seeks to avoid
or minimize its impact on the
environment because we understand
this supports business interests
and our commitment to being a
sustainable company. We deliver
electricity that is among the cleanest
in North America.
Partnerships have helped further our
biodiversity goals. We established
approximately three hectares of new
pollinator planting in Ottawa with
the Canadian Wildlife Federation as
part of a multi-stakeholder project
to assess species value resulting
from restoration of monarch butterfly
habitats. We also collaborated with
the Briarbrook Brookside Morgan’s
Grant Community Association to
establish pollinator friendly plots and
new management techniques on the
community’s electricity corridor.
12
Hydro One Limited | Annual Report 2018 $1.3m
In donations by
employees and
pensioners to
causes that matter
to them
We worked with union leadership
on the mutually beneficial renewal
of a two-year collective agreement
with the Power Workers Union,
which covers approximately 4,000
employees in critical front-line roles
until March 31, 2020.
To better support our employees
and pensioners, we refreshed The
Power to Give, our charitable giving
program. Last year, our employees
and pensioners generously donated
almost $1.3 million.
Hydro One has a strong history of giving
back to the communities where our
people and customers live and work.
In 2018, we invested $2.6 million
through sponsorships and donations
with local programs and activities
across the province.
People and Potential
Hydro One pursues a culture of
inclusion because it makes us stronger,
more innovative and helps ensure
we have the right skill set and
perspectives to succeed in the future.
In 2018, while representation
of women in executive positions
decreased slightly by 0.7% to
36.4%, we were able to increase
representation of visible minorities
in executive positions to 15.6% from
11.4% in 2017. We advanced our
Indigenous hiring plans and will
pursue our multi-year plan to
enhance future performance.
We celebrated Pride Month for
the first time, flying rainbow flags
at locations across the province,
distributing I Stand for Inclusion
stickers and creating our “PrideOne
Employee Resource Group” for
LGBTQ2+ employees and their allies.
Powering Economies
We support Ontario by buying goods
and services from businesses across
the province. In 2018, approximately
$1.3 billion was injected into the
Ontario economy through procurement.
This includes a 63% increase in
spend since 2017 with Indigenous
businesses, the largest amount to date,
and supports our goal to become the
primary business partner of Indigenous
communities in Ontario by 2021.
In 2018, we met with the 88 Indigenous
communities we serve and held over 700
one-on-one customer sessions. Following
extensive community consultations,
we completed the commercial terms
on a business partnership with the Six
Nations of the Grand River Development
Corporation and the Mississaugas of
the Credit First Nation on the Niagara
Reinforcement Transmission Line Project.
OUR PEOPLE
Hydro One was recognized by
Forbes on its list of Canada’s Best
Employers 2019.
5,643
Regular employees1
2,948
Non-regular employees2
COMMUNITY INVESTMENT
Since 2003, Hydro One has been
a proud sponsor of the Little Native
Hockey League tournament, which
hosts over 200 teams from First
Nations across Ontario. The largest
event of its kind in the province,
the tournament promotes respect,
citizenship, sportsmanship and
education with Indigenous youth.
1 In 2018, Hydro One changed its counting methodology for full-time regular and non-regular employees. Prior year figures referenced employment as at year-end December 31.
In 2018, the methodology changed to reflect the average employment throughout the year.
2 Non-regular includes: temporary and casual employees.
13
Hydro One Limited | Annual Report 2018 POWERING ECONOMIES, CONNECTING COMMUNITIES
Why invest in Hydro One?
Investing in Hydro One offers a unique opportunity
to participate in the transformation of a large-scale
regulated electric utility.
ONE
Performance-based Culture
Transformation into a commercially-oriented, cost conscious,
customer focused organization with a performance culture
under Ontario’s emerging incentive-based regulation.
TWO
Stable Operating Environment
Business is predominately (99%) rate-regulated
in a constructive, stable, transparent and collaborative
regulatory environment.
Resilient workforce in challenging environments.
Fully independent Board.
THREE
Predictable Growth
Pure-play electric transmission
and local distribution company
with an aging infrastructure
that requires investment and
no commodity price exposure.
$6.5b
4-year total of
capital investment
FOUR
Attractive Dividend
Stable and growing dividend with a 70–80% target
payout ratio1 that is underpinned by strong cash flows
from predictable rate base growth.
FIVE
Strong Balance Sheet
Solid investment grade balance sheet.
1 Payout ratio was 67% of Adjusted EPS in 2018
14
Credit Profile
Rating
Agency
Long-Term
Debt Rating
Short-Term
Debt Rating
DBRS Limited
A (high)
Moody’s
S&P
Baa1
A-
R-1 (low)
Prime-2
A-1 (low)
Outlook
stable
stable
negative
Hydro One Limited | Annual Report 2018 Corporate Governance
Board of Directors and Committees
Board Diversity
Audit
Governance
Human Resources
Health, Safety,
Environmental and
Indigenous Peoples
•
•
•
•
•
•
•
•
•
•
Hydro One’s Board of Directors
is composed of a diverse and
accomplished group of independent,
proven business leaders with deep
corporate governance experience.
The Board’s primary role is overseeing
corporate performance and the
quality, depth and continuity of
management required to meet the
Company’s strategic objectives.
Hydro One is committed to
maintaining best corporate
governance practices. The Company’s
practices are fully aligned with the
rules and regulations issued by
Canadian Securities Administrators
and the Toronto Stock Exchange,
including national corporate
governance guidelines and related
disclosure requirements.
4
40%
Female Directors
6
•Male
•Female
Board Structure
The Chair is responsible for leading
the Board of Directors in carrying
out its duties and responsibilities
effectively, efficiently and
independent of management. The
Chair is nominated and confirmed
annually by special resolution of the
Board. Consistent with best practices,
Hydro One’s Board Chair is separate
from the role of President and Chief
Executive Officer and is independent
of Hydro One and the province
of Ontario.
To learn more about the Directors,
committee mandates and
composition, go to
www.HydroOne.com/Investors.
Tom Woods
(Chair)
Cherie Brant
Blair Cowper-Smith
Anne Giardini
David Hay
Timothy Hodgson
Jessica McDonald
Russel Robertson
William Sheffield
Melissa Sonberg
•
•
•
•
Chair
• Committee Member
Strong corporate governance
practices are at the heart of how
we manage our day-to-day
operations in the interest of all
stakeholders.
Hydro One and its independent
Board of Directors recognize the
importance of corporate governance
in the effective management of
the Company. Independence,
integrity and accountability are
the foundation of Hydro One’s
approach to corporate governance.
It is in the long-term best interests
of shareholders, and promotes
and strengthens relationships with
our customers, employees, the
communities where we operate and
other stakeholders of the Company.
The Board of Directors is firmly
supported in these commitments by
a governance agreement between
Hydro One and the province of
Ontario, which was executed
in advance of the November
2015 Initial Public Offering of the
Company and ensures that the
province’s role is limited to that
of a shareholder and not a manager
of the business.
15
Hydro One Limited | Annual Report 2018 POWERING ECONOMIES, CONNECTING COMMUNITIES
Financial Report
8
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16
Contents
Notice to Reader
Amended Management’s
Discussion and Analysis
Amended Consolidated
Financial Statements
Notes to Amended
Consolidated Financial
Statements
Board of Directors and
Senior Leadership
Corporate and
Shareholder Information
17
18
65
69
110
IBC
Notice to Reader
Please be advised that Hydro One Limited (Hydro One or the Company)
is filing Amended Consolidated Financial Statements and Amended
Management’s Discussion and Analysis (MD&A) for the period ended
December 31, 2018, amending the documents previously filed to reflect
the following changes:
1. The Consolidated Statements of Operations and Comprehensive Income,
Consolidated Balance Sheets, Consolidated Statements of Changes
in Equity and Consolidated Statements of Cash Flows and the relevant
notes to the Consolidated Financial Statements for Income Taxes,
Regulatory Assets and Liabilities, Segment Reporting, and Subsequent
Events were updated to reflect the impact of the March 7, 2019 decision
issued by the Ontario Energy Board (OEB) relating to the Deferred Tax
Asset portion of the OEB’s decision on Hydro One Networks’ 2017 and
2018 transmission revenue requirement, for which the OEB previously
granted a Motion to Review and Vary (DTA Decision) as disclosed in the
Audited Consolidated Financial Statements Note 32(D) – Subsequent
Events (OEB Regulatory Decisions) and Note 12 – Regulatory Assets
and Liabilities.
2. MD&A was updated to reflect the impact of the DTA Decision, including
the Consolidated Financial Highlights and Statistics, Overview, Results
of Operations, Selected Annual Financial Statistics, Quarterly Results of
Operations, Regulation, Non-GAAP Measures, Risk Management and
Risk Factors, Summary of Fourth Quarter Results of Operations, Hydro
One Holdings Limited – Unaudited Consolidating Summary Financial
Information, and Forward-Looking Statements and Information.
The DTA Decision is a Type I subsequent event under United States
Generally Accepted Accounting Principles (US GAAP) and as such the
Company is required to update the Consolidated Financial Statements and
MD&A to reflect the subsequent event in connection with filing its annual
reports on Form 40-F with the US Securities and Exchange Commission, so
that they contain the current information required at March 25, 2019, the
date of approval of the annual report on Form 40-F.
Other than as expressly set forth above, the Amended Consolidated
Financial Statements and Amended MD&A do not purport to update or
restate the information in the original Consolidated Financial Statements and
MD&A or reflect any events that occurred after the date of the filing of the
original Consolidated Financial Statements and MD&A other than changes
to the sections as expressly set forth above.
The Amended Consolidated Financial Statements and Amended
MD&A have been filed electronically at www.sedar.com and at
www.sec.gov/edgar.shtml, and also on the Company’s website at
www.HydroOne.com/Investors.
17
Hydro One Limited | Annual Report 2018 Amended Management’s Discussion and Analysis
For the years ended December 31, 2018 and 2017
The following Amended Management’s Discussion and Analysis (MD&A)
of the financial condition and results of operations should be read together
with the amended consolidated financial statements and accompanying
notes thereto (Consolidated Financial Statements) of Hydro One Limited
(Hydro One or the Company) for the year ended December 31, 2018.
The Consolidated Financial Statements are presented in Canadian dollars
and have been prepared in accordance with United States (US) Generally
Accepted Accounting Principles (GAAP). All financial information in this
MD&A is presented in Canadian dollars, unless otherwise indicated.
The Company has prepared this MD&A in accordance with National
Instrument 51-102 – Continuous Disclosure Obligations of the Canadian
Securities Administrators. Under the US/Canada Multijurisdictional
Disclosure System, the Company is permitted to prepare this MD&A in
accordance with the disclosure requirements of Canada, which can vary
from those of the US. This MD&A provides information for the year ended
December 31, 2018, based on information available to management as
of February 20, 2019, other than with respect to information relating to the
subsequent events disclosed in Note 32(D) to the Consolidated Financial
Statements, dated March 25, 2019.
CONSOLIDATED FINANCIAL HIGHLIGHTS AND STATISTICS
Year ended December 31 (millions of dollars, except as otherwise noted)
2018
2017
Change
Revenues
Purchased power
Revenues, net of purchased power1
Operation, maintenance and administration (OM&A) costs
Depreciation, amortization and asset removal costs
Financing charges
Income tax expense
Net income (loss) attributable to common shareholders of Hydro One
Basic earnings per common share (EPS)
Diluted EPS
Basic adjusted non-GAAP EPS (Adjusted EPS)1
Diluted Adjusted EPS1
Net cash from operating activities
Funds from operations (FFO)1
Capital investments
Assets placed in-service
Transmission: Average monthly Ontario 60-minute peak demand (MW)
Distribution: Electricity distributed to Hydro One customers (GWh)
Debt to capitalization ratio2
$
$
$
$
6,150
2,899
3,251
1,105
837
459
915
(89)
(0.15) $
(0.15) $
1.35 $
1.35 $
1,575
1,572
1,575
1,813
20,485
27,338
2018
55.6%
5,990
2,875
3,115
1,066
817
439
111
658
1.11
1.10
1.17
1.16
1,716
1,579
1,567
1,592
19,587
25,876
2017
52.9%
2.7%
0.8%
4.4%
3.7%
2.4%
4.6%
724.3%
(113.5%)
(113.5%)
(113.6%)
15.4%
16.4%
(8.2%)
(0.4%)
0.5%
13.9%
4.6%
5.7%
1 See section “Non-GAAP Measures” for description and reconciliation of basic and diluted Adjusted EPS, FFO and Revenues, net of purchased power.
2
Debt to capitalization ratio has been presented at December 31, 2018 and 2017, and has been calculated as total debt (includes total long-term debt, convertible debentures and
short-term borrowings, net of cash and cash equivalents) divided by total debt plus total shareholders’ equity, including preferred shares but excluding any amounts related to
noncontrolling interest.
18
Hydro One Limited | Annual Report 2018
OVERVIEW
Hydro One is the largest electricity transmission and distribution company in Ontario. Through its wholly-owned subsidiary, Hydro One Inc., Hydro One owns
and operates substantially all of Ontario’s electricity transmission network, and approximately 123,000 circuit kilometres of primary low-voltage distribution
network. Hydro One has three business segments: (i) transmission; (ii) distribution; and (iii) other business.
For the years ended December 31, 2018 and 2017, Hydro One’s business segments accounted for the Company’s total revenues, net of purchased power,
as follows:
Year ended December 31
Transmission
Distribution
Other
At December 31, 2018 and 2017, Hydro One’s business segments accounted for the Company’s total assets as follows:
December 31
Transmission
Distribution
Other
2018
52%
47%
1%
2018
55%
36%
9%
2017
51%
48%
1%
2017
53%
36%
11%
Transmission Segment
Hydro One’s transmission business owns, operates and maintains Hydro
One’s transmission system, which accounts for approximately 98% of
Ontario’s transmission capacity based on revenue approved by the Ontario
Energy Board (OEB). The Company’s transmission business consists of the
transmission system operated by Hydro One Inc.’s subsidiaries, Hydro One
Networks Inc. (Hydro One Networks) and Hydro One Sault Ste. Marie
LP (HOSSM), as well as an approximately 66% interest in B2M Limited
Partnership (B2M LP), a limited partnership between Hydro One and the
Saugeen Ojibway Nation in respect of the Bruce-to-Milton transmission
line. The transmission business is rate-regulated and earns revenues mainly
from charging transmission rates that are approved by the OEB.
Electricity transmitted1 (MWh)
Transmission lines spanning the province (circuit-kilometres)
Rate base (millions of dollars)
Capital investments (millions of dollars)
Assets placed in-service (millions of dollars)
1 Electricity transmitted represents total electricity transmission in Ontario by all transmitters.
2018
2017
137,436,546 132,090,992
30,290
11,251
968
889
30,166
11,870
985
1,164
Distribution Segment
Hydro One’s distribution business is the largest in Ontario and consists of the distribution system operated by Hydro One Inc.’s subsidiaries, Hydro One
Networks and Hydro One Remote Communities Inc. (Hydro One Remote Communities). The distribution business is rate-regulated and earns revenues mainly
from charging distribution rates that are approved by the OEB.
Electricity distributed to Hydro One customers (GWh)
Electricity distributed through Hydro One lines (GWh)1
Distribution lines spanning the province (circuit-kilometres)
Distribution customers (number of customers)
Rate base (millions of dollars)
Capital investments (millions of dollars)
Assets placed in-service (millions of dollars)
2018
2017
27,338
38,265
123,441
1,370,819
7,852
577
642
25,876
36,525
123,361
1,358,093
7,389
588
689
1
Units distributed through Hydro One lines represent total distribution system requirements and include electricity distributed to consumers who purchased power directly from the
Independent Electricity System Operator (IESO).
19
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
2018 Distribution Revenues
Embedded
Distributors
9%
Large Users
11%
General
Service
29%
Residential
51%
Other Business Segment
Hydro One’s other business segment consists of the Company’s
telecommunications business and certain corporate activities. The
telecommunications business provides telecommunications support for
the Company’s transmission and distribution businesses, and also offers
communications and information technology solutions to organizations
with broadband network requirements utilizing Hydro One Telecom Inc.’s
(Hydro One Telecom) fibre optic network to provide diverse, secure and
highly reliable broadband connectivity. Hydro One’s other business segment
is not rate-regulated.
PRIMARY FACTORS AFFECTING RESULTS
OF OPERATIONS
Transmission Revenues
Transmission revenues primarily consist of regulated transmission rates
approved by the OEB which are charged based on the monthly peak
electricity demand across Hydro One’s high-voltage network. Transmission
rates are designed to generate revenues necessary to construct, upgrade,
extend and support a transmission system with sufficient capacity to
accommodate maximum forecasted demand and a regulated return on
the Company’s investment. Peak electricity demand is primarily influenced
by weather and economic conditions. Transmission revenues also include
export revenues associated with transmitting electricity to markets outside of
Ontario. Ancillary revenues include revenues from providing maintenance
services to power generators and from third-party land use.
Distribution Revenues
Distribution revenues include regulated distribution rates approved by the
OEB and amounts to recover the cost of purchased power used by the
customers of the distribution business. Distribution rates are designed to
generate revenues necessary to construct and support the local distribution
system with sufficient capacity to accommodate existing and new customer
demand and a regulated return on the Company’s investment. Accordingly,
distribution revenues are influenced by distribution rates, the cost of
purchased power, and the amount of electricity the Company distributes.
Distribution revenues also include ancillary distribution service revenues,
such as fees related to the joint use of Hydro One’s distribution poles by the
telecommunications and cable television industries, as well as miscellaneous
revenues such as charges for late payments.
Purchased Power Costs
Purchased power costs are incurred by the distribution business and
represent the cost of the electricity purchased by the Company for delivery
to customers within Hydro One’s distribution service territory. These costs are
comprised of the following: the wholesale commodity cost of energy; the
Global Adjustment, which is the difference between amounts the IESO pays
energy producers for the electricity they produce and the actual fair market
value of this electricity; and the wholesale market service and transmission
charges levied by the IESO. Hydro One passes the cost of electricity that it
delivers to its customers, and is therefore not exposed to wholesale electricity
commodity price risk.
Operation, Maintenance and Administration Costs
OM&A costs are incurred to support the operation and maintenance of
the transmission and distribution systems, and other costs such as property
taxes related to transmission and distribution lines, stations and buildings
and information technology (IT) systems. Transmission OM&A costs are
incurred to sustain the Company’s high-voltage transmission stations, lines,
and rights-of-way, and include preventive and corrective maintenance
costs related to power equipment, overhead transmission lines, transmission
station sites, and forestry control to maintain safe distance between line
spans and trees. Distribution OM&A costs are required to maintain the
Company’s low-voltage distribution system to provide safe and reliable
electricity to the Company’s residential, small business, commercial, and
industrial customers across the province. These include costs related to
distribution line clearing and forestry control to reduce power outages
caused by trees, line maintenance and repair, land assessment and
remediation, as well as issuing timely and accurate bills and responding
to customer inquiries. Hydro One manages its costs through ongoing
efficiency and productivity initiatives, while continuing to complete planned
work programs associated with the development and maintenance of its
transmission and distribution networks.
Depreciation, Amortization and Asset Removal Costs
Depreciation and amortization costs relate primarily to depreciation of the
Company’s property, plant and equipment, and amortization of certain
intangible assets and regulatory assets. Asset removal costs consist of costs
incurred to remove property, plant and equipment where no asset retirement
obligations have been recorded on the balance sheet.
Financing Charges
Financing charges relate to the Company’s financing activities, and
include interest expense on the Company’s long-term debt and short-
term borrowings, and gains and losses on interest rate swap agreements,
contingent foreign exchange or other similar contracts, net of interest
earned on short-term investments. A portion of financing charges incurred
by the Company is capitalized to the cost of property, plant and equipment
associated with the periods during which such assets are under construction
before being placed in-service.
20
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
RESULTS OF OPERATIONS
Net Income (Loss)
Net loss attributable to common shareholders for the year ended
December 31, 2018 of $89 million is a decrease of $747 million or
113.5% from the prior year. Significant influences on earnings included:
• increase in transmission and distribution revenues due
to higher energy consumption resulting from favourable weather;
• higher transmission revenues driven by increased OEB-approved
transmission rates;
• higher OM&A costs primarily resulting from:
— higher vegetation management costs resulting from a change to
an improved vegetation program resulting in greater coverage
and better reliability,
— higher property taxes, primarily due to non-recurring favourable
re-assessment of payments in lieu of property taxes in 2017,
— higher project write-offs due to revision of asset replacement
strategies and alternatives not pursued, and obsolete inventory
and technology, and
— higher volume of demand maintenance work on power equipment
and overhead lines; partially offset by
— savings related to the renewed IT contract, and
Revenues
Year ended December 31 (millions of dollars, except as otherwise noted)
Transmission
Distribution
Other
Total revenues
Transmission
Distribution, net of purchased power
Other
Total revenues, net of purchased power
— lower costs related to the proposed acquisition of Avista
Corporation (Merger);
• higher financing charges primarily due to an increase in interest expense
incurred on the convertible debentures and short-term notes payable,
partially offset by revaluation of the foreign exchange contract related to
the Merger; and
• higher income tax expense primarily attributable to a charge to deferred
tax expense of $799 million related to the OEB’s deferred tax asset and
distribution rates decisions, and higher before-tax earnings in 2018,
partially offset by higher temporary differences arising from higher in-
service additions in 2018, compared to 2017.
EPS and Adjusted EPS
EPS was ($0.15) in 2018, compared to $1.11 in 2017. The decrease in EPS
was driven by lower earnings in 2018, as discussed above. Adjusted
EPS, which adjusts for income and costs related to the Merger, including
gains and losses on the foreign exchange contract, as well as the impacts
related to the OEB’s deferred tax asset decision on Hydro One Networks’
distribution and transmission businesses, was $1.35 in 2018, compared to
$1.17 in 2017. The increase in Adjusted EPS was driven by higher net income
in 2018, as discussed above, but exclude the impact of items related to the
Merger and the impacts related to the OEB’s deferred tax asset decision on
Hydro One Networks’ distribution and transmission businesses. See section
“Non-GAAP Measures” for description of Adjusted EPS.
2018
1,686
4,422
42
6,150
1,686
1,523
42
3,251
2017
1,578
4,366
46
5,990
1,578
1,491
46
3,115
Change
6.8%
1.3%
(8.7%)
2.7%
6.8%
2.1%
(8.7%)
4.4%
4.6%
5.7%
Transmission: Average monthly Ontario 60-minute peak demand (MW)
Distribution: Electricity distributed to Hydro One customers (GWh)
20,485
27,338
19,587
25,876
Transmission Revenues
Transmission revenues increased by 6.8% in 2018 primarily due to
the following:
Distribution Revenues, Net of Purchased Power
Distribution revenues, net of purchased power, increased by 2.1% in 2018
primarily due to the following:
• higher revenues driven by increased OEB-approved transmission rates
• higher energy consumption resulting from favourable weather in 2018;
for 2018;
partially offset by
• higher average monthly Ontario 60-minute peak demand driven by
• lower external revenues in 2018, mainly due to lower late payment
colder winter and warmer summer in 2018; and
charges, connection setup fees and lower storm restorations;
• increased 2018 allowed return on equity (ROE) for the transmission business.
• lower Conservation and Demand Management (CDM) revenue; and
• lower deferred regulatory adjustments, mainly related to the pension cost
differential account.
21
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
OM&A Costs
Year ended December 31 (millions of dollars)
Transmission
Distribution
Other
2018
409
602
94
2017
375
593
98
1,105
1,066
Change
9.1%
1.5%
(4.1%)
3.7%
Transmission OM&A Costs
The increase of 9.1% in transmission OM&A costs for the year ended
December 31, 2018 was primarily due to:
• a reduction of provision for payments in lieu of property taxes following
a favourable reassessment of the regulation in 2017;
Depreciation, Amortization and Asset Removal Costs
The increase of $20 million or 2.4% in depreciation, amortization and asset
removal costs for 2018 was mainly due to the growth in capital assets as
the Company continues to place new assets in-service, consistent with its
ongoing capital investment program.
• higher volume of work on vegetation management;
• higher project write-offs due to revision of asset replacement strategies
and alternatives not pursued; and
Financing Charges
The increase of $20 million or 4.6% in financing charges for the year ended
December 31, 2018 was primarily due to the following:
• higher volume of demand maintenance work on power equipment and
• a full year of elevated interest expense related to the convertible
overhead lines; partially offset by
debentures issued in August 2017; and
• lower costs related to the renewed IT contract.
• an increase in interest expense on short-term notes payable driven by
Distribution OM&A Costs
The increase of 1.5% in distribution OM&A costs for the year ended
December 31, 2018 was primarily due to:
• higher volume of work on vegetation management;
• higher volume of emergency calls; and
• higher project and inventory write-offs due to revision of asset replacement
strategies, alternatives not pursued, and obsolete inventory and
technology; partially offset by
• lower storm restoration costs;
• lower costs related to the renewed IT contract; and
• a lower volume of field collections and investigations as a result
of extended winter moratorium.
Other OM&A Costs
The decrease in other OM&A costs for the year ended December 31, 2018
was driven by lower consulting and contract costs.
higher weighted-average interest rates and balance of
short-term notes outstanding in 2018; partially offset by
• a decrease in interest expense on long-term debt driven by lower
weighted-average interest rate in 2018; and
• an unrealized gain recorded in 2018 due to revaluation of the foreign
exchange contract related to the Merger.
Income Tax Expense
Income tax expense was $915 million for the year ended December
31, 2018, compared to $111 million in 2017. The Company realized an
effective tax rate (ETR) of approximately 107.6% in 2018, compared to
approximately 14.0% in 2017.
As prescribed by the regulators, the Company recovers income taxes and
is required to accrue its tax expense based on the tax liability determined
without accounting for temporary differences recoverable from or
refundable to customers in the future. The increase in income tax expense
for the year ended December 31, 2018 was primarily attributable to a
charge to deferred tax expense of $799 million related to the OEB’s
deferred tax asset and distribution rates decisions (see section
“Regulation – Electricity Rates Applications – Hydro One Networks –
Transmission” for details). Higher before-tax earnings for 2018, partially
offset by increased temporary differences from higher in-service
additions in 2018, also contributed to increased tax expense in 2018,
compared to 2017.
22
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
Common Share Dividends
In 2018, the Company declared and paid cash dividends to common shareholders as follows:
Date Declared
February 12, 2018
May 14, 2018
August 13, 2018
November 7, 2018
Record Date
Payment Date
Total Amount
Amount per Share (millions of dollars)
March 13, 2018
June 12, 2018
September 11, 2018
December 11, 2018
$
March 29, 2018
June 29, 2018
$
September 28, 2018 $
December 31, 2018 $
0.22
0.23
0.23
0.23
131
137
137
137
542
Following the conclusion of the fourth quarter of 2018, the Company declared a cash dividend to common shareholders as follows:
Date Declared
February 20, 2019
SELECTED ANNUAL FINANCIAL STATISTICS
Year ended December 31 (millions of dollars, except per share amounts)
Revenues
Net income attributable to common shareholders
Basic EPS
Diluted EPS
Basic Adjusted EPS
Diluted Adjusted EPS
Dividends per common share declared
Dividends per preferred share declared
Record Date
Payment Date
Total Amount
Amount per Share (millions of dollars)
March 13, 2019
March 29, 2019
$
0.23
137
2018
2017
6,150
(89)
(0.15) $
(0.15) $
1.35 $
1.35 $
0.91 $
1.06 $
5,990
658
1.11 $
1.10 $
1.17 $
1.16 $
0.87 $
1.06 $
2016
6,552
721
1.21
1.21
1.21
1.21
0.971
1.12
$
$
$
$
$
$
1
The $0.97 per share dividends declared in 2016 included $0.13 for the post-Initial Public Offering (IPO) period from November 5 to December 31, 2015, and $0.84 for the year ended
December 31, 2016.
December 31 (millions of dollars)
Total assets
Total non-current financial liabilities
2018
25,657
10,479
2017
25,701
9,815
2016
25,351
10,084
QUARTERLY RESULTS OF OPERATIONS
Quarter ended
(millions of dollars, except EPS)
Dec 31, 2018
Sep 30, 2018
Jun 30, 2018 Mar 31, 2018
Dec 31, 2017
Sep 30, 2017
Jun 30, 2017 Mar 31, 2017
Revenues
Purchased power
Revenues, net of
purchased power
Net income (loss) to
common shareholders
Basic EPS
Diluted EPS
Basic Adjusted EPS1
Diluted Adjusted EPS1
1,491
741
1,606
733
1,477
674
1,576
751
1,439
662
1,522
675
1,371
649
1,658
889
750
873
803
825
777
847
722
(705)
($1.18) $
($1.18) $
0.30 $
0.29 $
$
$
$
$
194
0.33 $
0.32 $
0.38 $
0.38 $
200
0.34 $
0.33 $
0.33 $
0.32 $
222
0.37 $
0.37 $
0.35 $
0.35 $
155
0.26 $
0.26 $
0.29 $
0.28 $
219
0.37 $
0.37 $
0.40 $
0.40 $
117
0.20 $
0.20 $
0.20 $
0.20 $
769
167
0.28
0.28
0.28
0.28
1 See section “Non-GAAP Measures” for description of Adjusted EPS.
Variations in revenues and net income over the quarters are primarily due to the impact of seasonal weather conditions on customer demand and market
pricing, as well as timing of regulatory decisions.
23
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
CAPITAL INVESTMENTS
The Company makes capital investments to maintain the safety, reliability
and integrity of its transmission and distribution system assets and to provide
for the ongoing growth and modernization required to meet the expanding
and evolving needs of its customers and the electricity market. This is
achieved through a combination of sustaining capital investments, which
are required to support the continued operation of Hydro One’s existing
assets, and development capital investments, which involve both additions
to existing assets and large scale projects such as new transmission lines
and transmission stations.
Assets Placed In-Service
The following table presents Hydro One’s assets placed in-service during the
year ended December 31, 2018 and 2017:
Year ended December 31 (millions of dollars)
Transmission
Distribution
Other
Total assets placed in-service
2018
1,164
642
7
1,813
2017
889
689
14
1,592
Change
30.9%
(6.8%)
(50.0%)
13.9%
Transmission Assets Placed In-Service
Transmission assets placed in-service increased by $275 million or 30.9% during the year ended December 31, 2018 primarily due to the following:
• substantial completion of major development work at the Clarington
transmission station;
• assets placed in-service in 2018 for station sustainment investments,
including Horning, NRC, Centralia, London Nelson, St. Isidore, Wanstead,
Mohawk, Palmerston, Chenaux, Dryden, and Bruce A transmission
stations, as well as the Bruce Special Protection System end-of-life
equipment replacement project;
• higher volume of demand work placed in-service associated with
equipment failures;
• higher volume of spare transformers;
Distribution Assets Placed In-Service
Distribution assets placed in-service decreased by $47 million or 6.8%
during the year ended December 31, 2018 primarily due to the following:
• higher volume of sustainment lines carryover work in 2017;
• lower volume of distribution station refurbishments and spare
transformer purchases;
• the completion of the Move-to-Mobile project in June 2017;
• lower volume of wood pole replacements;
• the completion of an operation center in Bolton in February 2017;
• higher volume of overhead lines and component replacement work placed
• lower volume of fleet and work equipment purchases;
in-service; and
• the completion of the Outage Response Management System project
• high volume of work on transmission facilities as a result of a wind storm;
in the third quarter of 2017; and
partially offset by
• assets placed in-service in 2017 for station sustainment investments,
including OverBrook, Hanmer, Aylmer, Leaside, Richview, Goderich,
Lakehead, Nepean, and Kirkland Lake transmission stations, as well
as DeCew Falls and Hinchinbrooke switching stations;
• substantial investments in major development projects placed in-service
in 2017, including the Leamington, Holland, Hawthorne, and Manby
transmission stations;
• the completion of the Move-to-Mobile project in June 2017;
• lower volume of wood pole replacements; and
• lower volume of fleet and work equipment purchases.
• the completion of the Company’s website redesign project in 2017 to
improve customer service and operational efficiencies; partially offset by
• higher volume of emergency power and storm restorations work;
• cumulative investments in the Advanced Distribution System project in 2018;
• cumulative investments in distribution generation connection projects in 2018;
• cumulative investments placed in-service for the Source-to-Order
Transformation project, which aims to modernize the Company’s sourcing
and procurement capabilities;
• increased investments placed in-service for meter sustainment work; and
• the completion of the Bill Redesign project, which included investments in
application enhancements and software upgrades.
24
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
Capital Investments
The following table presents Hydro One’s capital investments during the years ended December 31, 2018 and 2017:
Year ended December 31 (millions of dollars)
2018
2017
Change
Transmission
Sustaining
Development
Other
Distribution
Sustaining
Development
Other
Other
Total capital investments
810
116
59
985
296
217
64
577
13
764
137
67
968
280
227
81
588
11
1,575
1,567
6.0%
(15.3%)
(11.9%)
1.8%
5.7%
(4.4%)
(21.0%)
(1.9%)
18.2%
0.5%
2018 capital investments of $1,575 million were lower than the previously
disclosed expected amount of $1,660 million primarily due to:
• re-prioritization of distribution work resulting from the higher volume
of storm restoration work, including lower volume of wood pole
replacements, lines refurbishment work, distribution system capability
projects, and transformer replacements; and
• delayed or deferred projects, including the Integrated System Operations
Centre (new site and facility) deferred to future years, deferral of work to
2019 on North American Electric Reliability Corporation (NERC) projects,
delays of work to 2019 on the underground cable circuit from Leaside
to Main transmission stations, and on the Wanstead, Bronte and Seaton
transmission stations; partially offset by
• unplanned work, including the recommencement of Niagara
Reinforcement Project, Private Cloud Data Center project, Lake Superior
Project, and Advanced Metering Infrastructure initiative; and
• higher volume of storm restoration work.
Transmission Capital Investments
Transmission capital investments increased by $17 million or 1.8% during the
year ended December 31, 2018. Principal impacts on the levels of capital
investments included:
• higher volume of overhead lines refurbishments and replacements;
• higher volume of demand work associated with equipment failures;
• higher volume of spare transformer purchases;
• higher volume of work required to adhere to the NERC Critical
Infrastructure Protection (Cyber Security) standards; and
• higher volume of IT upgrades and enhancements primarily related to
the Private Cloud Data Center project in support of the modernization
of Hydro One’s IT infrastructure; partially offset by
• lower volume of transmission station refurbishments and replacements work;
• lower spend on load customer connections due to the completion of work
at Leamington transmission station in 2017 and higher capital contributions
received from customers in 2018;
• the completion of the Move-to-Mobile project in 2017;
• decreased investment in fleet and work equipment purchases as a result of
fleet standardization and asset specification review; and
• lower volume of wood pole replacements.
Distribution Capital Investments
Distribution capital investments decreased by $11 million or 1.9% during the
year ended December 31, 2018. Principal impacts on the levels of capital
investments included:
• lower volume of distribution lines and station refurbishments and
replacements work;
• lower volume of wood pole replacements;
• decreased investment on fleet and work equipment purchases as a result
of fleet standardization and asset specification review;
• lower volume of new connections and upgrades;
• lower spend on Advanced Distribution System infrastructures; and
• the completion of the Move-to-Mobile project in 2017; partially offset by
• increased volume of emergency power and storm restorations work due to
higher storm activity in 2018;
• higher volume of IT upgrades and enhancements primarily related to
the Private Cloud Data Center project in support of the modernization of
Hydro One’s IT infrastructure; and
• higher spend on joint-use and line relocation projects due to timing of
capital contributions.
25
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
Major Transmission Capital Investment Projects
The following table summarizes the status of significant transmission projects as at December 31, 2018:
Project Name
Location
Type
Development Projects:
Supply to Essex County
Transmission Reinforcement
Clarington Transmission Station
Niagara Reinforcement Project
Windsor-Essex area
Southwestern Ontario
Oshawa area
Southwestern Ontario
Niagara area
Southwestern Ontario
East-West Tie Station Expansion
Northern Ontario
Northwest Bulk Transmission
Line Development
Thunder Bay-Atikokan
Northwestern Ontario
New transmission line
and station
New transmission line
New transmission connection
and station expansion
New transmission line
Sustainment Projects:
Richview Transmission Station
Circuit Breaker Replacement
Bruce A Transmission Station
Beck #2 Transmission Station
Circuit Breaker Replacement
Lennox Transmission Station
Circuit Breaker Replacement
Toronto
Southwestern Ontario
Tiverton
Southwestern Ontario
Niagara area
Southwestern Ontario
Napanee
Southeastern Ontario
Station sustainment
Station sustainment
Station sustainment
Station sustainment
Anticipated
In-Service Date
Estimated
Cost
Capital Cost
To Date
(year)
(millions of dollars)
2018
561
54
New transmission station
2018
2401
238
2019
2022
2024
2020
2020
2022
2023
130
157
352
102
138
113
99
121
16
1
99
123
65
59
1
2
Major portions of the Supply to Essex County Transmission Reinforcement and Clarington Transmission Station projects were completed and placed in-service in 2018. Work on certain
minor portions of the project continues in 2019.
The scope of the Northwest Bulk Transmission Line Development project, as specified by the IESO on October 24, 2018, is currently limited to the development phase only, reducing the
estimated cost to $35 million.
Future Capital Investments
Following is a summary of estimated capital investments by Hydro One
over the years 2019 to 2023. The Company’s estimates are based on
management’s expectations of the amount of capital expenditures that
will be required to provide transmission and distribution services that are
efficient, reliable, and provide value for customers, consistent with the
OEB’s Renewed Regulatory Framework.
The 2019 transmission capital investments estimates differ from the prior year
disclosures, representing a decrease to reflect Hydro One’s recent one-year
inflation-based application for 2019 transmission rates. The 2020 to 2022
transmission capital investments estimates are lower than the prior year
disclosures as the Company has updated its plan for timing and pacing of
future capital investments, as well as reprioritization of work. The projections
and the timing of 2020-2023 expenditures are subject to approval by
the OEB.
26
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
The following table summarizes Hydro One’s annual projected capital investments for 2019 to 2023, by business segment:
(millions of dollars)
Transmission
Distribution
Other
Total capital investments
2019
1,049
751
13
1,813
2020
1,203
714
15
1,932
The following table summarizes Hydro One’s annual projected capital investments for 2019 to 2023, by category:
(millions of dollars)
Sustainment
Development
Other1
Total capital investments
1 “Other” capital expenditures consist of special projects, such as those relating to IT.
SUMMARY OF SOURCES AND USES OF CASH
2019
1,148
442
223
1,813
2020
1,211
502
219
1,932
2021
1,329
728
26
2,083
2021
1,467
431
185
2,083
2022
1,380
814
9
2,203
2022
1,574
473
156
2,203
2023
1,381
757
10
2,148
2023
1,530
468
150
2,148
Hydro One’s primary sources of cash flows are funds generated from operations, capital market debt issuances and bank credit facilities that are used to
satisfy Hydro One’s capital resource requirements, including the Company’s capital expenditures, servicing and repayment of debt, and dividend payments.
Year ended December 31 (millions of dollars)
Cash provided by operating activities
Cash provided by (used in) financing activities
Cash used in investing activities
Increase (decrease) in cash and cash equivalents
2018
1,575
399
(1,516)
458
2017
1,716
(201)
(1,540)
(25)
Cash provided by operating activities
The decrease of $141 million in cash from operating activities for the year
ended December 31, 2018 compared to 2017 was impacted by various
factors, including improved collection of accounts receivables in 2017 that
reached a stabilized level in 2018, and disposition of certain regulatory
variance and deferral accounts in 2018, partially offset by higher cash
earnings in 2018.
Cash provided by financing activities
Sources of cash
• The Company issued long-term debt of $1,400 million in 2018, compared
to no long-term debt issued in 2017.
• The Company received proceeds of $4,242 million from the issuance of
short-term notes in 2018, compared to $3,795 million received in 2017.
• In 2017, the Company received proceeds of $513 million, representing the
first instalment of the convertible debentures issued, gross of $27 million
financing costs, compared to no convertible debenture issuances in 2018.
Uses of cash
• The Company repaid $3,916 million of short-term notes in 2018,
compared to $3,338 million repaid in 2017.
• The Company repaid $753 million of long-term debt in 2018,
compared to long-term debt of $602 million repaid in 2017.
• Dividends paid in 2018 were $560 million, consisting of $542 million
common share dividends and $18 million of preferred share dividends,
compared to dividends of $536 million paid in 2017, consisting of
$518 million common share dividends and $18 million of preferred
share dividends.
Cash used in investing activities
Uses of cash
• Capital expenditures and future use asset purchases were lower in 2018,
primarily due to lower volume and timing of capital investment work.
27
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
Acquisition Credit Facilities
For the purpose of bridge financing for the Merger, the Company secured a
$1.0 billion non-revolving equity bridge credit facility, and a US$2.6 billion
non-revolving debt bridge credit facility (Acquisition Credit Facilities) in
June 2018. As a result of the termination of the Merger agreement (see
Other Developments – Avista Corporation Purchase Agreement), on
January 24, 2019, the Company cancelled the Acquisition Credit Facilities.
To mitigate the foreign currency risk related to the portion of the Merger
purchase price financed by the issuance of convertible debentures, in
October 2017, the Company entered into a deal-contingent foreign
exchange forward contract to convert $1.4 billion Canadian to US dollars.
For the year ended December 31, 2018, an unrealized fair value gain
of $25 million was recorded related to this contract, compared to an
unrealized fair value loss of $3 million recorded for the year ended
December 31, 2017. At December 31, 2018, the corresponding derivative
asset was $22 million, compared to a derivative liability of $3 million
at December 31, 2017. As a result of the termination of the Merger
agreement (see Other Developments – Avista Corporation Purchase
Agreement), no payment is due or receivable by Hydro One on the foreign
exchange contract.
Compliance
At December 31, 2018, the Company was in compliance with all financial
covenants and limitations associated with the outstanding borrowings and
credit facilities.
Credit Ratings
Various ratings organizations review the Company’s and Hydro One Inc.’s
debt ratings from time to time. These ratings organizations may take various
actions, positive or negative. The Company cannot predict what actions
rating agencies may take in the future. The failure to maintain the Company’s
current credit ratings could adversely affect the Company’s financial
condition and results of operations, and a downgrade in the Company’s
credit ratings could restrict the Company’s ability to access debt capital
markets and increase the Company’s cost of debt.
On June 20, 2018, Moody’s Investors Service (Moody’s) downgraded the
long-term debt rating for Hydro One Inc. to “Baa1” from “A3”, and revised
its outlook on Hydro One Inc. to stable from negative. In addition, Moody’s
affirmed the existing “Prime-2” short-term debt rating for Hydro One Inc.
Moody’s no longer assigns any probability of extraordinary support from
the Province of Ontario (Province) in Hydro One Inc.’s credit analysis which
has led to the downgrade.
LIQUIDITY AND FINANCING STRATEGY
Short-term liquidity is provided through FFO, Hydro One Inc.’s commercial
paper program, and the Company’s consolidated bank credit facilities.
Under the commercial paper program, Hydro One Inc. is authorized to
issue up to $1.5 billion in short-term notes with a term to maturity of up
to 365 days. At December 31, 2018, Hydro One Inc. had $1,252 million
in commercial paper borrowings outstanding, compared to $926 million
outstanding at December 31, 2017. The interest rates on the commercial
paper borrowings outstanding at December 31, 2018 ranged from 1.9%
to 2.3%. In addition, the Company has revolving bank credit facilities
(Operating Credit Facilities) with total availability of $2,550 million
maturing in 2021 and 2022, with no amounts used at December 31, 2018
or 2017. The Company may use these credit facilities for working capital and
general corporate purposes. On February 1, 2019, Hydro One entered into
a credit agreement for a $170 million unsecured demand operating credit
facility (Demand Facility) for the purpose of funding the payment of the
termination fee payable to Avista Corporation as a result of the termination
of the Merger Agreement and other Merger related costs. The short-term
liquidity under the commercial paper program, the Operating Credit
Facilities, the Demand Facility and anticipated levels of FFO are expected
to be sufficient to fund the Company’s normal operating requirements.
At December 31, 2018, the Company had long-term debt outstanding in
the principal amount of $10,716 million which included $10,573 million
of long-term debt issued by Hydro One Inc. and long-term debt in the
principal amount of $143 million issued by HOSSM. The majority of
long-term debt issued by Hydro One Inc. has been issued under its
Medium Term Note (MTN) Program. The maximum authorized principal
amount of notes issuable under the current MTN Program prospectus filed
in March 2018 is $4.0 billion. At December 31, 2018, $2.6 billion remained
available for issuance until April 2020. The long-term debt consists of
notes and debentures that mature between 2019 and 2064, and at
December 31, 2018, had a weighted-average term to maturity of
approximately 16.3 years and a weighted-average coupon rate
of 4.2%.
On June 18, 2018, Hydro One filed a short form base shelf prospectus
(Universal Base Shelf Prospectus) with securities regulatory authorities in
Canada to replace the universal base shelf prospectus that expired on
April 30, 2018. The Universal Base Shelf Prospectus allows Hydro One to
offer, from time to time in one or more public offerings, up to $4.0 billion
of debt, equity or other securities, or any combination thereof, during the
25-month period ending on July 18, 2020. On November 23, 2018,
Hydro One Holdings Limited (HOHL), an indirect wholly-owned subsidiary
of Hydro One, filed a short form base shelf prospectus (US Debt Shelf
Prospectus) with securities regulatory authorities in Canada and the US for
the purposes of, but not limited to, funding a portion of the cash purchase
price of the Merger. The US Debt Shelf Prospectus allows HOHL to offer,
from time to time in one or more public offerings, up to US$3.0 billion of
debt securities, unconditionally guaranteed by Hydro One, during the
25-month period ending on December 23, 2020. At December 31, 2018,
no securities have been issued under the Universal Base Shelf Prospectus
or the US Debt Shelf Prospectus.
28
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis On June 15, 2018, S&P Global Ratings (S&P) placed its ratings on the
Company and Hydro One Inc. on CreditWatch negative reflecting the
likelihood of a one-notch downgrade to both companies due to the Merger.
On July 18, 2018, S&P released an update maintaining the CreditWatch
negative placement, which continued to reflect the likelihood of a one-notch
downgrade in the Company and Hydro One Inc.’s issuer credit rating of “A”
due to the Merger, and also incorporated the possibility that the Company’s
governance structure could result in an additional one-notch downgrade
if S&P concludes that recent developments related to the retirement of the
Company’s Chief Executive Officer (CEO) and the replacement of the
Company’s Board of Directors (Board) adversely impact management
decision making and fails to promote the interests of all stakeholders.
See section “Hydro One Board of Directors and Executive Officers” for
more information.
On September 13, 2018, S&P lowered its issuer credit ratings on the
Company to “A-” from “A”. At the same time, S&P lowered the issue-level
rating on Hydro One Inc.’s senior unsecured debt by one notch to “A-” from
“A” and lowered the rating on Hydro One Inc.’s commercial paper program
by one notch to “A-1(low)” from “A-1(mid)” on the Canadian National
At December 31, 2018, Hydro One’s corporate credit ratings were as follows:
Rating Agency
S&P
Scale. All ratings remained on CreditWatch where S&P placed them with
negative implications on June 15, 2018. The one-notch downgrade reflected
S&P’s reassessment of Hydro One’s management and governance structure,
which according to S&P has weakened following the Province’s decision
to exert its influence on the Company’s compensation structure through
legislation, potentially promoting the interests and priorities of one owner
above those of other stakeholders.
On December 10, 2018, S&P removed Hydro One’s ratings from
CreditWatch with negative implications due to S&P’s revised assumption that
the Merger was unlikely to close as expected, following the Washington
Utilities and Transportation Commission (Washington UTC) decision on
December 5, 2018 to deny the Merger. Also on this date, S&P placed the
issuer credit rating on Hydro One and the issue-level rating on Hydro One
Inc.’s senior unsecured debt on negative outlook due to uncertainty about
Hydro One’s ability to convert its strategy into constructive actions that
support the Company’s financial performance, broader concerns related
to Hydro One’s governance, and uncertainty regarding the Company’s
strategic direction.
At December 31, 2018, Hydro One Inc.’s long-term and short-term debt ratings were as follows:
Rating Agency
DBRS Limited
Moody’s
S&P
Corporate Credit Rating
A-
Short-term
Debt Rating
R-1 (low)
Prime-2
A-1 (low)
Long-term
Debt Rating
A (high)
Baa1
A-
Hydro One has not obtained a credit rating in respect of any of its
securities. An issuer rating from S&P is a forward-looking opinion about
an obligor’s overall creditworthiness. This opinion focuses on the obligor’s
capacity and willingness to meet its financial commitments as they come
due but it does not apply to any specific financial obligation. An obligor
with a long-term credit rating of ‘A’ has strong capacity to meet its financial
commitments but is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligors in
higher-rated categories.
The rating above is not a recommendation to purchase, sell or hold any
of Hydro One’s securities and does not comment on the market price or
suitability of any of the securities for a particular investor. There can be no
assurance that the rating will remain in effect for any given period of time or
that the rating will not be revised or withdrawn entirely by S&P at any time
in the future. Hydro One has made, and anticipates making, payments to
S&P pursuant to agreements entered into with S&P in respect of the rating
assigned to Hydro One and expects to make payments to S&P in the future
to the extent it obtains a rating specific to any of its securities.
Effect of Interest Rates
The Company is exposed to fluctuations of interest rates as its regulated ROE
is derived using a formulaic approach that takes into account changes in
benchmark interest rates for Government of Canada debt and the A-rated
utility corporate bond yield spread. See section “Risk Management and
Risk Factors – Risks Relating to Hydro One’s Business – Market, Financial
Instrument and Credit Risk” for more details.
Pension Plan
In 2018, Hydro One contributed approximately $75 million to its pension
plan, compared to contributions of approximately $87 million in 2017,
and incurred $75 million in net periodic pension benefit costs, compared
to $88 million incurred in 2017.
In April 2018, Hydro One filed an actuarial valuation of its Pension
Plan as at December 31, 2017. Based on this valuation and 2018
levels of pensionable earnings, the 2018 annual Company pension
contributions of $75 million were comparable to $71 million as estimated
at December 31, 2016. Hydro One estimates that total Company
pension contributions for 2019, 2020, 2021, 2022, 2023 and 2024
are approximately $78 million, $77 million, $78 million, $79 million,
$81 million and $83 million, respectively.
29
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
The Company’s pension benefits obligation is impacted by various
assumptions and estimates, such as discount rate, rate of return on plan
assets, rate of cost of living increase and mortality assumptions. A full
discussion of the significant assumptions and estimates can be found in
the section “Critical Accounting Estimates – Employee Future Benefits”.
OTHER OBLIGATIONS
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have, or are reasonably
likely to have, a material current or future effect on the Company’s financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Summary of Contractual Obligations and Other Commercial Commitments
The following table presents a summary of Hydro One’s debt and other major contractual obligations and commercial commitments:
December 31, 2018 (millions of dollars)
Contractual obligations (due by year)
Long-term debt – principal repayments
Long-term debt – interest payments
Convertible debentures – principal repayments1
Convertible debentures – interest payments1
Short-term notes payable
Pension contributions2
Environmental and asset retirement obligations
Outsourcing and other agreements
Operating lease commitments
Long-term software/meter agreement
Total contractual obligations
Other commercial commitments (by year of expiry)
Operating Credit Facilities
Letters of credit3
Guarantees4
Total other commercial commitments
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
10,716
8,181
513
539
1,252
476
186
310
28
39
22,240
2,550
182
325
3,057
731
448
—
62
1,252
78
26
161
7
17
2,782
—
182
325
507
1,456
840
—
123
—
155
61
133
15
18
2,801
250
—
—
250
734
772
—
123
—
160
59
5
2
3
7,795
6,121
513
231
—
83
40
11
4
1
1,858
14,799
2,300
—
—
2,300
—
—
—
—
1
2
As a result of the termination of the Merger agreement (see Other Developments – Avista Corporation Purchase Agreement), on February 8, 2019, Hydro One redeemed the convertible
debentures and paid the holders of the Instalment Receipts $513 million plus accrued and unpaid interest of $7 million.
Contributions to the Hydro One Pension Fund are generally made one month in arrears. Company and employee contributions to the Pension Plan are based on actuarial reports,
including valuations performed at least every three years, and actual or projected levels of pensionable earnings, as applicable.
3 Letters of credit consist of a $163 million letter of credit related to retirement compensation arrangements, a $13 million letter of credit provided to the IESO for prudential support,
$5 million in letters of credit to satisfy debt service reserve requirements, and $1 million in letters of credit for various operating purposes.
4
Guarantees consist of prudential support provided to the IESO by Hydro One Inc. on behalf of its subsidiaries.
SHARE CAPITAL
The common shares of Hydro One are publicly traded on the Toronto Stock
Exchange (TSX) under the trading symbol “H”. Hydro One is authorized
to issue an unlimited number of common shares. The amount and timing of
any dividends payable by Hydro One is at the discretion of the Hydro One
Board and is established on the basis of Hydro One’s results of operations,
maintenance of its deemed regulatory capital structure, financial condition,
cash requirements, the satisfaction of solvency tests imposed by corporate
laws for the declaration and payment of dividends and other factors that
the Board may consider relevant. At February 20, 2019, Hydro One had
595,940,880 issued and outstanding common shares.
The Company is authorized to issue an unlimited number of preferred shares,
issuable in series. At February 20, 2019, two series of preferred shares are
authorized for issuance: the Series 1 preferred shares and the Series 2 preferred
shares. At February 20, 2019, the Company had 16,720,000 Series 1
preferred shares and no Series 2 preferred shares issued and outstanding.
The number of additional common shares of Hydro One that would be
issued if all outstanding awards under the share grant plans and the Long-
term Incentive Plan (LTIP) were vested and exercised as at February 20,
2019 is 6,231,715.
30
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
REGULATION
The OEB approves both the revenue requirements of and the rates charged
by Hydro One’s regulated transmission and distribution businesses. The
rates are designed to permit the Company’s transmission and distribution
businesses to recover the allowed costs and to earn a formula-based annual
rate of return on its deemed 40% equity level invested in the regulated
businesses. This is done by applying a specified equity risk premium to
forecasted interest rates on long-term bonds. In addition, the OEB approves
rate riders to allow for the recovery or disposition of specific regulatory
deferral and variance accounts over specified time frames.
The following table summarizes the status of Hydro One’s major regulatory proceedings with the OEB:
Application
Electricity Rates
Hydro One Networks
Hydro One Networks
Hydro One Networks
B2M LP
HOSSM
Years
Type
Status
2017-2018
2019
2018-2022
2015-2019
2017-2026
Transmission – Cost-of-service
Transmission – Revenue Cap
Distribution – Custom
Transmission – Cost-of-service
Transmission – Revenue Cap
OEB decision received1
OEB decision pending
OEB decision received
OEB decision received
OEB decision received2
Mergers Acquisitions Amalgamations and Divestitures (MAAD)
Orillia Power
Peterborough Distribution
Leave to Construct
East-West Tie Station Expansion
Lake Superior Link Project
n/a
n/a
n/a
n/a
Acquisition
Acquisition
Section 92
Section 92
OEB decision pending3
OEB decision pending
OEB decision received
OEB decision received4
1 On March 7, 2019, the OEB upheld its Original Decision relating to the deferred tax asset. The Company is currently considering its options under the Appeal.
2
In October 2016, the OEB approved the 2017-2026 revenue requirements. In July 2018, HOSSM filed an application for an inflationary increase (Revenue Cap Escalator factor)
to its 2019 revenue requirement.
3
In September 2018, Hydro One filed a new MAAD application with the OEB to acquire Orillia Power.
4
On February 11, 2019, the OEB issued its decision awarding the construction of the East-West Tie Line to NextBridge, as directed by the Province on January 30, 2019.
The following table summarizes the key elements and status of Hydro One’s electricity rate applications:
Application
Transmission
Hydro One Networks
B2M LP
HOSSM
Distribution
Hydro One Networks
Year
2018
2019
2018
2019
ROE
Allowed (A)
or Forecast (F)
Rate Base
Allowed (A)
or Forecast (F)
Rate Application Status
Rate Order Status
9.00% (A)
n/a1
9.00% (A)
8.98% (A)
$11,148 million (A)
n/a1
Approved in September 2017
Filed in October 2018
Approved in December 2017
To be filed
$502 million (A)
$496 million (A)
Approved in December 2015
Approved in December 2015
OEB decision received
Approved in December 2018
2017-2026
9.19% (A)
$218 million (A)
Approved in October 2016
OEB decision received2
2018
2019
2020
2021
2022
9.00% (A)
8.98% (A)
8.98% (F)
8.98% (F)
8.98% (F)
$7,650 million (F)
$8,009 million (F)
$8,412 million (F)
$8,941 million (F)
$9,306 million (F)
Filed in March 20173
Filed in March 20173
Filed in March 20173
Filed in March 20173
Filed in March 20173
To be filed in 2019 Q1
To be filed in 2019 Q1
To be filed in 2019 Q4
To be filed in 2020 Q4
To be filed in 2021 Q4
1 The Revenue Cap application is a formulaic adjustment to the approved revenue requirement and does not consider ROE or rate base.
2
In October 2016, the OEB approved the 2017-2026 revenue requirements. In July 2018, HOSSM filed an application for an inflationary increase (Revenue Cap Escalator factor) to its
2019 revenue requirement.
3 In June 2018, Hydro One Networks filed an undertaking with the OEB which included updated rate base amounts.
31
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
Electricity Rates Applications
Hydro One Networks – Transmission
On September 28, 2017, the OEB issued its decision and order on
Hydro One Networks’ 2017 and 2018 transmission rates revenue
requirements (Original Decision), with 2017 rates effective January 1, 2017.
Key changes to the application as filed included reductions in planned
capital expenditures of $126 million and $122 million for 2017 and 2018,
respectively, reductions in OM&A expenses related to compensation by
$15 million for each year, and reductions in estimated tax savings from
the IPO by $24 million and $26 million for 2017 and 2018, respectively.
On October 10, 2017, Hydro One Networks filed a Draft Rate Order
reflecting the changes outlined in the Original Decision.
In its Original Decision, the OEB concluded that the net deferred tax asset
resulting from transition from the payments in lieu of tax regime under the
Electricity Act (Ontario) to tax payments under the federal and provincial
tax regime should not accrue entirely to Hydro One shareholders and that a
portion should be shared with ratepayers. On November 9, 2017, the OEB
issued a decision and order that calculated the portion of the tax savings
that should be shared with ratepayers. The OEB’s calculation would result in
an impairment of a portion of Hydro One Networks’ transmission deferred
income tax regulatory asset. If the OEB were to apply the same calculation
for sharing in Hydro One Networks’ 2018-2022 distribution rates, it would
also result in an additional impairment of a portion of Hydro One Networks’
distribution deferred income tax regulatory asset. In October 2017, the
Company filed a Motion to Review and Vary (Motion) the Original Decision
and filed an appeal with the Divisional Court of Ontario (Appeal). In both
cases, the Company’s position is that the OEB made errors of fact and law
in its determination of allocation of the tax savings between the shareholders
and ratepayers. On December 19, 2017, the OEB granted a hearing of the
merits of the Motion which was held on February 12, 2018. On August 31,
2018, the OEB granted the Motion and returned the portion of the Decision
relating to the deferred tax asset to an OEB panel for reconsideration.
Subsequent to year end, on March 7, 2019, the OEB issued its
reconsideration decision and concluded that their Original Decision was
reasonable and should be upheld. Also, on March 7, 2019 the OEB issued
its decision for Hydro One Networks’ 2018-2022 distribution rates, in
which it directed the Company to apply the Original Decision to Hydro One
Networks’ distribution rates. As a result of this subsequent event that requires
adjustment in the 2018 financial statements, the Company has recognized
an impairment charge of Hydro One Networks’ distribution deferred income
tax regulatory asset of $474 million and Hydro One Networks’ transmission
deferred income tax regulatory asset of $558 million, an increase in
deferred income tax regulatory liability of $81 million, and a decrease in the
forgone revenue deferral regulatory asset of $68 million. After recognition
of the related $314 million deferred tax asset, the Company has recorded
an $867 million one-time decrease in net income as a reversal of revenues
of $68 million, and charge to deferred tax expense of $799 million, which
is expected to result in an annual decrease to FFO in the range of
$50 million to $60 million. Notwithstanding the recognition of the effects
of the decision in the financial statements, the Company is currently
considering its options under the Appeal.
See section “Risk Management and Risk Factors - Risks Relating to Hydro
One’s Business - Risks Relating to Regulatory Treatment of Deferred Tax
Asset” for description of related risks.
On November 23, 2017, the OEB approved the 2017 transmission revenue
requirement of $1,438 million. In December 2017, the OEB approved the
2018 transmission revenue requirement of $1,511 million, which included a
$25 million increase from the approved amount, as a result of the OEB-
updated cost of capital parameters. Uniform Transmission Rates (UTRs),
reflecting these approved amounts, were approved by the OEB on February
1, 2018 to be effective as of January 1, 2018.
On November 23, 2017, the OEB approved the 2017 transmission revenue
requirement of $1,438 million. In December 2017, the OEB approved the
2018 transmission revenue requirement of $1,511 million, which included
a $25 million increase from the approved amount, as a result of the
OEB-updated cost of capital parameters. Uniform Transmission Rates
(UTRs), reflecting these approved amounts, were approved by the OEB
on February 1, 2018 to be effective as of January 1, 2018.
On March 16, 2018, the OEB issued a letter requesting Hydro One to
file the transmission revenue requirement application for a four-year test
period from 2019 to 2022, rather than the minimum 5-year period allowed
under existing OEB policy. The OEB indicated that it is more appropriate to
consider rates for Hydro One’s distribution and transmission businesses in
a single application, and stated that it expected Hydro One to file a single
application for distribution rates (including Hydro One Remote Communities)
and transmission revenue requirement for the period from 2023 to 2027.
A one-year inflation-based application for 2019 transmission rates was
filed with the OEB on October 26, 2018. On December 20, 2018, the OEB
issued a decision declaring Hydro One’s revenue requirement and the UTRs
for 2019 as interim.
Hydro One Networks – Distribution
On March 31, 2017, Hydro One Networks filed a custom application with
the OEB for 2018-2022 distribution rates under the OEB’s incentive-based
regulatory framework (2018-2022 Distribution Application), which was
subsequently updated on June 7 and December 21, 2017. The application
reflects the level of capital investments required to minimize degradation
in overall system asset condition, to meet regulatory requirements, and to
maintain current reliability levels.
The OEB oral hearing related to Hydro One Networks’ application for
2018-2022 distribution rates was held on June 11-28, 2018. On August 31,
2018, Hydro One submitted its final argument. Subsequently, steps were
taken to address the outstanding issues related to pole attachment fees
and matters relating to recovery of certain amounts paid for executive
compensation, as per the Hydro One Accountability Act (Accountability
Act). See section “Hydro One Board of Directors and Executive Officers”
for more information. On December 6, 2018, Hydro One made its final
submission on matters relating to the Accountability Act and the impact
on revenue requirement. Regarding the pole attachment fees, after
following the process outlined by the OEB, Hydro One proposed the
use of the province-wide pole attachment rate, effective January 1, 2019.
On November 15, 2018, the OEB accepted the proposal. On March 7,
2019, the OEB issued its decision for Hydro One Networks’ 2018-2022
distribution rates. See above in “Hydro One Networks – Transmission” for
impacts relating to the distribution deferred income tax regulatory asset.
32
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis On June 27, 2018, the OEB issued a letter deferring Hydro One’s request
for the OEB to approve an alternative method to calculate amounts related
to the post-employment benefit costs for Hydro One Networks’ distribution
business until the next re-basing application is filed, as the OEB noted that
the issue is relevant to both the distribution and transmission businesses of
Hydro One Networks. In the 2019 transmission rates application filed with
the OEB on October 26, 2018, Hydro One requested this decision be made
as part of its next transmission re-basing application.
B2M LP
In December 2015, the OEB approved B2M LP’s revenue requirement for
years 2015 to 2019, subject to annual updates in each of 2016, 2017, 2018
and 2019 to adjust its revenue requirement for the following year consistent
with the OEB’s updated cost of capital parameters. On May 10, 2018, the
OEB issued its Decision and Rate Order on B2M LP’s 2018 transmission
application reflecting revenue requirement of $36 million, effective
January 1, 2018.
On November 23, 2018, a revised 2019 revenue requirement using
the updated cost of capital parameters was filed with the OEB. On
December 20, 2018, the OEB issued its Decision on UTRs effective
January 1, 2019, approving the requested 2019 revenue requirement
of $33 million.
HOSSM
HOSSM is under a 10-year deferred rebasing period for years 2017-2026,
as approved in the OEB MAAD decision dated October 13, 2016. On
July 26, 2018, HOSSM filed a 2019 application to allow for inflationary
increase (Revenue Cap Escalator factor) to its previously approved
revenue requirement. The Revenue Cap Escalator factor is designed to
add inflationary increases to the revenue requirement on an annual basis.
The proceeding continues and an OEB decision is expected in the second
quarter of 2019.
Hydro One Remote Communities
On August 28, 2017, Hydro One Remote Communities filed an application
with the OEB seeking approval of its 2018 revenue requirement of $57 million
and electricity rates effective May 1, 2018. On March 19, 2018, the OEB
approved the settlement agreement related to the 2018 rates application
reached by Hydro One Remote Communities and the intervenors in the rate
proceeding. On March 26, 2018, a draft rate order was filed with the OEB
for 2018 rates. The OEB approved the draft rate order on April 12, 2018,
and the new rates were implemented effective May 1, 2018.
On November 5, 2018, Hydro One Remote Communities filed an
application with the OEB seeking approval for increased base rates of
1.8% effective May 1, 2019. On February 11, 2019, the OEB issued a draft
decision approving the requested increase.
Hydro One Remote Communities is fully financed by debt and is operated
as a break-even entity with no ROE.
Niagara Reinforcement Limited Partnership (NRLP)
On September 19, 2018, NRLP was formed to own and operate a new
230 kV transmission line in the Niagara region that will enable generators in
the Niagara area to connect to the load centres of the Greater Toronto and
Hamilton areas. NRLP is designed to include minority participation of local
First Nations partners in a structure similar to B2M LP.
On September 27, 2018, Hydro One filed a transmission licence application
with the OEB for NRLP. On October 25, 2018, Hydro One filed two other
applications with the OEB relating to NRLP requesting approval for Hydro
One Networks to sell the applicable assets to NRLP and approval of interim
rates to include in the 2019 UTRs. On December 20, 2018, the OEB issued
a decision finding that the request for approval for an interim revenue
requirement effective January 1, 2019 was premature but indicated that
there would be an opportunity to adjudicate the matter at a later date.
NRLP expects the OEB to decide on this application later in 2019.
MAAD Applications
Orillia Power MAAD Application
In 2016, Hydro One filed a MAAD application (2016 Application) with the
OEB to acquire Orillia Power Distribution Corporation (Orillia Power) from
the City of Orillia, Ontario. On April 12, 2018, the OEB issued a decision
denying Hydro One’s proposed acquisition of Orillia Power. The decision
indicated that with the exception to pricing, the transaction met the no harm
test. Additionally, the OEB indicated that it required additional evidence on
the overall cost structure following the deferral period and the impact on
Orillia Power’s customers. On May 2, 2018, Hydro One and Orillia
Power both filed a Motion to Review and Vary the OEB’s decision, and on
August 23, 2018, the OEB issued a decision upholding its April 12, 2018
decision to deny Hydro One’s proposed acquisition of Orillia Power.
On September 26, 2018, Hydro One filed a new MAAD application
(2018 Application) with the OEB to acquire Orillia Power. The evidence in
the 2018 Application is similar to that provided in the 2016 Application.
However it includes additional information that was not available at the time
Hydro One filed its 2016 MAAD Application, including updates to reflect
current variables to costs and other metrics, as well as future cost structures
pertaining to the acquired entity.
On October 16, 2018, the School Energy Coalition (SEC) filed a motion with
the OEB seeking an order dismissing the 2018 Application. On January 16,
2019, Hydro One and Orillia Power filed submissions on the SEC motion,
maintaining that the motion should be dismissed, and the 2018 Application
should be heard by the OEB. A decision by the OEB is pending.
Peterborough Distribution MAAD Application
On October 12, 2018, the Company filed an application with the OEB
for approval of the acquisition of business and distribution assets of
Peterborough Distribution Inc. (Peterborough Distribution). On October 25,
2018, an advance ruling certification application was filed with the
Competition Bureau. On November 14, 2018, the Competition Bureau
issued no action letter, meaning that transaction can proceed from the
Competition Bureau’s perspective. The decision of the OEB is still pending.
See section “Other Developments – Peterborough Distribution Purchase
Agreement” for more information on the acquisition.
Other Applications
East-West Tie / Lake Superior Link
On February 15, 2018, Hydro One filed a Leave to Construct application
with the OEB to construct a transmission line (East-West Tie Line) in
northwestern Ontario (Lake Superior Link Project), which competed with an
application filed by NextBridge to construct the East-West Tie Line. Pursuant
to the OEB’s direction, on July 26, 2018, the IESO issued its analysis of the
33
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis impacts of a delay to the in-service date for the construction of the East-West
Tie Line. In its analysis, the IESO recommends an in-service date of 2020
for the completion of the East-West Tie Line and does not support a delay
beyond 2022, due to increased risks to system reliability and the associated
cost uncertainties.
A combined OEB oral hearing for the Hydro One Lake Superior Link Project
application, the Hydro One East-West Tie Station Expansion application,
and the NextBridge East-West Tie Line application was held in October
2018. On December 20, 2018, the OEB approved Hydro One’s East-West
Tie Station Expansion application. However, with respect to approval for the
Lake Superior Link Project, the OEB decided to add a further step requesting
both Hydro One and NextBridge to submit a final not-to-exceed price by
January 31, 2019, noting that price will be the deciding factor.
On January 18, 2019, BLP First Nations (BLP) filed a Notice of Appeal to
Divisional Court appealing the OEB’s December decision, asserting that
the OEB decision lacks consideration and application of duty to consult in
section 35 of the Constitution Act, 1982. On the same date, NextBridge
filed a Notice of Appeal to Divisional Court appealing portions of the OEB’s
December decision that relate to transferring information attained in the
environmental assessment process to Hydro One and the disallowance of
recovery of a portion of NextBridge’s development work. On January 30,
2019, the Minister of Energy, Northern Development and Mines, issued a
directive to the OEB to amend NextBridge’s electricity transmission licence
and allow it to proceed with the East-West Tie transmission line, effectively
ending Hydro One’s competitive bid to build the Lake Superior Link Project.
On February 11, 2019, the OEB issued its decision awarding the construction
of the East-West Tie Line to NextBridge. As a result, in the first quarter of
2019, Hydro One recognized an impairment loss of approximately
$11 million associated with previously capitalized costs related to
this project.
OTHER DEVELOPMENTS
Exemptive Relief
Disclosure of Ownership by the Province
On June 6, 2017, the Canadian securities regulatory authorities granted
(i) the Minister of Energy, (ii) Ontario Power Generation Inc. (OPG)
(on behalf of itself and the segregated funds established as required by
the Nuclear Fuel Waste Act (Canada)) and (iii) agencies of the Crown,
provincial Crown corporations and other provincial entities (collectively,
the Non-Aggregated Holders) exemptive relief, subject to certain conditions,
to enable each Non-Aggregated Holder to treat securities of Hydro One
that it owns or controls separately from securities of Hydro One owned or
controlled by the other Non-Aggregated Holders for purposes of certain
take-over bid, early warning reporting, insider reporting and control
person distribution rules and certain distribution restrictions under Canadian
securities laws. Hydro One was also granted relief permitting it to rely solely
on insider reports and early warning reports filed by Non-Aggregated
Holders when reporting beneficial ownership or control or direction over
securities in an information circular or annual information form in respect
of securities beneficially owned or controlled by any Non-Aggregated
Holder subject to certain conditions.
US GAAP
On March 27, 2018, Hydro One was granted exemptive relief by securities
regulators in each province and territory of Canada which allows Hydro
One to continue to report its financial results in accordance with US GAAP
(Exemptive Relief). The Exemptive Relief will remain in effect until the
earlier of: (i) January 1, 2024; (ii) the first day of Hydro One’s financial
year that commences after Hydro One ceases to have activities subject to
rate regulation; and (iii) the effective date prescribed by the International
Accounting Standards Board for the mandatory application of a standard
within International Financial Reporting Standards specific to entities with
activities subject to rate regulation.
Litigation
Class Action Lawsuit
Hydro One Inc., Hydro One Networks, Hydro One Remote Communities,
and Norfolk Power Distribution Inc. are defendants in a class action
suit in which the representative plaintiff is seeking up to $125 million in
damages related to allegations of improper billing practices. The action was
commenced in the Superior Court of Ontario on September 9, 2015. The
plaintiff’s motion for certification was dismissed by the court in November
2017. The plaintiff appealed the court’s decision to the Divisional Court.
The appeal was heard in October 2018; the Divisional Court dismissed the
appeal in December 2018; and in January 2019, the plaintiff applied for
leave to appeal to the Ontario Court of Appeal.
Litigation Relating to the Merger
To date, four putative class action lawsuits were filed by purported Avista
Corporation shareholders in relation to the Merger. First, Fink v. Morris, et
al., was filed in Washington state court and the amended complaint names
as defendants Avista Corporation’s directors, Hydro One, Olympus Holding
Corp., Olympus Corp., and Bank of America Merrill Lynch. The suit alleges
that Avista Corporation’s directors breached their fiduciary duties in relation
to the Merger, aided and abetted by Hydro One, Olympus Holding Corp.,
Olympus Corp. and Bank of America Merrill Lynch. The Washington state
court issued an order staying the litigation until after the Merger has closed.
Counsel for the plaintiffs in Fink has informally indicated that, in light of
the termination of the Merger, the lawsuit will be dismissed, but no formal
dismissal papers have been filed with the court at this time. Second, Jenß
v. Avista Corp., et al., Samuel v. Avista Corp., et al., and Sharpenter v.
Avista Corp., et al., were each filed in the US District Court for the Eastern
District of Washington and named as defendants Avista Corporation and its
directors; Sharpenter also named Hydro One, Olympus Holding Corp., and
Olympus Corp. The lawsuits alleged that the preliminary proxy statement
omitted material facts necessary to make the statements therein not false or
misleading. Jenß, Samuel, and Sharpenter were all voluntarily dismissed by
the respective plaintiffs with no consideration paid by any of the defendants.
Peterborough Distribution Purchase Agreement
On July 31, 2018, Hydro One reached an agreement to acquire the business
and distribution assets of Peterborough Distribution, an electricity distribution
company located in east central Ontario, from the City of Peterborough.
Hydro One will pay the City of Peterborough $105 million for the
transaction. The acquisition is conditional upon the satisfaction of customary
closing conditions and approval by the OEB and the Competition Bureau.
On October 12, 2018, the Company filed an application with the OEB
34
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis for approval of the acquisition. On November 14, 2018, the Competition
Bureau issued no action letter, meaning that transaction can proceed
from the Competition Bureau’s perspective. The decision of the OEB is
still pending.
Avista Corporation Purchase Agreement
In July 2017, Hydro One reached an agreement to acquire Avista
Corporation. The completion of the Merger was subject to receipt of
certain regulatory and governmental approvals, including the expiration
or termination of any applicable waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, clearance of the Merger by the
Committee on Foreign Investment in the United States, the approval by each
of the Regulatory Commission of Alaska, the Washington UTC, the Idaho
Public Utilities Commission (Idaho PUC), Oregon Public Utility Commission
(Oregon PUC), the Public Service Commission of the State of Montana, the
United States Federal Energy Regulatory Commission and the United States
Federal Communications Commission, and the satisfaction or waiver of
certain closing conditions contained in the Merger Agreement.
Following the announcement on July 11, 2018 of the resignation of Hydro
One’s Board and the immediate retirement of its President and CEO (see
section “Hydro One Board of Directors and Executive Officers” for more
information), regulatory authorities in Washington and Oregon extended
the timetable for arriving at a decision in Hydro One’s proposed acquisition
of Avista Corporation to mid-December 2018. In addition, the Idaho PUC
rescheduled its hearing from July 23, 2018 to November 26-27, 2018.
The Idaho PUC denied approval of the merger on January 3, 2019. The
Washington UTC denied approval of the merger on December 5, 2018.
On December 17, 2018, Hydro One and Avista Corporation filed a petition
for reconsideration and a petition for a rehearing with the Washington
UTC. On January 8, 2019, the Washington UTC gave notice of the deemed
denial by operation of law (effective January 7, 2019) of the petition for
reconsideration filed by Hydro One and Avista Corporation. In the same
notice, the Washington UTC also denied the petition for a rehearing on
the basis that it is moot because of the deemed denial of the petition for
reconsideration. In light of the decisions by the Washington UTC and the
Idaho PUC to deny approval of the Merger, the Oregon PUC issued an
order on January 14, 2019 suspending indefinitely the current procedural
schedule in its Merger docket until Hydro One and Avista Corporation
inform the Oregon PUC that they have sought a reversal of the denial
decisions through appeal or other means that would provide a justiciable
issue for the Oregon PUC to address.
related costs. On February 8, 2019, Hydro One redeemed the convertible
debentures and paid the holders of the Instalment Receipts $513 million
($333 per $1,000 principal amount) plus accrued and unpaid interest of
$7 million. The redemption of the convertible debentures was paid with cash
on hand. As a result of the termination of the Merger agreement, no payment
is due or receivable by Hydro One on the foreign exchange contract.
The following amounts related to the termination of the Merger agreement
will be recorded by the Company in its 2019 first quarter financial statements:
• approximately $138 million OM&A costs for payment of the
US$103 million termination fee;
• $22 million financing charges, due to revaluation of the foreign-exchange
contract to $nil and reversal of previously recorded gains;
• repayment of $513 million convertible debentures and related interest
of $7 million; and
• $24 million financing charges, due to derecognition of the deferred
financing costs related to convertible debentures.
HYDRO ONE BOARD OF DIRECTORS
AND EXECUTIVE OFFICERS
Directors and Executive Officers
On July 11, 2018, Hydro One, on behalf of itself and its wholly-owned
subsidiary, Hydro One Inc., announced that it had entered into an
agreement (Letter Agreement) with the Province for the purpose of the
orderly replacement of the Board of Hydro One and Hydro One Inc. and
the retirement of Mayo Schmidt as the CEO effective July 11, 2018. Hydro
One also announced the appointment of Paul Dobson as Acting President
and CEO of Hydro One and Hydro One Inc. effective July 11, 2018.
On August 14, 2018, Hydro One announced a new Board. Six directors
were identified and nominated by an ad hoc nominating committee,
comprised of three of the five largest shareholders of Hydro One excluding
the Province, and four directors were identified and nominated by the
Province, Hydro One’s largest shareholder. Each of the directors is
independent of both Hydro One and the Province in accordance with the
Governance Agreement dated as of November 5, 2015 between Hydro
One and the Province (Governance Agreement).
The directors of Hydro One and Hydro One Inc. are the same in accordance
with the provisions of the Governance Agreement.
On January 23, 2019, Hydro One and Avista Corporation announced that
the companies have mutually agreed to terminate the Merger agreement. As
a result of the termination of the Merger agreement, on January 24, 2019,
Hydro One paid a US$103 million termination fee to Avista Corporation
as required by the Merger agreement. On January 24, 2019, the Company
cancelled the Acquisition Credit Facilities, with no amounts drawn. On
February 1, 2019, Hydro One entered into the Demand Facility for the
purpose of funding the payment of the termination fee and other Merger
On September 7, 2018, Hydro One announced the appointment of Chris
Lopez as Acting Chief Financial Officer (CFO) of Hydro One and Hydro
One Inc., effective September 6, 2018. On September 7, 2018, Hydro One
announced the appointment of Tom Woods as Chair of the Board of Hydro
One and Hydro One Inc., effective September 6, 2018. Patrick Meneley,
Executive Vice President and Chief Corporate Development Officer has
advised the Company of his decision to leave Hydro One effective
March 1, 2019.
35
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis The following table sets forth information regarding the current directors and executive officers of Hydro One and Hydro One Inc. as at December 31, 2018.
Each of the directors was first appointed effective August 14, 2018. Each director is elected annually to serve for one year or until his or her successor is
elected or appointed.
Age
Position/Title
52
48
Acting President
and CEO
Chief Corporate Affairs
and Customer Care Officer
54
Chief Operating Officer
Independent
Board Member
Committees
Principal Occupation
Acting President
and CEO
Chief Corporate Affairs
and Customer Care Officer
Chief Operating Officer
44
Acting CFO
Acting CFO
Executive Vice President,
Chief Human Resources Officer
Executive Vice President,
Chief Human Resources Officer
Name, Province or State
and Country of Residence
Paul Dobson
Texas, USA
Jason Fitzsimmons
Ontario, Canada
Gregory Kiraly
Arizona, USA
Chris Lopez
Alberta, Canada
Judy McKellar
Ontario, Canada
Patrick Meneley
Ontario, Canada
James Scarlett
Ontario, Canada
Tom Woods1
Ontario, Canada
Cherie Brant1
Ontario, Canada
Blair Cowper-Smith1
Ontario, Canada
Anne Giardini
British Columbia,
Canada
David Hay
New Brunswick,
Canada
Timothy Hodgson
Ontario, Canada
Jessica McDonald
British Columbia,
Canada
Russel Robertson1
Ontario, Canada
William Sheffield
Ontario, Canada
62
55
65
66
Executive Vice President
and Chief Corporate
Development Officer
Executive Vice President
and Chief Legal Officer
Director and Chair
of the Board
44
Director
70
Director
59
Director
63
Director
58
Director
49
Director
71
Director
70
Director
Executive Vice President
and Chief Corporate
Development Officer
Executive Vice President
and Chief Legal Officer
Director
Partner,
Dickinson Wright LLP
Director
Director
Managing Partner,
Delgatie Incorporated
Governance Committee; Health,
Safety, Environment and Indigenous
Peoples Committee
Governance Committee (Chair);
Human Resources Committee
Audit Committee; Health, Safety,
Environment and Indigenous
Peoples Committee (Chair)
Audit Committee; Health, Safety,
Environment and Indigenous
Peoples Committee
Managing Partner and Director, Governance Committee;
Alignvest Management
Corporation
Human Resources Committee
Interim President and CEO,
Canada Post Corporation
Audit Committee;
Human Resources Committee
Director
Director
Audit Committee;
Human Resources Committee
Audit Committee (Chair);
Health, Safety, Environment and
Indigenous Peoples Committee
Adjunct Professor,
McGill University
Governance Committee;
Human Resources Committee (Chair)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Melissa Sonberg
Québec, Canada
58
Director
1 These directors have been designated as the Province’s nominees to the Board of Hydro One for the purpose of the Governance Agreement.
36
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
The following includes a brief profile of each of the executive officers and
directors of Hydro One and Hydro One Inc., which includes a description
of their present occupation and their principal occupations for the past
five years:
Paul Dobson – Acting President and CEO
Effective July 11, 2018, Paul Dobson was appointed to the role of Acting
President and CEO of Hydro One. Mr. Dobson joined the Company as CFO
on March 1, 2018 responsible for finance, treasury, controller, internal audit,
technology and regulation. Prior to joining Hydro One in 2018, Mr. Dobson
served as CFO for Direct Energy Ltd. (Direct Energy), Houston, Texas, where
he was responsible for overall financial leadership of a $15 billion revenue
business with three million customers in Canada and the US. Since 2003,
Mr. Dobson has held senior leadership positions in finance, operations, IT
and customer service across the Centrica Group, the parent company of
Direct Energy. Prior to Direct Energy, Mr. Dobson worked at CIBC for 10
years in finance, strategy and business development roles in both Canada
and the US. Mr. Dobson also brings considerable experience in mergers
and acquisitions and integrating acquired companies across North America
and in the United Kingdom. Mr. Dobson is a dual Canadian-US citizen
who holds an honours bachelor’s degree from the University of Waterloo
as well as a Masters of Business Administration (MBA) from the University
of Western Ontario and is a CPA, CMA.
Jason Fitzsimmons – Chief Corporate Affairs and Customer
Care Officer
Jason Fitzsimmons was promoted to Chief Corporate Affairs and Customer
Care Officer in August 2018, with oversight of the customer service,
corporate affairs, marketing and Indigenous relations functions. With
more than 25 years of experience in the electricity sector, Mr. Fitzsimmons
is a highly-regarded leader with a proven track record for successfully
executing large-scale transformations and building strong relationships with
key stakeholders. In his previous role as Vice President, Labour Relations
at Hydro One, Mr. Fitzsimmons played an instrumental role in bringing
the company’s 400-employee Customer Contact Centre in-house as the
Company continuously strives to deliver best-in-class customer service.
Prior to joining the Company in 2016, Mr. Fitzsimmons was the Chief
Negotiations Officer at the Ontario Hospital Association and also held
a number of executive roles at OPG, including Vice President of Human
Resources for the Nuclear division. He is a Certified Human Resource
Executive known for his broad experience in labour management as well
as his passion for health and safety in the workplace. He was a prior
member of the Advisory Board for Ryerson University’s Centre for Labour
Management Relations and has served on the Board for the Electrical Power
Sector Construction Association.
Gregory Kiraly – Chief Operating Officer
Effective September 12, 2016, Gregory Kiraly was appointed to
the role of Chief Operating Officer (COO) of Hydro One. As COO,
Mr. Kiraly oversees the complete transmission and distribution value chain
including planning, engineering, construction, operations, maintenance,
and forestry; shared services functions including facilities, real estate, fleet,
and procurement; and the Hydro One Telecom and Hydro One Remote
Communities subsidiaries. Prior to joining Hydro One in 2016, Mr. Kiraly
served as Senior Vice President of Electric Transmission and Distribution
at Pacific Gas and Electric Company (PG&E) in San Francisco, which
delivers safe and reliable energy to more than 16 million customers in
northern and central California. Since joining PG&E in 2008, Mr. Kiraly led
efforts that achieved the lowest employee injury rates ever, seven straight
years of record electric reliability, and over $500 million in productivity
improvements and efficiency savings. Before PG&E, Mr. Kiraly held
executive-level positions in energy delivery at Commonwealth Edison
(Exelon) in Chicago and leadership positions in both gas and electric
distribution at Public Service Electric and Gas Company in Newark, New
Jersey. Mr. Kiraly holds a bachelor’s degree in industrial engineering from
New Jersey Institute of Technology and an MBA in finance from Seton
Hall University. He is also a graduate of Harvard University’s Advanced
Management Program.
Chris Lopez – Acting CFO
Effective September 6, 2018, Chris Lopez was appointed as Acting CFO for
Hydro One. As Acting CFO, Mr. Lopez is responsible for corporate finance
(including treasury and tax), internal audit, investor relations, and pensions.
Mr. Lopez joined Hydro One on November 14, 2016 when he was
appointed as Senior Vice President of Finance, bringing almost 17 years of
progressive experience in the utilities industry in Canada and Australia. Prior
to joining Hydro One, Mr. Lopez was the Vice President, Corporate Planning
and Mergers & Acquisitions at TransAlta Corporation from 2011 to 2015.
Prior to that, Mr. Lopez was Director of Operations Finance at TransAlta in
Calgary from 2007 to 2011, and he held senior financial roles up to and
including Country Financial Controller for TransAlta in Australia, from 1999
to 2007. Mr. Lopez worked as a Senior Financial Accountant with Rio Tinto
Iron Ore, in Australia from 1997 to 1999. Mr. Lopez received a Bachelor
of Business degree from Edith Cowan University in 1996, and a Chartered
Accountant designation in Australia in 1999. He received a graduate
diploma in corporate governance and directorships from the Australian
Institute of Company Directors in 2007.
Judy McKellar – Executive Vice President, Chief Human
Resources Officer
Judy McKellar is the Executive Vice President, Chief Human Resources
Officer of Hydro One. She was appointed to this position on November 11,
2016. Ms. McKellar has held various roles of increasing responsibility at
Hydro One Networks, an indirect subsidiary of Hydro One, in the Human
Resources department over her 30+ year career and was appointed Vice
President of Human Resources in 2010. In 2014, she assumed the additional
responsibility of Senior Vice President of People and Culture/Health, Safety
and Environment and serves as the accountable executive for the Human
Resources Committee of the Board. Ms. McKellar earned a Bachelor of
Arts degree from Victoria College, University of Toronto, and was recently
named as one of 2015’s 100 Most Powerful Women in Canada by
PricewaterhouseCoopers in the “Public Sector” category.
37
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis Patrick Meneley – Executive Vice President and Chief Corporate
Development Officer
Effective March 1, 2018, Patrick Meneley was appointed to the role
of Executive Vice President and Chief Corporate Development Officer
of Hydro One. In this capacity, Mr. Meneley is responsible for leading
strategy, innovation and mergers and acquisitions. Prior to joining Hydro
One in 2018, Mr. Meneley served as Executive Vice President, Wholesale
Banking at TD Bank Group and Vice Chair and Head of Global Corporate
and Investment Banking for TD Securities. Mr. Meneley spent 15 years
leading and building one of the leading corporate and investment banking
businesses in Canada, along with a profitable and growing franchise in
the US. Mr. Meneley holds an MBA (with distinction) from the University
of Western Ontario and a Bachelor of Commerce (with honours) from the
University of British Columbia.
James Scarlett – Executive Vice President and Chief Legal Officer
Effective September 1, 2016, James Scarlett was appointed as Executive
Vice President and Chief Legal Officer of Hydro One. Prior to joining Hydro
One, Mr. Scarlett was a Senior Partner at Torys LLP. He joined Torys LLP in
March 2000 and held a number of leadership roles at the firm, including
head of Torys LLP’s Capital Markets Group, Mining Group and International
Business Development Strategy. Mr. Scarlett was also a member of the firm’s
Executive Committee from 2009-2015. Prior to joining Torys LLP, Mr. Scarlett
was a Partner at another major Canadian law firm. While at that firm
Mr. Scarlett held leadership roles as head of its Corporate Group, Securities
Group and as a member of its Board. Mr. Scarlett was also seconded to
the Ontario Securities Commission in 1987 and was appointed as the first
Director of Capital Markets in 1988, a position he held until his return to
private law practice in 1990. Mr. Scarlett earned his law degree (J.D.) from
the University of Toronto in 1981 and his Bachelor of Commerce Degree
from the University of McGill in 1975. Mr. Scarlett also holds his ICD.D.
Thomas D. Woods (provincial nominee) – Board Chair
Public Directorships (other than Hydro One and Hydro One Inc.):
Bank of America Corporation
Public Board Interlocks: None
Mr. Woods is a corporate director. He previously had a 37-year career with
CIBC and Wood Gundy, the predecessor firm of CIBC World Markets. He
started in Investment Banking, advising companies raising financing in the
equity and debt capital markets as well as mergers and acquisitions, and
later was Head of Canadian Corporate Banking, Chief Financial Officer,
Chief Risk Officer and served as Vice Chairman until his retirement in 2014.
Mr. Woods has served on the boards of Bank of America Corporation since
2016, Alberta Investment Management Corporation. Mr. Woods has also
acted as Board Chair of Providence St. Joseph’s St. Michael’s Health Care
since 2017 and CIBC Children’s Foundation. Previous directorships include
TMX Group Inc., DBRS Limited, Jarislowsky Fraser Limited and Covenant
House (Board Chair). Mr. Woods has a Bachelor of Applied Science in
Industrial Engineering from University of Toronto, and an MBA from Harvard
Business School.
Cherie L. Brant (provincial nominee)
Public Directorships (other than Hydro One and Hydro One Inc.): None
Public Board Interlocks: None
Ms. Brant has been a Partner at Dickinson Wright’s Toronto law office
since 2013 where she has an Indigenous law practice with a focus on
commercial real estate, energy and transmission and First Nations economic
development. Ms. Brant provides strategic counsel to several First Nations
and industry clients seeking to develop projects with First Nations and to
understand and address Indigenous rights and interests. As lead counsel,
Ms. Brant was instrumental in forming one of the largest First Nations-
led limited partnerships in Canada resulting in the Ontario First Nations
Sovereign Wealth LP’s share purchase of approximately 2.4% of Hydro
One Limited.
Ms. Brant is both Mohawk and Ojibway from the Mohawks of the Bay of
Quinte and Wikwemikong Unceded Indian Territory. She also serves on
the board of the Anishnawbe Health Foundation and is a member of the
Canadian Council for Aboriginal Business, Research Advisory Board and
the Aboriginal Energy Working Group of the Independent Electricity System
Operator. Previous directorships include Women’s College Hospital and
Trillium Gift of Life.
Ms. Brant has a Bachelor of Environmental Studies, Urban and Regional
Planning Program from the University of Waterloo and a Juris Doctor from
the University of Toronto. She is a member of the Ontario Bar Association
and the Law Society of Ontario.
Blair Cowper-Smith (provincial nominee)
Public Directorships (other than Hydro One and Hydro One Inc.): None
Public Board Interlocks: None
Mr. Cowper-Smith is the principal and founder of Erin Park Business
Solutions, a Canadian advisory and consulting firm. Previously, he was
Chief Corporate Affairs Officer of Ontario Municipal Employees Retirement
System (OMERS) and served as a member of the Senior Executive Team
from 2008 to 2017 where his responsibilities included regulatory affairs,
law and governance. Prior to joining OMERS he was a Senior Partner
at McCarthy Tetrault LLP where his practice focused on mergers and
acquisitions, infrastructure, governance and private equity.
Mr. Cowper-Smith’s Board experience includes numerous advisory
assignments, including governance advisory assignments, with boards of
directors including OMERS, Stelco, Hammerson, and includes existing or
prior director appointments and board committee leadership roles with
companies like Porter Airlines, 407 ETR, the Financial Services Regulatory
Authority and Face the Future Foundation. He served until recently on the
Public Policy Committee of the Canadian Coalition for Good Governance
and on the Securities Advisory Committee of the Ontario Securities
Commission. He co-founded The Canadian Council for Public and Private
Partnerships which led to a long-term interest in infrastructure policy and
delivery of infrastructure based services to Canadians.
38
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis Mr. Cowper-Smith has a Bachelor of Laws (LLB) and Master of Laws (LLM)
from Osgoode Hall Law School at York University and holds his ICD.D. He is
a member of the Law Society of Ontario.
Timothy E. Hodgson
Public Directorships (other than Hydro One and Hydro One Inc.):
Alignvest Acquisition II Corporation and MEG Energy Corp.
Anne Giardini, O.C., O.B.C., Q.C.
Public Directorships (other than Hydro One and Hydro One Inc.):
Nevsun Resources Ltd.
Public Board Interlocks: None
Ms. Giardini has been a corporate director since 2014 and Chancellor
of Simon Fraser University. She previously had a 20-year career with
Weyerhaeuser Company Limited, including as Canadian President until her
retirement in 2014. Before her tenure as President, she was Vice President
and General Counsel at Weyerhaeuser where she worked on corporate,
legal, policy and strategic matters. Ms. Giardini has been a newspaper
columnist and is the author of two novels.
Ms. Giardini also serves on the boards of Nevsun Resources Ltd., Canada
Mortgage & Housing Corporation, World Wildlife Fund (Canada), BC
Achievement Foundation, TransLink and the Greater Vancouver Board of
Trade. Previous directorships include Thompson Creek Metals Company, Inc.
and Weyerhaeuser Company Limited.
Ms. Giardini has a BA in Economics from Simon Fraser University, a
Bachelor of Laws from the University of British Columbia and a Master
of Law from the University of Cambridge (Trinity Hall). She is licensed to
practice law in British Columbia where she is a member of the Law Society
of British Columbia (and formerly in Ontario and Washington State). In
2016, Ms. Giardini was appointed an Officer of the Order of Canada
and in 2018 she was appointed to the Order of British Columbia.
David Hay
Public Directorships (other than Hydro One and Hydro One Inc.):
EPCOR Utilities Inc.
Public Board Interlocks: None
Mr. Hay is a corporate director and Managing Director of Delgatie
Incorporated (2015). He is the former Vice-Chair and Managing Director of
CIBC World Markets Inc. with power, utilities and infrastructure as his major
focus (2010 to 2015). From 2004 until 2010, he was President and Chief
Executive Officer of New Brunswick Power Corporation and held senior
investment banking roles, including Senior Vice-President and Director
responsible for mergers and acquisitions with Merrill Lynch Canada and
Managing Director of European mergers and acquisitions with Merrill Lynch
International. Mr. Hay spent the early part of his career as a practicing
lawyer and taught part-time at both the University of Toronto and University
of New Brunswick.
Mr. Hay also serves on the boards of EPCOR, SHAD (Chair), the Council of
Clean and Reliable Energy and as Chair of the Acquisition Committee of the
Beaverbrook Art Gallery. Prior directorships include Toronto Hydro-Electric
System Limited where he was Vice-Chair.
Mr. Hay has a Bachelor of Laws from Osgoode Hall Law School, York
University and a Bachelor of Arts from the University of Toronto (Victoria
College) and holds his ICD.D.
Public Board Interlocks: None
Mr. Hodgson has been a Managing Partner of Alignvest Management
Corporation since 2012. Mr. Hodgson is also the Chief Compliance
Officer of Alignvest Capital Management Inc. and Alignvest Investment
Management Corporation. Mr. Hodgson was Special Advisor to Mr.
Mark Carney, Governor of the Bank of Canada from 2010 to 2012, where
he lead the Bank’s market infrastructure initiatives to build a new repo
clearinghouse business for Canada; reform Canada’s over-the-counter
derivatives markets; and review changes to systemically important market
infrastructure businesses in Canada.
From 1990 to 2010, Mr. Hodgson held various positions in New York,
London, Silicon Valley and Toronto with Goldman Sachs and served as
Chief Executive Officer of Goldman Sachs Canada from 2005 to 2010
with overall responsibilities for the firm’s operations, client relationships and
regulatory matters in the region.
Mr. Hodgson currently sits on the boards of The Public Sector Pension
Investment Board (PSP Investments), MEG Energy, Alignvest Acquisition II
Corporation, and Next Canada. Mr. Hodgsons’s prior directorships include
The Global Risk Institute, KGS-Alpha Capital Markets, and the Richard Ivey
School of Business. Mr. Hodgson also served on the board of Bridgepoint
Health for eight years until July 2014.
Mr. Hodgson holds a Masters of Business Administration from The Richard
Ivey School of Business at Western University and a Bachelor of Commerce
from the University of Manitoba. He is a Chartered Professional Accountant
(CPA), Chartered Accountant (CA) and holds his ICD.D.
Jessica L. McDonald
Public Directorships (other than Hydro One and Hydro One Inc.):
Coeur Mining Inc. and Trevali Mining Corporation
Public Board Interlocks: None
Ms. McDonald has been Chair of the Board of Directors and Interim
President and Chief Executive Officer of Canada Post Corporation since
2017. From 2014 to 2017, she served as President and Chief Executive
Officer of British Columbia Hydro & Power Authority. Ms. McDonald was
also Executive Vice President of HB Global Advisors Corp., as well as a
successful practice in mediation and negotiation on major commercial and
industrial projects. In addition, Ms. McDonald has held many positions with
the BC government, including the most senior public service position in the
provincial government as Deputy Minister to the Premier, Cabinet Secretary
and Head of the BC Public Service from 2005 to 2009, responsible for
overseeing all aspects of government operations.
Ms. McDonald also serves on the boards of Coeur Mining Inc. and
Trevali Mining Corporation, and is on the Member Council of Sustainable
Development Technology Canada. Previous directorships include Powertech
Labs (Chair) and Powerex Corp.
Ms. McDonald has a Bachelor of Arts (Political Science) from the University
of British Columbia. She is also a member of the Institute of Corporate
Directors and holds her ICD.D.
39
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis Russel C. Robertson (provincial nominee)
Public Directorships (other than Hydro One and Hydro One Inc.):
Bausch Health Companies Inc. and Turquoise Hill Resources Ltd.
Public Board Interlocks: None
Mr. Robertson is a corporate director and served as Executive Vice President
and Head, Anti-Money Laundering, BMO Financial Group from 2008 to
2016. Mr. Robertson has served as Chief Financial Officer, BMO Financial
Group and Executive Vice President, Business Integration where he oversaw
the integration of Harris Bank and M&I Bank forming BMO Harris Bank.
Before joining BMO, he spent over 35 years as a Chartered Professional
Accountant holding various senior positions including the positions of Vice-
Chair, Deloitte & Touche LLP (Canada) and Canadian Managing Partner,
Arthur Andersen LLP (Canada).
Mr. Robertson has also served on the board of Bausch Health Companies
Inc. since 2016 and acts as the chairperson of the Audit and Risk Committee
and has served on the Board of Turquoise Hill Resources since 2012.
Previous directorships include Virtus Investment Partners, Inc.
Mr. Robertson has a Bachelor of Arts (Honours) in Business Administration
from the Ivey School of Business at the University of Western Ontario. He
is a Chartered Professional Accountant (FCPA, FCA) and a Fellow of the
Institute of Chartered Accountants (Ontario). He is also a member of the
Institute of Corporate Directors and holds his ICD.D.
William H. Sheffield
Public Directorships (other than Hydro One and Hydro One Inc.):
Houston Wire & Cable Company, Velan Inc.
Public Board Interlocks: None
Mr. Sheffield is a corporate director. He is the former Chief Executive
Officer of Sappi Fine Papers, headquartered in South Africa. Previously, he
held senior roles with Abitibi-Consolidated, Inc. and Abitibi-Price, Inc. He
began his career in the steel industry and held General Manager, Industrial
Engineering and Cold Mill Operating roles at Stelco Inc.
Mr. Sheffield has served on the board of Houston Wire & Cable Company
since 2006 where he acts as Chairman. Mr. Sheffield also serves on the
boards of Velan, Inc., Burnbrae Farms Ltd., Longview Aviation Capital,
Family Enterprise Xchange, and 4iiii Innovations Inc. Previous directorships
include Canada Post Corporation, Ontario Power Generation, Corby
Distilleries, Royal Group Technologies and SHAD.
Mr. Sheffield has a Bachelor of Science (Chemistry) from Carleton University
and an MBA from McMaster University. Mr. Sheffield also holds his ICD.D
and in 2015, he was awarded a Fellowship from the National Association
of Corporate Directors in the US. He also completed the Family Enterprise
Advisors Program (FEA) at the University of British Columbia.
Melissa Sonberg
Public Directorships (other than Hydro One and Hydro One Inc.):
Exchange Income Corporation
Public Board Interlocks: None
Ms. Sonberg is a corporate director and has been Adjunct Professor
and Executive-in-Residence at McGill University’s Desautel Faculty of
Management since 2014. She spent the early part of her career in the
healthcare industry before joining Air Canada, where she held leadership
positions in a range of customer facing, operational and corporate functions.
Ms. Sonberg was part of the founding executive team of Aeroplan, now
part of AIMIA. Ms. Sonberg held positions of Senior Vice President, Human
Resources & Corporate Affairs and Senior Vice President, Global Brands,
Communications and External Affairs at AIMIA from 2001 to 2013.
Ms. Sonberg also serves on the boards of Exchange Income Corporation,
MD Financial Holdings, Inc., Canadian Professional Sales Association,
Group Touchette, Women in Capital Markets and Equitas – International
Centre for Human Rights. Previous directorships include Rideau, Inc., Via Rail
Canada, University of Ottawa, International Advisory Board and the McGill
University Health Centre.
Ms. Sonberg has a Bachelor of Science (Psychology) from McGill University
and a Masters of Health Administration from the University of Ottawa. She is
a Certified Human Resource Executive and holds her ICD.D.
Information Regarding Certain Directors and Executive Officers
As at December 31, 2018, the directors and executive officers of Hydro
One and its subsidiaries beneficially owned, controlled or directed, directly
or indirectly, as a group, 15,905 common shares, which represented
approximately 0.003% of the outstanding common shares.
As at December 31, 2018, approximately 36.4% of the executives (those
who hold a vice president role and above or equivalent) (12 out of 33)
across Hydro One and its major subsidiaries, including 1 of 5 executive
officers, are women.
Corporate Cease Trade Orders and Bankruptcies
Except as described below:
• none of the directors or executive officers of Hydro One or Hydro
One Inc. nor any shareholder holding shares sufficient to materially
affect control of Hydro One or Hydro One Inc. is, or within the last
10 years has served as, a director or executive officer of any company
that, during such service or within a year after the end of such service,
became bankrupt, made a proposal under any legislation relating to
bankruptcy or insolvency or was subject to or instituted any proceedings,
arrangement or compromise with creditors or had a receiver, receiver
manager or trustee appointed to hold its assets;
• none of the directors or executive officers of Hydro One or Hydro
One Inc. is, or within the last 10 years has served as, a director, CEO, or
CFO of any company that, during such service or as a result of an event
that occurred during such service, was subject to an order (including
a cease trade order, or similar order or an order that denied access to
any exemption under securities legislation), for a period of more than
30 consecutive days; or
• none of the directors or executive officers of Hydro One or Hydro One Inc.
nor any shareholder holding shares sufficient to materially affect control
of Hydro One or Hydro One Inc., within the last 10 years has become
bankrupt, made a proposal under any legislation relating to bankruptcy
or insolvency, or become subject to or instituted any proceedings,
arrangement or compromise with creditors, or had a receiver, receiver
manager or trustee appointed to hold the assets of the director.
40
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis Blair Cowper-Smith served as a Director of Golfsmith International Holdings
GP Inc. and Golf Town Canada Inc. (Golf Town) from 2016 to 2018. On
September 14, 2016, Golf Town filed for and was granted Court bankruptcy
protection under the CCAA. Golf Town emerged from Court protection after
being sold to Fairfax Financial Holdings Limited and CI Investments Inc. in
October 2016.
Penalties or Sanctions
None of the directors or executive officers of Hydro One or Hydro
One Inc., nor any shareholder holding shares sufficient to materially
affect control of Hydro One or Hydro One Inc., has been subject to any
penalties or sanctions imposed by a court relating to securities legislation
or by a securities regulatory authority or has entered into a settlement
agreement with a securities regulatory authority or been subject to any
other penalties or sanctions imposed by a court or regulatory body that
would likely be considered important to a reasonable investor making
an investment decision.
Conflicts of Interest
To the best of Hydro One’s and Hydro One Inc.’s knowledge, there are no
existing material potential conflicts of interest among Hydro One or any of
its subsidiaries and the directors or executive officers of Hydro One or any
of its subsidiaries as a result of their outside business interests as at the date
hereof. Certain of the directors and executive officers serve as directors
and executive officers of other public companies. Accordingly, conflicts
of interest may arise which could influence these persons in evaluating
possible acquisitions or in generally acting on behalf of Hydro One or
Hydro One Inc. Where conflicts arise, they are managed through a variety
of measures, including declaration of the conflict, recusal from meetings
and/or portions of meetings, and the creation of separate board materials
for the affected directors.
Interest of Management and Others in Material Transactions
There are no material interests, direct or indirect, of any director or executive
officer of Hydro One and its subsidiaries, or any associate or affiliate of any
of the foregoing persons, in any transaction within the three years before
the date hereof that has materially affected or is reasonably expected to
materially affect Hydro One or Hydro One Inc.
Indebtedness of Directors and Executive Officers
No director, executive officer, employee, former director, former executive
officer or former employee or associate of any director or executive officer
of Hydro One or any of its subsidiaries had any outstanding indebtedness to
Hydro One or any of its subsidiaries except routine indebtedness or had any
indebtedness that was the subject of a guarantee, support agreement, letter
of credit or other similar arrangement or understanding provided by Hydro
One or any of its subsidiaries.
Independence Matters
The Board of Hydro One and Hydro One Inc. currently consists of 10 directors,
all of whom are independent of Hydro One and Hydro One Inc. and
independent of the Province within the meaning of the Governance Agreement.
For Hydro One’s purposes, an independent director is one who is
independent of Hydro One and independent of the Province. Directors will
be independent of Hydro One if they are independent within the meaning
of all Canadian securities laws governing the disclosure of corporate
governance practices and stock exchange requirements imposing a number
or percentage of independent directors. Pursuant to Canadian securities
laws, a director who is “independent” within the meaning of applicable
securities laws is one who is free from any direct or indirect relationship
which could, in the view of the board, be reasonably expected to interfere
with a director’s independent judgement, with certain specified relationships
deemed to be non-independent. A director will be “independent of the
Province” if he or she is independent of Hydro One under Ontario securities
laws governing the disclosure of corporate governance practices, where
the Province and certain specified provincial entities are treated as Hydro
One’s parent under that definition, but excluding current directors where the
relationship ended before August 31, 2015. The Governance Agreement
requires each of the directors, other than the CEO, to be both independent
of Hydro One and independent of the Province. The Chair of Hydro One is
independent of Hydro One and the Province.
The following table summarizes the committee memberships and independence status of Board members:
Director
Cherie Brant
Blair Cowper-Smith
Anne Giardini
David Hay
Timothy Hodgson
Jessica McDonald
Russel Robertson
William Sheffield
Melissa Sonberg
Tom Woods
Committees
Independence
Audit
Committee
Governance
Committee
Health, Safety,
Environment
and Indigenous
Peoples
Committee
Human
Resources
Committee
Independent
of Hydro One
Independent
of the Province
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
41
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
Diversity Policy
The Board has adopted a board diversity policy which formalizes the
company’s commitment to diversity and its desire to maintain a board
comprising talented and dedicated directors whose skills, experience,
knowledge and backgrounds reflect the diverse nature of the business
environment in which it operates, including an appropriate number of
female directors. The Board aspires towards a board composition in which
each gender comprises at least 40% of the directors on the Board. Currently,
the Board includes four female directors (40%).
Director Attendance
Directors are expected to attend board meetings, meetings of the committees on which they serve and the annual meeting of shareholders.
Number of Board and Committee Meetings (August 13, 2018 to December 31, 2018)1:
Board
Audit Committee
Health, Safety, Environment and Indigenous Peoples Committee
Human Resources Committee
Governance Committee
Regular
Non-Regular
In Camera
Sessions
2
1
1
2
1
11
4
–
3
3
13
5
1
5
4
1
All of the current directors were appointed directors of Hydro One effective August 13, 2018. The directors of Hydro One are also directors of Hydro One Inc. and the two boards and
each committee thereof hold joint meetings.
Audit Committee
The Audit Committee must consist of at least three directors, all of whom are
persons determined by Hydro One to be both “independent” (within the
meaning of all Canadian securities laws and stock exchange requirements
and the Governance Agreement) and “financially literate” (within the
meaning of other applicable requirements or guidelines for audit committee
service under securities laws or the rules of any applicable stock exchange,
including National Instrument 52-110 – Audit Committees). At least
one member of the Audit Committee will qualify as an “audit committee
financial expert” as defined by the applicable rules of the US Securities and
Exchange Commission. The Audit Committee comprises William Sheffield
(Chair), Anne Giardini, David Hay, Jessica McDonald and Russel Robertson.
Each of the Audit Committee members is independent and financially literate
and each has an understanding of the accounting principles used to prepare
Hydro One’s financial statements and varied experience as to the general
application of such accounting principles, as well as an understanding
of the internal controls and procedures necessary for financial reporting.
Russel Robertson and David Hay each qualify as an audit committee
financial expert.
Please refer to the biographies of our Audit Committee members described
under “– Directors and Executive Officers” above for details of their
additional invaluable skills and experience.
Human Resource Committee
Hydro One’s management team, the Human Resources Committee and
the Company’s compensation advisors all play a key role in determining
executive compensation for the company’s directors and executives and
in managing compensation risk on behalf of the Board of Hydro One.
The Human Resources Committee is responsible for assisting the Board in
fulfilling its oversight responsibilities relating to the attraction and retention
of key senior management.
All of the members of the Human Resources Committee are independent.
The Human Resources Committee comprises Melissa Sonberg (Chair), Blair
Cowper-Smith, Timothy Hodgson, Jessica McDonald and Russel Robertson.
All of the members of the Human Resources Committee have gained the
following relevant experience in human resources and compensation by
serving as an executive officer (or equivalent) of a major organization and/
or through prior service on the compensation committee of a stock exchange
listed company or otherwise:
• human resources experience (experience with benefit, pension and
compensation programs (in particular, executive compensation));
• risk management experience (knowledge and experience with internal
risk controls, risk assessments and reporting as it pertains to executive
compensation); and
• executive leadership experience (experience as a senior executive/officer
of a public company or major organization).
Please refer to the biographies of our Human Resources Committee members
described under “– Directors and Executive Officers” above for details of
their additional invaluable skills and experience.
CEO Selection Committee
The Board has also formed an ad hoc CEO Selection Committee to identify
and select a President and CEO.
Compensation Policies and Practices
Other than as set forth in Hydro One’s management information circular
dated March 19, 2018 prepared in connection with the annual meeting of
shareholders held on May 15, 2018 or as otherwise described below, there
have been no material changes to the policies and practices adopted by
the Board of Hydro One or Hydro One Inc. to determine compensation
for Hydro One’s or Hydro One Inc.’s directors and executive officers since
January 1, 2018.
Changes to Hydro One’s Board and CEO Compensation
As disclosed under “– Directors and Executive Officers” above, on July 11,
2018, Hydro One, on behalf of itself and Hydro One Inc., announced
that it had entered into the Letter Agreement for the purpose of the
orderly replacement of the Board of Hydro One and Hydro One Inc. and
the retirement of Mayo Schmidt as the CEO effective July 11, 2018. In
42
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
accordance with the Letter Agreement, Hydro One has agreed to consult
with the Province in respect of future matters of executive compensation.
In addition, the then-existing Hydro One and Hydro One Inc. Board
volunteered and agreed to immediately reduce board compensation to
the levels contemplated by the pre-January 1, 2018 director compensation
policy. The then-existing Hydro One and Hydro One Inc. Board also
volunteered and agreed to forego any compensation for their service
after June 30, 2018.
In connection with Mr. Schmidt’s retirement, he received amounts consistent
with Hydro One’s retirement policies applicable to his outstanding equity
awards and his employment agreement as previously disclosed and was
not entitled to severance. Mr. Schmidt received a $0.4 million lump sum
payment in lieu of all post-retirement benefits and allowances.
Urgent Priorities Act (formerly, Bill 2)
In July 2018, the Province introduced the Urgent Priorities Act, 2018 (Urgent
Priorities Act), which amended the Ontario Energy Board Act, 1998 (OEB
Act) and introduced the Hydro One Accountability Act (Accountability Act).
The Accountability Act came into force in August 2018. The Accountability
Act requires the Board to establish a new compensation framework for the
Board, the CEO and other executives, in consultation with the Province and
the other five largest shareholders of Hydro One Limited (which framework
must include policies governing severance and other entitlements in
connection with any termination of employment). The new compensation
framework is not effective until approved by Management Board of Cabinet
of the Province. In addition, the Management Board of Cabinet of the
Province has the authority to issue directives governing the compensation
of directors and certain executives of Hydro One and its subsidiaries
(excluding subsidiaries incorporated outside Canada). In February 2019,
the Board published a revised compensation framework that complies
with the requirements of the Urgent Priorities Act. The Accountability Act
also requires Hydro One to annually provide public disclosure concerning
compensation paid to certain executives. The Accountability Act may
adversely impact Hydro One and Hydro One Inc.’s ability to continue to
attract and retain executives.
The OEB Act was amended to preclude the OEB from approving or fixing
rates for Hydro One or any of its subsidiaries that include any amount in
respect of compensation paid to the CEO and other executives. The impact
of this amendment is expected to restrict Hydro One’s ability to recover
certain amounts paid for executive compensation through separate rate
mechanisms, which is expected to result in a reduction to Hydro One’s net
income for the year ending December 31, 2019 of up to $14 million and is
subject to a final determination by the OEB. The reduction may be materially
lower, depending on the determination by the OEB of the executives whose
compensation is to be excluded. The Urgent Priorities Act expressly provides
that certain causes of action and proceedings are not available or will be
barred against the Province, Hydro One or any of its subsidiaries, or any
of its current or former officers, directors, employees or agents in respect of
the Accountability Act, the Province’s involvement in compensation matters
or other aspects of the corporate governance of Hydro One or any of its
subsidiaries or any alleged misrepresentation in any prospectus, document
or other public statement related to the involvement of the Province in
compensation matters at Hydro One or any of its subsidiaries.
Province of Ontario
Notwithstanding the Governance Agreement, and in light of actions taken
by the Province following the provincial election in June 2018 including the
passage of the Urgent Priorities Act, the Province may elect to make further
decisions relevant to Hydro One that could be detrimental to the interests of
various stakeholders of Hydro One.
HYDRO ONE WORK FORCE
Hydro One has a skilled and flexible work force of approximately 5,700
regular employees and 2,200 non-regular employees province-wide,
comprising of a mix of skilled trades, engineering, professional, managerial
and executive personnel. Hydro One’s regular employees are supplemented
primarily by accessing a large external labour force available through
arrangements with the Company’s trade unions for variable workers,
sometimes referred to as “hiring halls”, and also by access to contract
personnel. The hiring halls offer Hydro One the ability to flexibly utilize
highly trained and appropriately skilled workers on a project-by-project
and seasonal basis.
The following table sets out the number of Hydro One employees as at December 31, 2018:
Power Workers’ Union (PWU)1
Society of United Professionals (Society)
Canadian Union of Skilled Workers (CUSW) and construction building trade unions2
Total employees represented by unions
Management and non-represented employees
Total employees3
Regular
Employees
Non-Regular
Employees
3,583
1,458
—
5,041
667
5,708
856
36
1,277
2,169
22
2,191
Total
4,439
1,494
1,277
7,210
689
7,899
1 Includes 715 non-regular “hiring hall” employees covered by the PWU agreement.
2 The construction building trade unions have collective agreements with the Electrical Power Systems Construction Association (EPSCA).
3
The average number of Hydro One employees in 2018 was approximately 8,600, consisting of approximately 5,650 regular employees and approximately 2,950 non-regular employees.
Collective Agreements
On March 1, 2018, Hydro One insourced its customer service operations
(CSO), which had been previously outsourced to Inergi LP and Vertex
Customer Management (Canada) Limited since 2002. The insourcing
was facilitated through labour agreements reached with the PWU and
the Society (formerly the Society of Energy Professionals) in 2017.
The prior collective agreement with the PWU expired on March 31, 2018.
On March 26, 2018, Hydro One and the PWU reached a tentative
agreement, and on June 27, 2018, the agreement was ratified by the PWU.
The term of the agreement is for two years ending on March 31, 2020.
43
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
Stock-based Compensation
During 2018 and 2017, the Company granted awards under its LTIP, consisting of Performance Share Units (PSUs), Restricted Share Units (RSUs), and Stock
Options, all of which are equity settled. At December 31, 2018 and 2017, the following LTIP awards were outstanding:
December 31 (number of units)
PSUs
RSUs
Stock Options
NON-GAAP MEASURES
2018
2017
605,180
442,470
949,910
429,980
393,430
—
FFO
FFO is defined as net cash from operating activities, adjusted for (i) changes in non-cash balances related to operations, (ii) dividends paid on preferred
shares, and (iii) distributions to noncontrolling interest. Management believes that FFO is helpful as a supplemental measure of the Company’s operating cash
flows as it excludes timing-related fluctuations in non-cash operating working capital and cash flows not attributable to common shareholders. As such, FFO
provides a consistent measure of the cash generating performance of the Company’s assets.
Year ended December 31 (millions of dollars)
Net cash from operating activities
Changes in non-cash balances related to operations
Preferred share dividends
Distributions to noncontrolling interest
FFO
2018
1,575
23
(18)
(8)
1,572
2017
1,716
(113)
(18)
(6)
1,579
Adjusted Net Income and Adjusted EPS
The following basic and diluted Adjusted EPS has been calculated by management on a supplementary basis which excludes costs and income related to the
Avista Corporation acquisition, as well as the impacts related to the OEB’s deferred tax asset decision on Hydro One Networks’ distribution and transmission
businesses, from net income attributable to common shareholders. Adjusted EPS is used internally by management to assess the Company’s performance
and is considered useful because it excludes the impact of acquisition-related costs and loss or gain on the foreign exchange contract, as well as the impacts
related to the OEB’s deferred tax asset decision on Hydro One Networks’ distribution and transmission businesses. It provides users with a comparative basis
to evaluate the current ongoing operations of the Company compared to prior year.
Year ended December 31 (millions of dollars, except number of shares and EPS)
Net income (loss) attributable to common shareholders
Impacts related to Avista Corporation acquisition:
OM&A – Avista Corporation-related costs (before tax)
Financing charges – Avista Corporation-related costs (before tax)
Financing charges – loss (gain) on foreign exchange contract (before tax)
Tax impact
Avista Corporation-related impacts (after tax)
Impacts related to OEB’s deferred tax asset decision on Hydro One Networks’ distribution and transmission businesses:
Reversal of revenues
Deferred tax expense
OEB’s deferred tax asset decision on Hydro One Networks’ distribution and transmission businesses impacts (after tax)
Adjusted net income attributable to common shareholders
Weighted average number of shares
Basic
Effect of dilutive stock-based compensation plans
Diluted
Adjusted EPS
Basic
Diluted
44
2018
(89)
11
58
(25)
(15)
29
68
799
867
807
2017
658
20
22
3
(9)
36
–
–
–
694
595,756,470 595,287,586
2,234,665
2,147,473
597,903,943 597,522,251
$
$
1.35 $
1.35 $
1.17
1.16
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
Revenues, Net of Purchased Power
Revenues, net of purchased power is defined as revenues less the cost of purchased power. Management believes that revenue, net of purchased power is
helpful as a measure of net revenues for the Distribution segment, as purchased power is fully recovered through revenues.
Year ended December 31 (millions of dollars)
Revenues
Less: Purchased power
Revenues, net of purchased power
Year ended December 31 (millions of dollars)
Distribution revenues
Less: Purchased power
Distribution revenues, net of purchased power
2018
6,150
2,899
3,251
2018
4,422
2,899
1,523
2017
5,990
2,875
3,115
2017
4,366
2,875
1,491
FFO, basic and diluted Adjusted EPS, Adjusted Net Income, Revenues, Net of Purchased Power, and Distribution Revenues, Net of Purchased Power are
not recognized measures under US GAAP and do not have a standardized meaning prescribed by US GAAP. They are therefore unlikely to be directly
comparable to similar measures presented by other companies. They should not be considered in isolation nor as a substitute for analysis of the Company’s
financial information reported under US GAAP.
RELATED PARTY TRANSACTIONS
The Province is a shareholder of Hydro One with approximately 47.4% ownership at December 31, 2018. The IESO, OPG, Ontario Electricity Financial
Corporation (OEFC), and the OEB, are related parties to Hydro One because they are controlled or significantly influenced by the Province. The following
is a summary of the Company’s related party transactions during the years ended December 31, 2018 and 2017:
Year ended December 31 (millions of dollars)
Related Party
Transaction
Province
Dividends paid
IESO
OPG
OEFC
OEB
Power purchased
Revenues for transmission services
Amounts related to electricity rebates
Distribution revenues related to rural rate protection
Distribution revenues related to the supply of electricity to remote northern communities
Funding received related to CDM programs
Power purchased
Revenues related to provision of services and supply of electricity
Costs related to the purchase of services
Power purchased from power contracts administered by the OEFC
OEB fees
2018
275
1,636
1,615
477
239
35
62
10
9
—
2
8
2017
301
1,583
1,521
357
247
32
59
9
8
1
2
8
RISK MANAGEMENT AND RISK FACTORS
Risks Relating to Hydro One’s Business
Regulatory Risks and Risks Relating to Hydro One’s Revenues
Risks Relating to Obtaining Rate Orders
The Company is subject to the risk that the OEB will not approve the
Company’s transmission and distribution revenue requirements requested
in outstanding or future applications for rates. Rate applications for revenue
requirements are subject to the OEB’s review process, usually involving
participation from intervenors and a public hearing process. There can be
no assurance that resulting decisions or rate orders issued by the OEB will
permit Hydro One to recover all costs actually incurred, costs of debt and
income taxes, or to earn a particular ROE. A failure to obtain acceptable
rate orders, or approvals of appropriate returns on equity and costs actually
incurred, may materially adversely affect: Hydro One’s transmission or
distribution businesses, the undertaking or timing of capital expenditures,
ratings assigned by credit rating agencies, the cost and issuance of long-
term debt, and other matters, any of which may in turn have a material
adverse effect on the Company. In addition, there is no assurance that
the Company will receive regulatory decisions in a timely manner and,
therefore, costs may be incurred prior to having an approved revenue
requirement and cash flows could be impacted.
45
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
Risks Relating to Actual Performance Against Forecasts
The Company’s ability to recover the actual costs of providing service and
earn the allowed ROE depends on the Company achieving its forecasts
established and approved in the rate-setting process. Actual costs could
exceed the approved forecasts if, for example, the Company incurs
operations, maintenance, administration, capital and financing costs above
those included in the Company’s approved revenue requirement. The
inability to obtain acceptable rate decisions or to recover any significant
difference between forecast and actual expenses could materially adversely
affect the Company’s financial condition and results of operations.
On March 7, 2019, the OEB issued a decision upholding its Original
Decision on the handling of the deferred tax asset. Also, on March 7,
2019 the OEB issued its decision for Hydro One Networks’ 2018–2022
distribution rates in which it directed the Company to apply the Original
Decision to Hydro One Networks’ distribution rates. Based on these
decisions, the Company recognized a total one-time $867 million
decrease to net income, which represents the amount of $885 million
as previously disclosed, reduced by $18 million related to forgone
revenue and net tax recovery adjustments. The Company is currently
considering its options with respect to the Appeal.
Further, the OEB approves the Company’s transmission and distribution
rates based on projected electricity load and consumption levels, among
other factors. If actual load or consumption materially falls below projected
levels, the Company’s revenue and net income for either, or both, of these
businesses could be materially adversely affected. Also, the Company’s
current revenue requirements for these businesses are based on cost and
other assumptions that may not materialize. There is no assurance that the
OEB would allow rate increases sufficient to offset unfavourable financial
impacts from unanticipated changes in electricity demand or in the
Company’s costs.
The Company is subject to risk of revenue loss from other factors, such
as economic trends and weather conditions that influence the demand
for electricity. The Company’s overall operating results may fluctuate
substantially on a seasonal and year-to-year basis based on these trends
and weather conditions. For instance, a cooler than normal summer
or warmer than normal winter can be expected to reduce demand for
electricity below that forecast by the Company, causing a decrease in
the Company’s revenues from the same period of the previous year. The
Company’s load could also be negatively affected by successful CDM
programs whose results exceed forecasted expectations.
Risks Relating to Regulatory Treatment of Deferred Tax Asset
As a result of leaving the payments in lieu of corporate income taxes (PILs)
Regime and entering the federal tax regime in connection with the IPO of
the Company, Hydro One recorded additional deferred tax assets due
to the revaluation of the tax basis of Hydro One’s fixed assets at their fair
market value and recognition of eligible capital expenditures. At the time
of the IPO, the Company determined the tax savings derived from the
additional deferred tax assets should accrue to the shareholders of Hydro
One Limited. The OEB’s September 28, 2017 decision (Original Decision)
(see details above in “Regulation – Electricity Rates Applications – Hydro
One Networks – Transmission”) altered Hydro One’s allocation of the tax
savings derived from the additional deferred tax assets and determined a
portion of the tax savings should be accrued to the ratepayers. In October
2017, the Company filed a motion to review and vary (Motion) the Original
Decision and filed an appeal with the Divisional Court of Ontario (Appeal)
which was stayed pending the outcome of the Motion. In both cases, the
Company’s position was that the OEB made errors of fact and law in its
determination of the allocation of the tax savings between the shareholders
and ratepayers.
Risks Relating to Other Applications to the OEB
The Company is also subject to the risk that it will not obtain, or will
not obtain in a timely manner, required regulatory approvals for other
matters, such as leave to construct applications, applications for mergers,
acquisitions, amalgamations and divestitures, and environmental approvals.
Decisions to acquire or divest other regulated businesses licensed by the
OEB are subject to OEB approval. Accordingly, there is the risk that such
matters may not be approved or that unfavourable conditions will be
imposed by the OEB.
Risks Relating to Rate-Setting Models for Transmission and Distribution
The OEB approves and periodically changes the rate-setting models and
methodology for the transmission and distribution businesses. Changes
to the application type, filing requirements, rate-setting methodology, or
revenue requirement determination may have a material negative impact
on Hydro One’s revenue and net income. For example, the OEB may in
the future decide to reduce the allowed ROE for either of these businesses,
modify the formula or methodology it uses to determine the ROE, or
reduce the weighting of the equity component of the deemed capital
structure. Any such reduction could reduce the net income of the Company.
The OEB’s recent Custom Incentive Rate-setting model requires that the
term of a custom rate application be for multi-year periods. There are risks
associated with forecasting key inputs such as revenues, operating expenses
and capital, over such a long period. For instance, if unanticipated capital
expenditures arise that were not contemplated in the Company’s most recent
rate decision, the Company may be required to incur costs that may not be
recoverable until a future period or not recoverable at all in future rates.
This could have a material adverse effect on the Company.
When rates are set for a multi-year period, including under a Custom
Incentive Rate application, the OEB expects there to be no further rate
applications for annual updates within the multi-year period, unless there
are exceptional circumstances, with the exception of the clearance of
established deferral and variance accounts. For example, the OEB does
not expect to address annual rate applications for updates for cost of
capital (including ROE), working capital allowance or sales volumes. If
there were an increase in interest rates over the period of a rate decision
and no corresponding changes were permitted to the Company’s allowed
cost of capital (including ROE), then the result could be a decrease in the
Company’s financial performance.
46
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis To the extent that the OEB approves an In-Service Variance Account for the
transmission and/or distribution businesses, and should the Company fail
to meet the threshold levels of in-service capital, the OEB may reclaim a
corresponding portion of the Company’s revenues.
Risks Relating to Capital Expenditures
In order to be recoverable, capital expenditures require the approval of the
OEB, either through the approval of capital expenditure plans, rate base or
revenue requirements for the purposes of setting transmission and distribution
rates, which include the impact of capital expenditures on rate base or
cost of service. There can be no assurance that all capital expenditures
incurred by Hydro One will be approved by the OEB. Capital cost overruns
may not be recoverable in transmission or distribution rates. The Company
could incur unexpected capital expenditures in maintaining or improving its
assets, particularly given that new technology may be required to support
renewable generation and unforeseen technical issues may be identified
through implementation of projects. There is risk that the OEB may not allow
full recovery of such expenditures in the future. To the extent possible, Hydro
One aims to mitigate this risk by ensuring prudent expenditures, seeking from
the regulator clear policy direction on cost responsibility, and pre-approval
of the need for capital expenditures.
Any regulatory decision by the OEB to disallow or limit the recovery of
any capital expenditures would lead to a lower than expected approved
revenue requirement or rate base, potential asset impairment or charges to
the Company’s results of operations, any of which could have a material
adverse effect on the Company.
Risk of Recoverability of Total Compensation Costs
The Company manages all of its total compensation costs, including
pension and other post-employment and post-retirement benefits, subject to
restrictions and requirements imposed by the collective bargaining process.
Any element of total compensation costs which is disallowed in whole or
part by the OEB and not recoverable from customers in rates could result in
costs which could be material and could decrease net income, which could
have a material adverse effect on the Company.
The changes flowing from the Urgent Priorities Act are expected to
restrict Hydro One’s ability to recover certain amounts paid for executive
compensation through separate rate mechanisms, which is estimated to result
in a reduction in Hydro One’s net income for the year ending December 31,
2019 of up to $14 million, and is subject to a final determination by the OEB.
The reduction may be materially lower, depending on the determination by
the OEB of the executives whose compensation is to be excluded.
Risks Relating to Government Action
The Province is, and is likely to remain, the largest shareholder in Hydro
One Limited. The Province may be in a position of conflict from time to time
as a result of being an investor in Hydro One Limited and also being a
government actor setting broad policy objectives in the electricity industry.
Government actions may not be in the interests of the Company or investors.
Governments may pass legislation or regulation at any time, including
legislation or regulation impacting Hydro One, which could have potential
material adverse effects on Hydro One and its business. Such government
actions may include, but are not limited to, legislation, regulation, directives
or shareholder action intended to reduce electricity rates, place constraints
on compensation, or affect the governance of Hydro One (for example,
potential government actions relating to the Province’s election promise
to reduce hydro rates by 12%). Such government actions could adversely
affect the Company’s financial condition and results of operations, as well as
public opinion and the Company’s reputation. Government action may also
hinder Hydro One’s ability to pursue its strategy and/or objectives.
Additionally, involvement by the Province in placing constraints on
executive compensation may inhibit the Company’s ability to attract and
retain qualified executive talent, which may also impact the Company’s
performance, strategy and/or objectives. The failure to attract and retain
qualified executives could have a material adverse effect on the Company.
In June 2018, Moody’s downgraded the long-term debt rating for Hydro
One Inc. and in September 2018, S&P lowered its issuer credit ratings on the
Company and Hydro One Inc. (as detailed above in the “Credit Ratings”
section). These ratings downgrades reflect the ratings agencies’ assessment
of government involvement in the business of Hydro One. The Company
cannot predict what actions rating agencies may take in the future, positive
or negative, including in response to government action or inaction relating
to or impacting Hydro One. The failure to maintain the Company’s current
credit ratings could adversely affect the Company’s financial condition and
results of operations, and a downgrade in the Company’s credit ratings
could restrict the Company’s ability to access debt capital markets and
increase the Company’s cost of debt.
Executive Recruitment and Retention Risk
Involvement by the Province relating to executive compensation, and
Hydro One executive compensation constraints flowing from the Urgent
Priorities Act may inhibit the Company’s ability to attract and retain qualified
executive talent. The Company’s strategy is tied to its ability to continue
to attract and retain qualified executives. The failure to attract and retain
qualified executives could have a material adverse effect on the Company.
47
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis Management Retention
In the fourth quarter of 2018, the Company entered into retention
agreements with certain of its key officers, namely Messrs. Dobson, Kiraly,
Meneley, Scarlett, Lopez and Ms. McKellar, in order to ensure stability
in the organization and to allow the Company sufficient time to complete
its recruitment of a new CEO and support the transition to a renewed
senior management team. The retention arrangements are intended to
ensure the continued employment of those officers for periods ranging
from February 28, 2019 through May 31, 2019 depending on the officer.
The retention agreements generally confirm, among other things, that so
long as the individual does not resign prior to a specified date (being the
retention date), certain key terms (other than severance) of the individual’s
employment arrangements will be respected, including the vesting of his
or her outstanding share-based awards and a pro-rata portion of his or
her short-term and long-term incentive in respect of the 2019 fiscal year.
To date, Mr. Meneley has notified the Company that he intends to resign
effective March 1, 2019, and Ms. McKellar has notified the Company that
she intends to retire effective April 1, 2019. The retention agreements may
be extended by mutual agreement, however, there is no assurance that any
of the key officers will remain after their retention dates, in which case the
Company could have a lack of senior management to run the Company’s
business. While the Company has succession plans in place for certain
key officers, there is no assurance that there will not be an impact on the
Company’s business if any or all such key officers resign before, on, or after,
their respective retention dates. In addition, there is no assurance that the
Company will be able to attract and retain qualified replacement officers on
a timely basis, or at all, in order to replace these individuals. The failure to
attract and retain qualified officers could have a material adverse effect on
the Company.
Indigenous Claims Risk
Some of the Company’s current and proposed transmission and distribution
assets are or may be located on reserve (as defined in the Indian Act
(Canada)) (Reserve) lands, or lands over which Indigenous people
have Aboriginal, treaty, or other legal claims. Some Indigenous leaders,
communities, and their members have made assertions related to sovereignty
and jurisdiction over Reserve lands and traditional territories (land
traditionally occupied or used by a First Nation, Metis or Inuit group) and
are increasingly willing to assert their claims through the courts, tribunals, or
by direct action. These claims and/or settlement of these claims could have
a material adverse effect on the Company or otherwise materially adversely
impact the Company’s operations, including the development of current and
future projects.
The Company’s operations and activities may give rise to the Crown’s
duty to consult and potentially accommodate Indigenous communities.
Procedural aspects of the duty to consult may be delegated to the Company
by the Province or the federal government. A perceived failure by the Crown
to sufficiently consult an Indigenous community, including communities with
a traditional governance model not recognized under the Indian Act, or
a perceived failure by the Company in relation to delegated consultation
obligations, could result in legal challenges against the Crown or the
Company, including judicial review or injunction proceedings, or could
potentially result in direct action against the Company by a community or
its citizens. If this occurs, it could disrupt or delay the Company’s operations
and activities, including current and future projects, and have a material
adverse effect on the Company.
Risk from Transfer of Assets Located on Reserves
The transfer orders by which the Company acquired certain of Ontario
Hydro’s businesses as of April 1, 1999 did not transfer title to assets
located on Reserves. The transfer of title to these assets did not occur
because authorizations originally granted by the federal government for
the construction and operation of these assets on Reserves could not be
transferred without required consent. In several cases, the authorizations
had either expired or had never been issued.
Currently, the OEFC holds legal title to these assets and it is expected that
the Company will manage them until it has obtained permits to complete
the title transfer. To occupy Reserves, the Company must have valid permits.
For each permit, the Company must negotiate an agreement (in the form of
a memorandum of understanding) with the First Nation, the OEFC and any
members of the First Nation who have occupancy rights. The agreement
includes provisions whereby the First Nation consents to the issuance of
a permit. For transmission assets, the Company must negotiate terms of
payment. It is difficult to predict the aggregate amount that the Company
may have to pay to obtain the required agreements from First Nations. If
the Company cannot reach satisfactory agreements with the relevant First
Nation to obtain federal permits, it may have to relocate these assets to
other locations and restore the lands at a cost that could be substantial. In a
limited number of cases, it may be necessary to abandon a line and replace
it with diesel generation facilities. In either case, the costs relating to these
assets could have a material adverse effect on the Company if the costs are
not recoverable in future rate orders.
Compliance with Laws and Regulations
Hydro One must comply with numerous laws and regulations affecting its
business, including requirements relating to transmission and distribution
companies, environmental laws, employment laws and health and safety
laws. The failure of the Company to comply with these laws could have a
material adverse effect on the Company’s business. See also “– Health,
Safety and Environmental Risk”.
For example, Hydro One’s licensed transmission and distribution businesses
are required to comply with the terms of their licences, with codes and
rules issued by the OEB, and with other regulatory requirements, including
regulations of the National Energy Board. In Ontario, the Market Rules
issued by the IESO require the Company to, among other things, comply
with the reliability standards established by the NERC and Northeast Power
Coordinating Council, Inc. (NPCC). The incremental costs associated with
compliance with these reliability standards are expected to be recovered
through rates, but there can be no assurance that the OEB will approve the
recovery of all of such incremental costs. Failure to obtain such approvals
could have a material adverse effect on the Company.
48
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis There is the risk that new legislation, regulations, requirements or policies
will be introduced in the future. These may reduce Hydro One’s revenue,
or may require Hydro One to incur additional costs, which may or may not
be recovered in future transmission and distribution rates. For example, the
federal government’s November 2018 Fall Economic Statement announced
measures related to accelerated investment incentives which, if implemented,
could have a material adverse impact on Hydro One.
Risk of Natural and Other Unexpected Occurrences
The Company’s facilities are exposed to the effects of severe weather
conditions, natural disasters, man-made events including but not limited
to cyber and physical terrorist type attacks, events which originate from
third-party connected systems, or any other potentially catastrophic
events. Climate change may have the effect of shifting weather patterns
and increasing the severity and frequency of extreme weather events and
natural disasters, which could impact Hydro One’s business. The Company’s
facilities may not withstand occurrences of these types in all circumstances.
The Company could also be subject to claims for damages from events
which may be proximately connected with the Company’s assets (for
example, forest fires), claims for damages caused by its failure to transmit
or distribute electricity or costs related to ensuring its continued ability to
transmit or distribute electricity. The Company does not have insurance for
damage to its transmission and distribution wires, poles and towers located
outside its transmission and distribution stations resulting from these or other
events. Where insurance is available for the Company’s other assets and for
damage claims, such insurance coverage may have deductibles, limits and/
or exclusions that may still expose the Company to material losses. Losses
from lost revenues and repair costs could be substantial, especially for many
of the Company’s facilities that are located in remote areas.
Risk Associated with Information Technology Infrastructure
and Data Security
The Company’s ability to operate effectively in the Ontario electricity market
is, in part, dependent upon it developing, maintaining and managing
complex IT systems which are employed to operate and monitor its
transmission and distribution facilities, financial and billing systems and other
business systems. The Company’s increasing reliance on information systems
and expanding data networks increases its exposure to information security
threats. The Company’s transmission business is required to comply with
various rules and standards for transmission reliability, including mandatory
standards established by the NERC and the NPCC. These include standards
relating to cyber-security and IT, which only apply to certain of the Company’s
assets (generally being those whose failure could impact the functioning of
the bulk electricity system). The Company may maintain different or lower
levels of IT security for its assets that are not subject to these mandatory
standards. The Company must also comply with various cyber-security and
privacy-related regulatory requirements under the OEB’s Ontario Cyber
Security Framework and legislative and licence requirements relating to
the collection, use and disclosure of personal information and information
regarding consumers, wholesalers, generators and retailers.
Cyber-attacks or unauthorized access to corporate and IT systems could
result in service disruptions and system failures, which could have a material
adverse effect on the Company, including as a result of a failure to provide
electricity to customers. Due to operating critical infrastructure, Hydro One
may be at greater risk of cyber-attacks from third parties (including state run
or controlled parties) that could impair or incapacitate its assets. In addition,
in the course of its operations, the Company collects, uses, processes and
stores information which could be exposed in the event of a cyber-security
incident or other unauthorized access or disclosure, such as information
about customers, suppliers, counterparties, employees and other third parties.
Security and system disaster recovery controls are in place; however,
there can be no assurance that there will not be system failures or security
breaches or that such threats would be detected or mitigated on a timely
basis. Upon occurrence and detection, the focus would shift from prevention
to isolation, remediation and recovery until the incident has been fully
addressed. Any such system failures or security breaches could have a
material adverse effect on the Company.
Labour Relations Risk
The substantial majority of the Company’s employees are represented
by either the PWU or the Society. Over the past several years, significant
effort has been expended to increase Hydro One’s flexibility to conduct
operations in a more cost-efficient manner. Although the Company has
achieved improved flexibility in its collective agreements, the Company
may not be able to achieve further improvements. The Company reached
an agreement with the PWU for a renewal collective agreement with a
two-year term, covering the period from April 1, 2018 to March 31, 2020.
The Company also reached a renewal collective agreement with the CUSW
for a five-year term, covering the period from May 1, 2017 to April 30,
2022. Additionally, the EPSCA and a number of construction unions have
reached renewal agreements, to which Hydro One is bound, for a five-year
term, covering the period from May 1, 2015 to April 30, 2020. Agreements
were also reached with the Society and the PWU to facilitate the insourcing
of CSO services effective March 1, 2018. Future negotiations with unions
present the risk of a labour disruption and the ability to sustain the continued
supply of energy to customers. The Company also faces financial risks
related to its ability to negotiate collective agreements consistent with its rate
orders. In addition, in the event of a labour dispute, the Company could face
operational risk related to continued compliance with its requirements of
providing service to customers. Any of these could have a material adverse
effect on the Company. Collective agreements requiring renewal in 2019
include the Society agreement and the PWU CSO agreement, expiring on
March 31, 2019 and September 30, 2019, respectively.
Work Force Demographic Risk
By the end of 2018, approximately 16% of the Company’s employees who
are members of the Company’s defined benefit and defined contribution
pension plans were eligible for retirement, and by the end of 2019,
approximately 18% could be eligible. These percentages are not evenly
spread across the Company’s work force, but tend to be most significant
in the most senior levels of the Company’s staff and especially among
management staff. During 2018, approximately 4% of the Company’s work
force (down from 5% in 2017) elected to retire. Accordingly, the Company’s
49
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis continued success will be tied to its ability to continue to attract and retain
sufficient qualified staff to replace the capability lost through retirements
and meet the demands of the Company’s work programs.
In addition, the Company expects the skilled labour market for its industry
will remain highly competitive. Many of the Company’s current and potential
employees being sought after possess skills and experience that are also
highly coveted by other organizations inside and outside the electricity
sector. The failure to attract and retain qualified personnel for Hydro
One’s business could have a material adverse effect on the Company.
Risk Associated with Arranging Debt Financing
The Company expects to borrow to repay its existing indebtedness and
to fund a portion of capital expenditures. Hydro One Inc. has substantial
debt principal repayments, including $731 million in 2019, $653 million
in 2020, and $803 million in 2021. In addition, from time to time, the
Company may draw on its syndicated bank lines and/or issue short-term
debt under Hydro One Inc.’s $1.5 billion commercial paper program which
would mature within one year of issuance. The Company also plans to incur
continued material capital expenditures for each of 2019 and 2020. Cash
generated from operations, after the payment of expected dividends, will not
be sufficient to fund the repayment of the Company’s existing indebtedness
and capital expenditures. The Company’s ability to arrange sufficient and
cost-effective debt financing could be materially adversely affected by
numerous factors, including the regulatory environment in Ontario, the
Company’s results of operations and financial position, market conditions,
the ratings assigned to its debt securities by credit rating agencies, an
inability of the Company to comply with its debt covenants, and general
economic conditions. A downgrade in the Company’s credit ratings could
restrict the Company’s ability to access debt capital markets and increase
the Company’s cost of debt. Any failure or inability on the Company’s part
to borrow the required amounts of debt on satisfactory terms could impair
its ability to repay maturing debt, fund capital expenditures and meet other
obligations and requirements and, as a result, could have a material adverse
effect on the Company.
Market, Financial Instrument and Credit Risk
Market risk refers primarily to the risk of loss that results from changes in
costs, foreign exchange rates and interest rates. The Company is exposed
to fluctuations in interest rates as its regulated ROE is derived using a
formulaic approach that takes into account anticipated interest rates, but
is not currently exposed to material commodity price risk. In the future,
the Company may be exposed to additional foreign exchange risk in
connection with other acquisitions or transactions in which it completes
in a currency other than Canadian dollars. Although the Company may
attempt to mitigate such risk through hedging transactions, there can be
no assurance any such hedge will fully mitigate the risk of currency
exchange fluctuations.
The OEB-approved adjustment formula for calculating ROE in a deemed
regulatory capital structure of 60% debt and 40% equity provides for
increases and decreases depending on changes in benchmark interest rates
for Government of Canada debt and the A-rated utility corporate bond yield
spread. The Company estimates that a decrease of 100 basis points in the
combination of the forecasted long-term Government of Canada bond yield
and the A-rated utility corporate bond yield spread used in determining its
rate of return would reduce the Company’s transmission business’ 2020 net
income by approximately $25 million. For the distribution business, after
distribution rates are set as part of a Custom Incentive Rate application,
the OEB does not expect to address annual rate applications for updates
to allowed ROE, so fluctuations will have no impact to net income. The
Company periodically utilizes interest rate swap agreements to mitigate
elements of interest rate risk.
Financial assets create a risk that a counterparty will fail to discharge an
obligation, causing a financial loss. Derivative financial instruments result
in exposure to credit risk, since there is a risk of counterparty default.
Hydro One monitors and minimizes credit risk through various techniques,
including dealing with highly rated counterparties, limiting total exposure
levels with individual counterparties, entering into agreements which enable
net settlement, and by monitoring the financial condition of counterparties.
The Company does not trade in any energy derivatives. The Company is
required to procure electricity on behalf of competitive retailers and certain
local distribution companies for resale to their customers. The resulting
concentrations of credit risk are mitigated through the use of various security
arrangements, including letters of credit, which are incorporated into the
Company’s service agreements with these retailers in accordance with the
OEB’s Retail Settlement Code.
The failure to properly manage these risks could have a material adverse
effect on the Company.
Risks Relating to Asset Condition and Capital Projects
The Company continually incurs sustainment and development capital
expenditures and monitors the condition of its assets to manage the risk
of equipment failures and to determine the need for and timing of major
refurbishments and replacements of its transmission and distribution
infrastructure. The connection of large numbers of generation facilities
to the distribution network has resulted in greater than expected usage
of some of the Company’s equipment. This increases maintenance
requirements and may accelerate the aging of the Company’s assets.
Execution of the Company’s capital expenditure programs, particularly
for development capital expenditures, is partially dependent on external
factors, such as environmental approvals, municipal permits, equipment
outage schedules that accommodate the IESO, generators and transmission-
connected customers, and supply chain availability for equipment suppliers
and consulting services. There may also be a need for, among other things,
Environmental Assessment Act (Ontario) approvals, approvals which require
public meetings, appropriate engagement with Indigenous communities,
OEB approvals of expropriation or early access to property, and other
activities. Obtaining approvals and carrying out these processes may also
be impacted by opposition to the proposed site of the capital investments.
Delays in obtaining required approvals or failure to complete capital
projects on a timely basis could materially adversely affect transmission
reliability or customers’ service quality or increase maintenance costs which
could have a material adverse effect on the Company. Failure to receive
approvals for projects when spending has already occurred would result
50
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis in the inability of the Company to recover the investment in the project as
well as forfeit the anticipated return on investment. The assets involved
may be considered impaired and result in the write off of the value of the
asset, negatively impacting net income. External factors are considered in
the Company’s planning process. If the Company is unable to carry out
capital expenditure plans in a timely manner, equipment performance
may degrade, which may reduce network capacity, result in customer
interruptions, compromise the reliability of the Company’s networks or
increase the costs of operating and maintaining these assets. Any of these
consequences could have a material adverse effect on the Company.
recently filed valuation was prepared as at December 31, 2017, and was
filed in April 2018, covering a three-year period from 2018 to 2020. Hydro
One’s contributions to its pension plan satisfy, and are expected to satisfy,
minimum funding requirements. Contributions beyond 2020 will depend on
the funded position of the plan, which is determined by investment returns,
interest rates and changes in benefits and actuarial assumptions at that
time. A determination by the OEB that some of the Company’s pension
expenditures are not recoverable through rates could have a material
adverse effect on the Company, and this risk may be exacerbated if the
amount of required pension contributions increases.
Increased competition for the development of large transmission projects
and legislative changes relating to the selection of transmitters could impact
the Company’s ability to expand its existing transmission system, which may
have an adverse effect on the Company. To the extent that other parties
are selected to construct, own and operate new transmission assets, the
Company’s share of Ontario’s transmission network would be reduced.
Health, Safety and Environmental Risk
The Company is subject to provincial health and safety legislation.
Findings of a failure to comply with this legislation could result in penalties
and reputational risk, which could negatively impact the Company. The
Company is subject to extensive Canadian federal, provincial and municipal
environmental regulation. Failure to comply could subject the Company to
fines or other penalties. In addition, the presence or release of hazardous
or other harmful substances could lead to claims by third parties or
governmental orders requiring the Company to take specific actions such
as investigating, controlling and remediating the effects of these substances.
Contamination of the Company’s properties could limit its ability to sell or
lease these assets in the future.
In addition, actual future environmental expenditures may vary materially
from the estimates used in the calculation of the environmental liabilities
on the Company’s balance sheet. The Company does not have insurance
coverage for these environmental expenditures.
There is also risk associated with obtaining governmental approvals, permits,
or renewals of existing approvals and permits related to constructing or
operating facilities. This may require environmental assessment or result in
the imposition of conditions, or both, which could result in delays and cost
increases. Failure to obtain necessary approvals or permits could result in
an inability to complete projects.
Hydro One emits certain greenhouse gases, including sulphur hexafluoride
or “SF6”. There are increasing regulatory requirements and costs, along with
attendant risks, associated with the release of such greenhouse gases, all of
which could impose additional material costs on Hydro One.
Any regulatory decision to disallow or limit the recovery of such costs could
have a material adverse effect on the Company.
Pension Plan Risk
Hydro One has the Hydro One Defined Benefit Pension Plan in place
for the majority of its employees. Contributions to the pension plan are
established by actuarial valuations which are required to be filed with the
Financial Services Commission of Ontario on a triennial basis. The most
In 2017, the OEB released a report establishing the use of the accrual
accounting method as the default method on which to set rates for pension
and other post-employment benefits (OPEB) amounts in cost-based
applications, unless that method does not result in just and reasonable rates.
Hydro One currently reports and recovers its pension expense on a cash
basis, and maintains the accrual method with respect to OPEBs. Transitioning
from the cash basis to an accrual method for pension may have material
negative rate impacts for customers or material negative impacts on the
company should recovery of costs be disallowed by the OEB. See “– Other
Post-Employment and Post-Retirement Benefits Risks”.
Other Post-Employment and Post-Retirement Benefits Risks
The Company provides other post-employment and post-retirement benefits,
including workers compensation benefits and long-term disability benefits
to qualifying employees. In 2017, the OEB released a report establishing
the use of the accrual accounting method as the default method on which
to set rates for pension and OPEB amounts in cost-based applications,
unless that method does not result in just and reasonable rates. Hydro One
currently maintains the accrual accounting method with respect to OPEBs.
If the OEB directed Hydro One to transition to a different accounting
method for OPEBs, this could result in income volatility, due to an inability
of the company to book the difference between the accrual and cash as
a regulatory asset. A determination that some of the Company’s post-
employment and post-retirement benefit costs are not recoverable could
have a material adverse effect on the Company.
Risk Associated with Outsourcing Arrangements
Hydro One has entered into an outsourcing arrangement with a third
party for the provision of back office and IT services. If the outsourcing
arrangement or statements of work thereunder are terminated for any
reason or expire before a new supplier is selected and fully transitioned,
the Company could be required to transfer to another service provider or
insource, which could have a material adverse effect on the Company’s
business, operating results, financial condition or prospects.
Risk from Provincial Ownership of Transmission Corridors
The Province owns some of the corridor lands underlying the Company’s
transmission system. Although the Company has the statutory right to use
these transmission corridors, the Company may be limited in its options to
expand or operate its systems. Also, other uses of the transmission corridors
by third parties in conjunction with the operation of the Company’s systems
may increase safety or environmental risks, which could have a material
adverse effect on the Company.
51
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis Litigation Risks
In the normal course of the Company’s operations, it becomes involved
in, is named as a party to and is the subject of, various legal proceedings,
including regulatory proceedings, tax proceedings and legal actions,
relating to actual or alleged violations of law, common law damages
claims, personal injuries, property damage, property taxes, land rights, the
environment and contract disputes. The outcome of outstanding, pending
or future proceedings cannot be predicted with certainty and may be
determined adversely to the Company, which could have a material
adverse effect on the Company. Even if the Company prevails in any such
legal proceeding, the proceedings could be costly and time-consuming
and would divert the attention of management and key personnel from the
Company’s business operations, which could adversely affect the Company.
See also “Other Developments – Litigation – Class Action Lawsuit”.
One of the four putative class action lawsuits commenced since the
announcement of the Merger is still in existence, namely a putative class
action lawsuit that has been filed by two Avista Corporation shareholders in
Washington state court which names Hydro One, Olympus Holding Corp.
and Olympus Corp. as defendants and alleges that they aided and abetted
Avista Corporation’s directors’ breach of their fiduciary duties in connection
with the Merger. The court issued an order staying the litigation until after the
Merger has closed. Counsel for the plaintiffs in Fink has informally indicated
that, in light of the termination of the Merger, the lawsuit will be dismissed,
but no formal dismissal papers have been filed with the court at this time. The
lawsuit and other potential legal proceedings could have an adverse impact
on Hydro One. See also “Other Developments – Litigation – Litigation
Relating to the Merger”.
Transmission Assets on Third-Party Lands Risk
Some of the lands on which the Company’s transmission assets are located
are owned by third parties, including the Province and federal Crown, and
are or may become subject to land claims by First Nations. The Company
requires valid occupation rights to occupy such lands (which may take the
form of land use permits, easements or otherwise). If the Company does not
have valid occupational rights on third-party owned or controlled lands or
has occupational rights that are subject to expiry, it may incur material costs
to obtain or renew such occupational rights, or if such occupational rights
cannot be renewed or obtained it may incur material costs to remove and
relocate its assets and restore the subject land. If the Company does not
have valid occupational rights and must incur costs as a result, this could
have a material adverse effect on the Company or otherwise materially
adversely impact the Company’s operations.
Reputational, Public Opinion and Political Risk
Reputation risk is the risk of a negative impact to Hydro One’s business,
operations or financial condition that could result from a deterioration
of Hydro One’s reputation. Hydro One’s reputation could be negatively
impacted by changes in public opinion, attitudes towards the Company’s
privatization, failure to deliver on its customer promises and other external
forces. Adverse reputational events or political actions could have negative
impacts on Hydro One’s business and prospects including, but not limited to,
delays or denials of requisite approvals, such as denial of requested rates,
and accommodations for Hydro One’s planned projects, escalated costs,
legal or regulatory action, and damage to stakeholder relationships.
Risks Associated with Acquisitions
While the Company has experience in operating in the Ontario electricity
market, if it were to pursue acquisitions in other markets it would need
to develop or obtain additional expertise in these new markets. Such
acquisitions would include inherent risks that some or all of the expected
benefits may fail to materialize, or may not occur within the time periods
anticipated, and Hydro One may incur material unexpected costs.
Realization of the anticipated benefits would depend, in part, on the
Company’s ability to successfully integrate the acquired business, including
the requirement to devote management attention and resources to
integrating business practices and support functions. The failure to realize the
anticipated benefits, the diversion of management’s attention, or any delays
or difficulties encountered in connection with the integration could have an
adverse effect on the Company’s business, results of operations, financial
condition or cash flows.
Risks Relating to the Company’s Relationship with the Province
Ownership and Continued Influence by the Province and Voting
Power; Share Ownership Restrictions
The Province currently owns approximately 47.4% of the outstanding
common shares of Hydro One. The Electricity Act restricts the Province from
selling voting securities of Hydro One (including common shares) of any
class or series if it would own less than 40% of the outstanding number
of voting securities of that class or series after the sale and in certain
circumstances also requires the Province to take steps to maintain that level
of ownership. Accordingly, the Province is expected to continue to maintain
a significant ownership interest in voting securities of Hydro One for an
indefinite period.
As a result of its significant ownership of the common shares of Hydro
One, the Province has, and is expected indefinitely to have, the ability
to determine or significantly influence the outcome of shareholder votes,
subject to the restrictions in the Governance Agreement. Despite the terms
of the Governance Agreement in which the Province has agreed to engage
in the business and affairs of the Company as an investor and not as a
manager, there is a risk that the Province’s engagement in the business
and affairs of the Company as an investor will be informed by its policy
objectives and may influence the conduct of the business and affairs of
the Company in ways that may not be aligned with the interests of other
investors. Notwithstanding the Governance Agreement, and in light of
actions taken by the Province following the provincial election in June 2018,
there can be no assurance that the Province will not take other actions in the
future that could be detrimental to the interests of investors in Hydro One.
See “Risks Relating to Government Action” above.
The share ownership restrictions in the Electricity Act (Share Ownership
Restrictions) and the Province’s significant ownership of common shares of
Hydro One together effectively prohibit one or more persons acting together
from acquiring control of Hydro One. They also may limit or discourage
transactions involving other fundamental changes to Hydro One and
the ability of other shareholders to successfully contest the election of the
directors proposed for election pursuant to the Governance Agreement. The
Share Ownership Restrictions may also discourage trading in, and may limit
the market for, the common shares and other voting securities.
52
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis Nomination of Directors and Confirmation of CEO and Chair
Although director nominees (other than the CEO) are required to be
independent of both the Company and the Province pursuant to the
Governance Agreement, there is a risk that the Province will nominate or
confirm individuals who satisfy the independence requirements but who it
considers are disposed to support and advance its policy objectives and
give disproportionate weight to the Province’s interests in exercising their
business judgment and balancing the interests of the stakeholders of Hydro
One. This, combined with the fact certain matters require a two-thirds vote
of the Board, could allow the Province to unduly influence certain Board
actions such as confirmation of the Chair and confirmation of the CEO.
Board Removal Rights
Under the Governance Agreement, the Province has the right to withhold
from voting in favour of all director nominees and has the right to seek to
remove and replace the entire Board, including in each case its own director
nominees but excluding the CEO and, at the Province’s discretion, the Chair.
In exercising these rights in any particular circumstance, the Province is
entitled to vote in its sole interest, which may not be aligned with the interests
of other stakeholders of Hydro One.
More Extensive Regulation
Although under the Governance Agreement, the Province has agreed to
engage in the business and affairs of Hydro One as an investor and not as
a manager and has stated that its intention is to achieve its policy objectives
through legislation and regulation as it would with respect to any other
utility operating in Ontario, there is a risk that the Province will exercise its
legislative and regulatory power to achieve policy objectives in a manner
that has a material adverse effect on the Company. See “Risks Relating to
Government Action” above.
Prohibitions on Selling the Company’s Transmission or
Distribution Business
The Electricity Act prohibits the Company from selling all or substantially
all of the business, property or assets related to its transmission system
or distribution system that is regulated by the OEB. There is a risk that
these prohibitions may limit the ability of the Company to engage in sale
transactions involving a substantial portion of either system, even where such
a transaction may otherwise be considered to provide substantial benefits to
the Company and the holders of the common shares.
Future Sales of Common Shares by the Province
Although the Province has indicated that it does not intend to sell further
common shares of Hydro One, the registration rights agreement between
Hydro One and the Province dated November 5, 2015 (available on
SEDAR at www.sedar.com) grants the Province the right to request that
Hydro One file one or more prospectuses and take other procedural steps
to facilitate secondary offerings by the Province of the common shares of
Hydro One. Future sales of common shares of Hydro One by the Province,
or the perception that such sales could occur, may materially adversely
affect market prices for these common shares and impede Hydro One’s
ability to raise capital through the issuance of additional common shares,
including the number of common shares that Hydro One may be able to
sell at a particular time or the total proceeds that may be realized.
Limitations on Enforcing the Governance Agreement
The Governance Agreement includes commitments by the Province restricting
the exercise of its rights as a holder of voting securities, including with
respect to the maximum number of directors that the Province may nominate
and on how the Province will vote with respect to other director nominees.
Hydro One’s ability to obtain an effective remedy against the Province, if the
Province were not to comply with these commitments, is limited as a result of
the Proceedings Against the Crown Act (Ontario). This legislation provides
that the remedies of injunction and specific performance are not available
against the Province, although a court may make an order declaratory of the
rights of the parties, which may influence the Province’s actions. A remedy of
damages would be available to Hydro One, but damages may not be an
effective remedy, depending on the nature of the Province’s non-compliance
with the Governance Agreement.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of Hydro One Consolidated Financial Statements requires
the Company to make key estimates and critical judgments that affect the
reported amounts of assets, liabilities, revenues and costs, and related
disclosures of contingencies. Hydro One bases its estimates and judgments
on historical experience, current conditions and various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of
assets and liabilities, as well as identifying and assessing the Company’s
accounting treatment with respect to commitments and contingencies. Actual
results may differ from these estimates and judgments. Hydro One has
identified the following critical accounting estimates used in the preparation
of its Consolidated Financial Statements:
Revenues
Distribution revenues attributable to the delivery of electricity are based on
OEB-approved distribution rates and are recognized on an accrual basis
and include billed and unbilled revenues. Billed revenues are based on
electricity delivered as measured from customer meters. At the end of each
month, electricity delivered to customers since the date of the last billed
meter reading is estimated, and the corresponding unbilled revenue is
recorded. The unbilled revenue estimate is affected by energy consumption,
weather, and changes in the composition of customer classes.
Regulatory Assets and Liabilities
Hydro One’s regulatory assets represent certain amounts receivable from
future electricity customers and costs that have been deferred for accounting
purposes because it is probable that they will be recovered in future rates.
The regulatory assets mainly include amounts related to the pension benefit
liability, deferred income tax liabilities, post-retirement and post-employment
benefit liability, share-based compensation costs, forgone revenue, and
environmental liabilities. The Company’s regulatory liabilities represent
certain amounts that are refundable to future electricity customers, and
pertain primarily to OEB deferral and variance accounts. The regulatory
assets and liabilities can be recognized for rate-setting and financial
reporting purposes only if the amounts have been approved for inclusion in
the electricity rates by the OEB, or if such approval is judged to be probable
by management. If management judges that it is no longer probable that
53
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis the OEB will allow the inclusion of a regulatory asset or liability in future
electricity rates, the applicable carrying amount of the regulatory asset
or liability will be reflected in results of operations in the period that the
judgment is made by management.
Environmental Liabilities
Hydro One records a liability for the estimated future expenditures
associated with the removal and destruction of polychlorinated biphenyl
(PCB)-contaminated insulating oils and related electrical equipment, and
for the assessment and remediation of chemically contaminated lands. There
are uncertainties in estimating future environmental costs due to potential
external events such as changes in legislation or regulations and advances
in remediation technologies. In determining the amounts to be recorded
as environmental liabilities, the Company estimates the current cost of
completing required work and makes assumptions as to when the future
expenditures will actually be incurred, in order to generate future cash flow
information. All factors used in estimating the Company’s environmental
liabilities represent management’s best estimates of the present value of costs
required to meet existing legislation or regulations. However, it is reasonably
possible that numbers or volumes of contaminated assets, cost estimates
to perform work, inflation assumptions and the assumed pattern of annual
cash flows may differ significantly from the Company’s current assumptions.
Environmental liabilities are reviewed annually or more frequently if
significant changes in regulations or other relevant factors occur. Estimate
changes are accounted for prospectively.
Employee Future Benefits
Hydro One’s employee future benefits consist of pension and post-retirement
and post-employment plans, and include pension, group life insurance,
health care, and long-term disability benefits provided to the Company’s
current and retired employees. Employee future benefits costs are included
in Hydro One’s labour costs that are either charged to results of operations
or capitalized as part of the cost of property, plant and equipment and
intangible assets. Changes in assumptions affect the benefit obligation
of the employee future benefits and the amounts that will be charged to
results of operations or capitalized in future years. The following significant
assumptions and estimates are used to determine employee future benefit
costs and obligations:
Weighted Average Discount Rate
The weighted average discount rate used to calculate the employee future
benefits obligation is determined at each year end by referring to the most
recently available market interest rates based on “AA”-rated corporate bond
yields reflecting the duration of the applicable employee future benefit plan.
The discount rate at December 31, 2018 increased to 3.90% (from 3.40%
at December 31, 2017) for pension benefits and increased to 4.00% (from
3.40% at December 31, 2017) for the post-retirement and post-employment
plans. The increase in the discount rate has resulted in a corresponding
decrease in employee future benefits liabilities for the pension, post-
retirement and post-employment plans for accounting purposes. The
liabilities are determined by independent actuaries using the projected
benefit method prorated on service and based on assumptions that reflect
management’s best estimates.
Expected Rate of Return on Plan Assets
The expected rate of return on pension plan assets of 6.50% is based on
expectations of long-term rates of return at the beginning of the year and
reflects a pension asset mix consistent with the pension plan’s investment
policy effective November 11, 2016. A new investment policy was adopted
by Hydro One effective May 14, 2018 which will be implemented over
the next several years. Hydro One’s current expectation is that the new
investment policy will not be fully implemented until 2021-2022. As such,
with the implementation timing noted above, the investment policy effective
November 11, 2016 would continue to be appropriate for the December 31,
2018 disclosures and the 2019 registered pension plan expense.
Rates of return on the respective portfolios are determined with reference to
respective published market indices. The expected rate of return on pension
plan assets reflects the Company’s long-term expectations. The Company
believes that this assumption is reasonable because, with the pension plan’s
balanced investment approach, the higher volatility of equity investment
returns is intended to be offset by the greater stability of fixed-income and
short-term investment returns. The net result, on a long-term basis, is a lower
return than might be expected by investing in equities alone. In the short
term, the pension plan can experience fluctuations in actual rates of return.
Rate of Cost of Living Increase
The rate of cost of living increase is determined by considering differences
between long-term Government of Canada nominal bonds and real return
bonds, which decreased from 1.60% per annum as at December 31, 2017
to approximately 1.40% per annum as at December 31, 2018. Given the
Bank of Canada’s commitment to keep long-term inflation between 1.00%
and 3.00%, management believes that the current rate is reasonable to
use as a long-term assumption and as such, has used a 2.0% per annum
inflation rate for employee future benefits liability valuation purposes as at
December 31, 2018.
Salary Increase Assumptions
Salary increases should reflect general wage increases plus an allowance
for merit and promotional increases for current members of the plan, and
should be consistent with the assumptions for consumer price inflation and
real wage growth in the economy. The merit and promotion scale was
developed based on the salary increase assumption review performed in
2017. The review considers actual salary experience from 2002 to 2016
using valuation data for all active members as at December 31, 2016, based
on age and service and Hydro One’s expectation of future salary increases.
Additionally, the salary scale reflects negotiated salary increases over the
contract period.
Mortality Assumptions
The Company’s employee future benefits liability is also impacted by
changes in life expectancies used in mortality assumptions. Increases in life
expectancies of plan members result in increases in the employee future
benefits liability. The mortality assumption used at December 31, 2018 is
95% of 2014 Canadian Pensioners Mortality Private Sector table projected
generationally using improvement Scale B.
54
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis Internal control over financial reporting is designed by, or under the
direction of the CEO and CFO to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with US GAAP. The
Company’s internal control over financial reporting framework includes
those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
disposition of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with US GAAP, and that receipts and
expenditures of the Company are being made only in accordance with
authorization of management and directors of the Company; and (iii)
provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company’s assets
that could have a material effect on the Company’s consolidated
financial statements.
The Company’s management, at the direction of the CEO and CFO,
evaluated the effectiveness of the design and operation of internal control
over financial reporting based on the criteria established in the Internal
Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based
on that evaluation, management concluded that the Company’s internal
control over financial reporting was effective as at December 31, 2018.
Internal control, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives and due to its inherent limitations, may not prevent or detect
all misrepresentations. Furthermore, the effectiveness of internal control is
affected by change and subject to the risk that internal control effectiveness
may change over time.
There were no changes in the design of the Company’s internal control over
financial reporting during the three months ended December 31, 2018 that
have materially affected, or are reasonably likely to materially affect, the
operation of the Company’s internal control over financial reporting.
Management will continue to monitor its systems of internal control over
reporting and disclosure and may make modifications from time to time
as considered necessary.
Rate of Increase in Health Care Cost Trends
The costs of post-retirement and post-employment benefits are determined
at the beginning of the year and are based on assumptions for expected
claims experience and future health care cost inflation. For the post-
retirement benefit plans, a trend study of historical Hydro One experience
was conducted in 2017, which resulted in a change in the prescription drug,
dental and hospital trends used for 2017 and 2018 year-end reporting
purposes. A 1% increase in the health care cost trends would result
in a $23 million increase in 2018 interest cost plus service cost, and
a $230 million increase in the benefit liability at December 31, 2018.
Valuation of Deferred Tax Assets
Hydro One assesses the likelihood of realizing deferred tax assets by
reviewing all readily available current and historical information, including
a forecast of future taxable income. To the extent management considers it
is more likely than not that some portion or all of the deferred tax assets will
not be realized, a valuation allowance is recognized.
Asset Impairment
Within Hydro One’s regulated businesses, the carrying costs of most of the
long-lived assets are included in the rate base where they earn an OEB-
approved rate of return. Asset carrying values and the related return are
recovered through OEB-approved rates. As a result, such assets are only
tested for impairment in the event that the OEB disallows recovery, in whole
or in part, or if such a disallowance is judged to be probable. The Company
regularly monitors the assets of its unregulated Hydro One Telecom
subsidiary for indications of impairment. As at December 31, 2018, no asset
impairment had been recorded for assets within Hydro One’s regulated or
unregulated businesses.
Goodwill is evaluated for impairment on an annual basis, or more frequently
if circumstances require. Hydro One has concluded that goodwill was not
impaired at December 31, 2018. Goodwill represents the cost of acquired
distribution and transmission companies that is in excess of the fair value of
the net identifiable assets acquired at the acquisition date.
DISCLOSURE CONTROLS AND PROCEDURES AND
INTERNAL CONTROL OVER FINANCIAL REPORTING
Disclosure controls and procedures are the processes designed to ensure
that information is recorded, processed, summarized and reported on a
timely basis to the Company’s management, including its CEO and CFO,
as appropriate, to make timely decisions regarding required disclosure in
the MD&A and financial statements. At the direction of the Company’s CEO
and CFO, management evaluated disclosure controls and procedures as
of the end of the period covered by this report. Based on that evaluation,
management concluded that the Company’s disclosure controls and
procedures were effective as at December 31, 2018.
55
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis NEW ACCOUNTING PRONOUNCEMENTS
The following tables present Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) that are applicable to
Hydro One:
Recently Adopted Accounting Guidance
Date issued
Description
Effective date
Impact on Hydro One
Guidance
ASC 606
May 2014 –
November 2017
ASC 606 Revenue from Contracts with
Customers replaced ASC 605 Revenue
Recognition. ASC 606 provides guidance
on revenue recognition relating to the transfer
of promised goods or services to customers in
an amount that reflects the consideration
to which the entity expects to be entitled in
exchange for those goods and services.
Service cost components of net benefit cost
associated with defined benefit plans are
required to be reported in the same line as
other compensation costs arising from services
rendered by the Company’s employees.
All other components of net benefit cost are
to be presented in the income statement
separately from the service cost component.
Only the service cost component is eligible for
capitalization where applicable.
January 1, 2018 On January 1, 2018, Hydro One adopted
ASC 606 using the retrospective method,
without the election of any practical expedients.
Upon adoption, there was no material impact
to the Company’s revenue recognition policy
and no adjustments were made to prior
period reported financial statements amounts.
The Company has included the disclosure
requirements of ASC 606 for annual and
interim periods in the year of adoption.
Hydro One applied for a regulatory asset to
maintain the capitalization of post-employment
benefit related costs and as such, there is no
material impact upon adoption. See Note 2 –
Significant Accounting Policies and Note 12
– Regulatory Assets and Liabilities.
January 1, 2018
ASU 2017-07 March 2017
Recently Issued Accounting Guidance Not Yet Adopted
Guidance
Date issued
Description
Effective date
Anticipated impact on Hydro One
February 2016 –
December 2018
2016-02
2018-01
2018-10
2018-11
2018-20
January 1, 2019
Lessees are required to recognize the rights and
obligations resulting from operating leases as
assets (right to use the underlying asset for the
term of the lease) and liabilities (obligation to
make future lease payments) on the balance
sheet. ASU 2018-01 permits an entity to elect
an optional practical expedient to not evaluate
under ASC 842 land easements that exist or
expired before the entity’s adoption of ASC
842 and that were not previously accounted
for as leases under ASC 840. ASU 2018-10
amends narrow aspects of ASC 842. ASU
2018-11 provides entities with an additional
and option transition method in adopting ASC
842. ASU 2018-11 also permits lessors to elect
an optional practical expedient to not separate
non-lease components from the associated lease
component by underlying asset classes. ASU
2018-20 provides relief to lessors that have
lease contracts that either require lessees to pay
lessor costs directly to a third party or require
lessees to reimburse lessors for costs paid by
lessors directly to third parties.
Hydro One reviewed its existing leases and
other contracts that are within the scope of
ASC 842. Apart from the existing leases, no
other contracts contained lease arrangements.
Upon adoption in the first quarter of 2019, the
Company will utilize the modified retrospective
transition approach using the effective date
of January 1, 2019 as its date of initial
application. As a result, comparatives will
not be updated. The Company will elect the
package of practical expedients and the land
easement practical expedient upon adoption.
The impact to Hydro One’s financial statements
will be the recognition of approximately
$27 million Right-of-Use (ROU) assets
and corresponding lease obligations on
the Consolidated Balance Sheet. The ROU
assets and lease obligations represent the
present value of the Company’s remaining
minimum lease payments for leases with
terms greater than 12 months. Discount rates
used in calculating the ROU assets and lease
obligations correspond to the Company’s
incremental borrowing rate.
56
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
Guidance
2018-07
Date issued
June 2018
2018-13
August 2018
2018-14
August 2018
2018-15
August 2018
Effective date
Anticipated impact on Hydro One
January 1, 2019
No impact upon adoption
January 1, 2020
Under assessment
January 1, 2021
Under assessment
January 1, 2020
Under assessment
Description
Expansion in the scope of ASC 718 to include
share-based payment transactions for acquiring
goods and services from non-employees.
Previously, ASC 718 was only applicable to
share-based payment transactions for acquiring
goods and services from employees.
Disclosure requirements on fair value
measurements in ASC 820 are modified to
improve the effectiveness of disclosures in
financial statement notes.
Disclosure requirements related to single-
employer defined benefit pension or other post-
retirement benefit plans are added, removed
or clarified to improve the effectiveness of
disclosures in financial statement notes.
The amendment aligns the requirements for
capitalizing implementation costs incurred
in a hosting arrangement that is a service
contract with the requirements for capitalizing
implementation costs incurred to develop or
obtain internal-use software. The accounting for
the service element of a hosting arrangement is
not affected by the amendment.
57
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis SUMMARY OF FOURTH QUARTER RESULTS OF OPERATIONS
Three months ended December 31 (millions of dollars, except EPS)
2018
2017
Change
Revenues
Distribution
Transmission
Other
Costs
Purchased power
OM&A
Distribution
Transmission
Other
Depreciation, amortization and asset removal costs
Income before financing charges and income taxes
Financing charges
Income before income taxes
Income taxes
Net income (loss)
Net income (loss) attributable to common shareholders of Hydro One
Basic EPS
Diluted EPS
Basic Adjusted EPS
Diluted Adjusted EPS
Capital Investments
Distribution
Transmission
Other
Assets Placed In-Service
Distribution
Transmission
Other
1,138
342
11
1,491
741
167
114
27
308
217
1,049
379
11
1,439
662
146
79
19
244
214
1,266
1,120
225
123
102
800
(698)
(705)
$
$
$
$
(1.18) $
(1.18) $
0.30 $
0.29 $
168
292
7
467
253
698
1
952
319
119
200
38
162
155
0.26
0.26
0.29
0.28
161
267
3
431
207
522
4
733
8.5%
(9.8%)
0.0%
3.6%
11.9%
14.4%
44.3%
42.1%
26.2%
1.4%
13.0%
(29.5%)
3.4%
(49.0%)
2,005.3%
(530.9%)
(554.8%)
(553.8%)
(553.8%)
3.4%
3.6%
4.3%
9.4%
133.3%
8.4%
22.2%
33.7%
(75.0%)
29.9%
Net Income (Loss)
Net loss attributable to common shareholders for the quarter ended
December 31, 2018 of $705 million is a decrease of $860 million or
554.8% from the prior year net income. Significant influences on
earnings included:
• increase in transmission and distribution revenues due to higher energy
consumption resulting from favourable weather;
• higher transmission revenues driven by increased OEB-approved
transmission rates;
• higher OM&A costs primarily resulting from:
— higher vegetation management costs resulting from a change to
an improved vegetation program resulting in greater coverage
and better reliability,
— higher property taxes, primarily due to non-recurring favourable
re-assessment of payments in lieu of property taxes in 2017,
58
— higher stations and lines maintenance costs,
— insurance proceeds received in Q4 2017,
— higher HST recovery in 2017, and
— higher costs related to the Merger;
• higher income tax expense primarily attributable to a charge to deferred
tax expense of $799 million related to the OEB’s deferred tax asset and
distribution rates decisions, partially offset by higher temporary differences
arising from a combination of higher in-service additions, the asset mix and
higher pension and OPEB contributions in excess of accounting expense in
the fourth quarter of 2018, compared to 2017.
EPS and Adjusted EPS
EPS was ($1.18) for the fourth quarter of 2018, compared to $0.26 in 2017.
The decrease in EPS was driven by lower earnings for the fourth quarter
of 2018, as discussed above. Adjusted EPS was $0.30 in the fourth quarter
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
of 2018, compared to $0.29 in 2017. The increase in Adjusted EPS
was driven by higher net income for the fourth quarter of 2017, net of
impacts related to the Merger and the impacts related to the OEB’s
deferred tax asset decision on Hydro One Networks’ distribution and
transmission businesses.
Revenues
The quarterly decrease of $37 million or 9.8% in transmission revenues
was primarily due to impacts of the OEB’s deferred tax asset decision,
partially offset by higher revenues driven by increased OEB-approved
transmission rates for 2018, and higher average monthly Ontario 60-minute
peak demand driven by favourable weather in the fourth quarter of 2018.
The quarterly increase of $10 million or 2.6% in distribution revenues, net of
purchased power, was primarily due to higher energy consumption resulting
from favourable weather in the fourth quarter of 2018 and higher deferred
regulatory adjustments; partially offset by lower CDM revenue.
OM&A Costs
The quarterly increase of $35 million or 44.3% in transmission OM&A costs
was primarily due to a non-recurring reduction of provision for payments in
lieu of property taxes following a favourable reassessment of the regulation
in 2017, higher volume of demand maintenance work on power equipment
and overhead lines, insurance proceeds received in 2017 due to equipment
failures at the Fairchild and Campbell transmission stations, and higher
volume of work on vegetation management.
The quarterly increase of $21 million or 14.4% in distribution OM&A costs
was primarily due to higher volume of work on vegetation management,
and higher volume of emergency calls, partially offset by lower storm
restoration costs, and lower costs related to the renewed IT contract.
A further increase of $8 million in other OM&A is driven primarily by higher
costs related to the Merger.
Financing Charges
The quarterly increase of $4 million or 3.4% in financing charges was
primarily due to an increase in interest expense on long-term debt resulting
from an increase in weighted-average long-term debt balance outstanding
during the quarter, partially offset by an unrealized loss recorded in 2017
due to revaluation of the foreign exchange contract related to the Merger.
Income Taxes
Income tax expense for the fourth quarter of 2018 increased by $762 million
compared to 2017, and the Company realized an ETR of approximately
784.3% in the fourth quarter of 2018, compared to approximately
19.0% realized in 2017. This was primarily attributable to a charge to
deferred tax expense of $799 million related to the OEB’s deferred tax
asset and distribution rates decisions (see section “Regulation –
Electricity Rates Applications – Hydro One Networks – Transmission” for
details). This increase was partially offset by an increase in tax deductions
arising from higher in-service additions coupled with an increased allocation
to a higher depreciation class, as well as higher pension and other post-
employment benefit (OPEB) contributions for tax purposes. The Company
is required to accrue taxes based on the tax liability without considering
the temporary differences as prescribed by the regulator.
Assets Placed In-Service
The increase in transmission assets placed in-service during the fourth
quarter was primarily due to the following:
• assets placed in-service in the fourth quarter of 2018 for station
sustainment investments, including Horning, Centralia, London Nelson,
St. Isidore, Wanstead, Palmerston, Chenaux, and Dryden transmission
stations, as well as the Bruce Special Protection System end-of-life
equipment replacement project;
• higher volume of demand work placed in-service associated with
equipment failures; and
• higher volume of overhead lines and component replacement work placed
in-service; partially offset by
• substantial investments in major development projects placed in-service in
2017, including Leamington and Holland transmission stations; and
• assets placed in-service in the fourth quarter of 2017 for station
sustainment investments, including OverBrook, Hanmer, and Leaside
transmission stations.
The increase in distribution assets placed in-service during the fourth
quarter was primarily due to the following:
• timing of investments placed in-service for system capability
reinforcement projects;
• cumulative investments in the Advanced Distribution System project
placed in-service in 2018; and
• cumulative investments in distribution generation connection projects
placed in-service in 2018; partially offset by
• the completion of the Company’s website redesign project to improve
customer service and operational efficiencies; and
• timing of demand work on large joint-use and line relocation projects.
Capital Investments
The increase in transmission capital investments during the fourth quarter
was primarily due to the following:
• higher volume of overhead lines refurbishments and replacements;
• higher volume of demand work associated with equipment failures;
• higher volume of work required to adhere to the NERC Cyber
Security standards;
• timing of project work on major development projects, including
the Niagara Reinforcement, Lake Superior Link, and East-West Tie
Connection projects, as well as work at Clarington and Holland
transmission stations; and
• higher volume of spare transformer purchases; partially offset by
• lower volume of transmission station refurbishments and replacements work.
The increase in distribution capital investments during the fourth quarter was
primarily due to the following:
• higher spend on joint use and line relocation projects due to timing of
capital contributions; and
• increased volume of emergency power and storm restorations work due
to higher storm activity in 2018.
59
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis HYDRO ONE HOLDINGS LIMITED –
UNAUDITED CONSOLIDATING SUMMARY
FINANCIAL INFORMATION
Hydro One Limited fully and unconditionally guarantees the payment
obligations of its wholly-owned subsidiary Hydro One Holdings Limited
(HOHL) issuable under the short form base shelf prospectus dated
November 23, 2018. Accordingly, the following consolidating summary
financial information is provided in compliance with the requirements
of section 13.4 of National Instrument 51-102 – Continuous Disclosure
Obligations providing for an exemption for certain credit support issuers.
The tables below contain consolidating summary financial information as at
and for the years ended December 31, 2018 and December 31, 2017 for:
(i) Hydro One Limited; (ii) HOHL; (iii) the subsidiaries of Hydro One Limited,
other than HOHL, on a combined basis, (iv) consolidating adjustments, and
(v) Hydro One Limited and all of its subsidiaries on a consolidated basis,
in each case for the periods indicated. Such summary financial information
is intended to provide investors with meaningful and comparable financial
information about Hydro One Limited and its subsidiaries. This summary
financial information should be read in conjunction with Hydro One Limited’s
most recently issued annual financial statements. This summary financial
information has been prepared in accordance with US GAAP, as issued
by the FASB.
For the year ended
December 31
(millions of dollars, unaudited)
Hydro One
Limited
HOHL
Subsidiaries of
Hydro One Limited,
other than HOHL
Consolidating
Adjustments
Total Consolidated
Amounts of Hydro
One Limited
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
Revenue
Net Income (Loss) Attributable
to Common Shareholders
12
16
(74)
(43)
—
22
—
6,243
6,053
(105)
(79)
6,150
5,990
(3)
47
745
(84)
(41)
(89)
658
As at December 31
(millions of dollars, unaudited)
Hydro One
Limited
HOHL
Subsidiaries of
Hydro One Limited,
other than HOHL
Consolidating
Adjustments
Total Consolidated
Amounts of Hydro
One Limited
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
Current Assets
Non-Current Assets
Current Liabilities
Non-Current Liabilities
159
5,799
97
1,516
117
6,423
83
1,514
22
—
—
3
—
—
3
—
2,054
41,597
4,391
22,373
1,444
41,745
3,933
21,403
(744)
(23,230)
(1,460)
(10,906)
(542)
(23,486)
(1,279)
(10,209)
1,491
24,166
3,028
12,986
1,019
24,682
2,740
12,708
FORWARD-LOOKING STATEMENTS AND
INFORMATION
The Company’s oral and written public communications, including this
document, often contain forward-looking statements that are based
on current expectations, estimates, forecasts and projections about
the Company’s business and the industry, regulatory and economic
environments in which it operates, and include beliefs and assumptions
made by the management of the Company. Such statements include,
but are not limited to, statements regarding: the Company’s transmission
and distribution rate applications, including resulting decisions, rates and
expected impacts and timing; the Company’s liquidity and capital resources
and operational requirements; the Operating Credit Facilities; expectations
regarding the Company’s financing activities; the Company’s maturing debt;
ongoing and planned projects and initiatives, including expected results and
completion dates; expected future capital investments, including expected
timing and investment plans; contractual obligations and other commercial
commitments; expectations regarding the deferred tax asset; the Appeal;
the OEB; the Exemptive Relief; NRLP and the Niagara Reinforcement Project,
the Lake Superior Link Project, and related regulatory applications; the
Company’s share capital and conversion of outstanding awards under the
share grant plans and the LTIP; collective agreements; the pension plan,
future pension contributions, valuations and expected impacts; impacts of
OEB treatment of post-employment benefit costs; dividends; credit ratings
and related risks; Hydro One’s strategy; effect of interest rates; non-GAAP
measures; critical accounting estimates, including environmental liabilities,
regulatory assets and liabilities, and employee future benefits; occupational
rights; internal control over financial reporting and disclosure; recent
accounting-related guidance; the Universal Base Shelf Prospectus; the US
Debt Shelf Prospectus; the Demand Facility; the Company’s acquisitions and
mergers, including Orillia Power and Peterborough Distribution; expected
outcomes and impacts relating to the termination of the Merger; the Urgent
Priorities Act, the Accountability Act, and anticipated impacts; Hydro
One’s new compensation framework; expectations relating to executive
compensation and potential impacts on Hydro One; anticipated and
potential senior management departures and possible impacts; retention
arrangements; the Company’s ability to attract and retain qualified officers;
risk associated with acquisitions; anticipated impact of measures related to
accelerated investment initiatives; climate change; cyber and data security;
expectations related to work force demographics; class action litigation,
including litigation relating to the Merger; foreign exchange risk; the
Province’s ownership of Hydro One, and conflicts that may arise between
the Province and Hydro One from time to time; government actions and the
potential impacts on Hydro One and its business; future sales of shares of
Hydro One; and reputational, public opinion and political risk. Words such
as “expect”, “anticipate”, “intend”, “attempt”, “may”, “plan”, “will”, “believe”,
“seek”, “estimate”, “goal”, “aim”, “target”, and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve
assumptions and risks and uncertainties that are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed,
implied or forecasted in such forward-looking statements. Hydro One does
not intend, and it disclaims any obligation, to update any forward-looking
statements, except as required by law.
60
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis
These forward-looking statements are based on a variety of factors and
assumptions including, but not limited to, the following: no unforeseen
changes in the legislative and operating framework for Ontario’s
electricity market or for Hydro One specifically; favourable decisions
from the OEB and other regulatory bodies concerning outstanding and
future rate and other applications; no unexpected delays in obtaining
the required approvals; no unforeseen changes in rate orders or rate
setting methodologies for the Company’s distribution and transmission
businesses; continued use of US GAAP; a stable regulatory environment; no
unfavourable changes in environmental regulation; no significant changes
to the Company’s current credit ratings; no unforeseen impacts of new
accounting pronouncements; and no significant event occurring outside the
ordinary course of business. These assumptions are based on information
currently available to the Company, including information obtained from
third party sources. Actual results may differ materially from those predicted
by such forward-looking statements. While Hydro One does not know what
impact any of these differences may have, the Company’s business, results
of operations, financial condition and credit stability may be materially
adversely affected. Factors that could cause actual results or outcomes to
differ materially from the results expressed or implied by forward-looking
statements include, among other things:
• risks associated with the Province’s share ownership of Hydro One and
other relationships with the Province, including potential conflicts of interest
that may arise between Hydro One, the Province and related parties;
• regulatory risks and risks relating to Hydro One’s revenues, including risks
relating to rate orders, actual performance against forecasts and capital
expenditures, or denials of applications;
• the risk that the Company may be unable to comply with regulatory and
legislative requirements or that the Company may incur additional costs for
compliance that are not recoverable through rates;
• the risk of exposure of the Company’s facilities to the effects of severe
weather conditions, natural disasters or other unexpected occurrences
for which the Company is uninsured or for which the Company could be
subject to claims for damage;
• public opposition to and delays or denials of the requisite approvals and
accommodations for the Company’s planned projects;
• risks associated with the Province exercising further legislative and
regulatory powers in the implementation of the Urgent Priorities Act and
the Accountability Act;
• the risk that Hydro One may incur significant costs associated with
transferring assets located on reserves (as defined in the Indian
Act (Canada));
• the risks associated with information system security and maintaining
a complex IT system infrastructure;
• the risk of labour disputes and inability to negotiate appropriate
collective agreements on acceptable terms consistent with the Company’s
rate decisions;
• the risks related to the Company’s work force demographic and its
potential inability to attract and retain qualified personnel;
• risk that the Company is not able to arrange sufficient cost-effective
financing to repay maturing debt and to fund capital expenditures;
• the risk of a credit rating downgrade and its impact on the Company’s
funding and liquidity;
• risks associated with fluctuations in interest rates and failure to manage
exposure to credit risk;
• the risk that the Company may not be able to execute plans for capital
projects necessary to maintain the performance of the Company’s assets
or to carry out projects in a timely manner;
• the risk of non-compliance with environmental regulations or failure
to mitigate significant health and safety risks and inability to recover
environmental expenditures in rate applications;
• the risk that assumptions that form the basis of the Company’s recorded
environmental liabilities and related regulatory assets may change;
• the risk of not being able to recover the Company’s pension
expenditures in future rates and uncertainty regarding the future
egulatory treatment of pension, other post-employment benefits and
post-retirement benefits costs;
• the potential that Hydro One may incur significant expenses to replace
functions currently outsourced if agreements are terminated or expire
before a new service provider is selected;
• the risks associated with economic uncertainty and financial market volatility;
• the inability to prepare financial statements using US GAAP;
• the impact of the ownership by the Province of lands underlying the
Company’s transmission system; and
• the risk related to the impact of the new accounting pronouncements.
Hydro One cautions the reader that the above list of factors is not
exhaustive. Some of these and other factors are discussed in more detail
in the section “Risk Management and Risk Factors” in this MD&A.
In addition, Hydro One cautions the reader that information provided in
this MD&A regarding the Company’s outlook on certain matters, including
potential future investments, is provided in order to give context to the nature
of some of the Company’s future plans and may not be appropriate for
other purposes.
Additional information about Hydro One, including the Company’s Annual
Information Form, is available on SEDAR at www.sedar.com and the
Company’s website at www.HydroOne.com/Investors.
61
Hydro One Limited | Annual Report 2018Amended Management’s Discussion and Analysis Management’s Report
The Amended Consolidated Financial Statements, Management’s Discussion
and Analysis (MD&A) and related financial information have been prepared
by the management of Hydro One Limited (Hydro One or the Company).
Management is responsible for the integrity, consistency and reliability
of all such information presented. The Amended Consolidated Financial
Statements have been prepared in accordance with United States Generally
Accepted Accounting Principles and applicable securities legislation. The
MD&A has been prepared in accordance with National Instrument 51–102.
procedures and internal control over financial reporting based on the
framework and criteria established in the Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on that evaluation, management
concluded that the Company’s internal control over financial reporting was
effective at a reasonable level of assurance as of December 31, 2018. As
required, the results of that evaluation were reported to the Audit Committee
of the Hydro One Board of Directors and the external auditors.
The preparation of the Amended Consolidated Financial Statements and
information in the MD&A involves the use of estimates and assumptions
based on management’s judgment, particularly when transactions affecting
the current accounting period cannot be finalized with certainty until future
periods. Estimates and assumptions are based on historical experience,
current conditions and various other assumptions believed to be reasonable
in the circumstances, with critical analysis of the significant accounting
policies followed by the Company as described in Note 2 to the Amended
Consolidated Financial Statements. The preparation of the Amended
Consolidated Financial Statements and the MD&A includes information
regarding the estimated impact of future events and transactions. The
MD&A also includes information regarding sources of liquidity and capital
resources, operating trends, risks and uncertainties. Actual results in the
future may differ materially from the present assessment of this information
because future events and circumstances may not occur as expected.
Management is responsible for establishing and maintaining adequate
disclosure controls and procedures and internal control over financial
reporting as described in the annual MD&A. Management evaluated
the effectiveness of the design and operation of disclosure controls and
The Amended Consolidated Financial Statements have been audited by
KPMG LLP, independent external auditors appointed by the shareholders of
the Company. The external auditors’ responsibility is to express their opinion
on whether the Consolidated Financial Statements are fairly presented in
all material respects in accordance with United States Generally Accepted
Accounting Principles. The Independent Auditors’ Report outlines the scope
of their examination and their opinion.
The Hydro One Board of Directors, through its Audit Committee, is
responsible for ensuring that management fulfills its responsibilities for
financial reporting and internal control over reporting and disclosure.
The Audit Committee of Hydro One met periodically with management,
the internal auditors and the external auditors to satisfy itself that each
group had properly discharged its respective responsibility and to review
the Amended Consolidated Financial Statements before recommending
approval by the Board of Directors. The external auditors had direct
and full access to the Audit Committee, with and without the presence of
management, to discuss their audit findings.
On behalf of Hydro One’s management:
Paul Dobson
Acting President and
Chief Executive Officer
Christopher Lopez
Acting Chief Financial Officer
62
Hydro One Limited | Annual Report 2018
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Hydro One Limited
Opinion on the Amended Consolidated Financial Statements
We have audited the accompanying amended consolidated balance
sheet of Hydro One Limited (the Company) as of December 31, 2018, the
related amended consolidated statements of operations and comprehensive
income, changes in equity, and cash flows for the year then ended, and the
related amended notes (collectively, the amended consolidated financial
statements). In our opinion, the amended consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 2018, and the results of its operations and its cash
flows for the year then ended, in conformity with US generally accepted
accounting principles.
Basis for Opinion
These amended consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion
on these amended consolidated financial statements based on our audit.
We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with the
US federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements
are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audit,
we are required to obtain an understanding of internal control over
financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material
misstatement of the amended consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the amended consolidated financial
statements. Our audit also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating
the overall presentation of the amended consolidated financial statements.
We believe that our audit provides a reasonable basis for our opinion.
Chartered Professional Accountants, Licensed Public Accountants
We have served as the Company’s auditor since 2008
Toronto, Canada
March 25, 2019
63
Hydro One Limited | Annual Report 2018 Independent Auditors’ Report
To the Shareholders and Board of Directors of Hydro One Limited
We have audited the accompanying consolidated financial statements
of Hydro One Limited, which comprise the consolidated balance sheet
as at December 31, 2017, the consolidated statements of operations and
comprehensive income, changes in equity, and cash flows for the year then
ended, and notes, comprising a summary of significant accounting policies
and other explanatory information.
Management’s Responsibility for the Consolidated
Financial Statements
Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with US
generally accepted accounting principles, and for such internal control
as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit. We conducted our audit in accordance with
Canadian generally accepted auditing standards. Those standards require
that we comply with ethical requirements and plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the consolidated financial statements. The
procedures selected depend on our judgment, including the assessment of
the risks of material misstatement of the financial statements, whether due to
fraud or error. In making those risk assessments, we consider internal control
relevant to the entity’s preparation and fair presentation of the consolidated
financial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Hydro One Limited
as at December 31, 2017, and its consolidated results of operations and its
consolidated cash flows for the year then ended in accordance with US
generally accepted accounting principles.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
March 25, 2019
64
Hydro One Limited | Annual Report 2018 Amended Consolidated Statements of Operations and
Comprehensive Income (Loss)
Year ended December 31 (millions of Canadian dollars, except per share amounts)
2018
2017
Revenues
Distribution (includes $280 related party revenues; 2017 – $284) (Note 27)
Transmission (includes $1,617 related party revenues; 2017 – $1,523) (Note 27)
Other
Costs
Purchased power (includes $1,648 related party costs; 2017 – $1,594) (Note 27)
Operation, maintenance and administration (Note 27)
Depreciation, amortization and asset removal costs (Note 5)
Income before financing charges and income taxes
Financing charges (Note 6)
Income before income taxes
Income taxes (Note 7)
Net income (loss)
Other comprehensive income
Comprehensive income (loss)
Net income (loss) attributable to:
Noncontrolling interest (Note 26)
Preferred shareholders
Common shareholders
Comprehensive income attributable to:
Noncontrolling interest (Note 26)
Preferred shareholders
Common shareholders
Earnings per common share (Note 24)
Basic
Diluted
Dividends per common share declared (Note 23)
See accompanying notes to Amended Consolidated Financial Statements.
4,422
1,686
42
6,150
2,899
1,105
837
4,841
1,309
459
850
915
(65)
4
(61)
6
18
(89)
(65)
6
18
(85)
(61)
$
$
$
(0.15) $
(0.15) $
0.91 $
4,366
1,578
46
5,990
2,875
1,066
817
4,758
1,232
439
793
111
682
1
683
6
18
658
682
6
18
659
683
1.11
1.10
0.87
65
Hydro One Limited | Annual Report 2018
Amended Consolidated Balance Sheets
December 31 (millions of Canadian dollars)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable (Note 8)
Due from related parties (Note 27)
Other current assets (Note 9)
Property, plant and equipment (Note 10)
Other long-term assets:
Regulatory assets (Note 12)
Deferred income tax assets (Note 7)
Intangible assets (Note 11)
Goodwill
Other assets
Total assets
Liabilities
Current liabilities:
Short-term notes payable (Note 15)
Long-term debt payable within one year (Notes 15, 17)
Accounts payable and other current liabilities (Note 13)
Due to related parties (Note 27)
Long-term liabilities:
Long-term debt (includes $845 measured at fair value; 2017 – $541) (Notes 15, 17)
Convertible debentures (Notes 16, 17)
Regulatory liabilities (Note 12)
Deferred income tax liabilities (Note 7)
Other long-term liabilities (Note 14)
Total liabilities
Contingencies and Commitments (Notes 29, 30)
Subsequent Events (Note 4, 16, 17, 32)
Noncontrolling interest subject to redemption (Note 26)
Equity
Common shares (Note 22)
Preferred shares (Note 22)
Additional paid-in capital (Note 25)
Retained earnings
Accumulated other comprehensive loss
Hydro One shareholders’ equity
Noncontrolling interest (Note 26)
Total equity
See accompanying notes to Amended Consolidated Financial Statements.
On behalf of the Board of Directors:
Tom Woods
Chair
William Sheffield
Chair, Audit Committee
66
2018
2017
483
628
255
125
25
636
253
105
1,491
20,687
1,019
19,947
1,721
1,018
410
325
5
3,479
3,049
987
369
325
5
4,735
25,657
25,701
1,252
731
956
89
3,028
9,978
489
326
58
2,135
926
752
905
157
2,740
9,315
487
128
71
2,707
12,986
16,014
12,708
15,448
21
22
5,643
418
56
3,459
(3)
9,573
49
9,622
25,657
5,631
418
49
4,090
(7)
10,181
50
10,231
25,701
Hydro One Limited | Annual Report 2018
Amended Consolidated Statements of Changes in Equity
Year ended December 31, 2018
(millions of Canadian dollars)
Common
Shares
Preferred
Shares
January 1, 2018
Net income (loss)
Other comprehensive income
Distributions to noncontrolling interest
Dividends on preferred shares
Dividends on common shares
Common shares issued
Stock-based compensation (Note 25)
5,631
—
—
—
—
—
12
—
December 31, 2018
5,643
418
—
—
—
—
—
—
—
418
Year ended December 31, 2017
(millions of Canadian dollars)
Common
Shares
Preferred
Shares
January 1, 2017
Net income
Other comprehensive income
Distributions to noncontrolling interest
Dividends on preferred shares
Dividends on common shares
Common shares issued
Stock-based compensation (Note 25)
5,623
—
—
—
—
—
8
—
December 31, 2017
5,631
418
—
—
—
—
—
—
—
418
See accompanying notes to Amended Consolidated Financial Statements.
Additional
Paid-in
Capital
49
—
—
—
—
—
(12)
19
56
Additional
Paid-in
Capital
34
—
—
—
—
—
(8)
23
49
Accumulated
Other
Comprehensive
Income (Loss)
Hydro One
Shareholders’
Equity
Non-
controlling
Interest
(Note 26)
(7)
—
4
—
—
—
—
—
(3)
10,181
(71)
4
—
(18)
(542)
—
19
9,573
50
4
—
(5)
—
—
—
—
49
Accumulated
Other
Comprehensive
Income (Loss)
Hydro One
Shareholders’
Equity
Non-
controlling
Interest
(Note 26)
(8)
—
1
—
—
—
—
—
(7)
10,017
676
1
—
(18)
(518)
—
23
10,181
50
4
—
(4)
—
—
—
—
50
Retained
Earnings
4,090
(71)
—
—
(18)
(542)
—
—
3,459
Retained
Earnings
3,950
676
—
—
(18)
(518)
—
—
4,090
Total
Equity
10,231
(67)
4
(5)
(18)
(542)
—
19
9,622
Total
Equity
10,067
680
1
(4)
(18)
(518)
—
23
10,231
67
Hydro One Limited | Annual Report 2018
Amended Consolidated Statements of Cash Flows
Year ended December 31 (millions of Canadian dollars)
Operating activities
Net income (loss)
Environmental expenditures
Adjustments for non-cash items:
Depreciation and amortization (Note 5)
Regulatory assets and liabilities
Deferred income taxes
Unrealized loss (gain) on foreign exchange contract
Other
Changes in non-cash balances related to operations (Note 28)
Net cash from operating activities
Financing activities
Long-term debt issued
Long-term debt repaid
Short-term notes issued
Short-term notes repaid
Convertible debentures issued (Note 16)
Dividends paid
Distributions paid to noncontrolling interest
Other (Note 16)
Net cash from (used in) financing activities
Investing activities
Capital expenditures (Note 28)
Property, plant and equipment
Intangible assets
Capital contributions received (Note 28)
Other
Net cash used in investing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to Amended Consolidated Financial Statements.
2018
2017
(65)
(22)
747
35
890
(25)
38
(23)
682
(24)
727
112
85
3
18
113
1,575
1,716
1,400
(753)
4,242
(3,916)
—
(560)
(8)
(6)
399
(1,418)
(120)
7
15
(1,516)
458
25
483
—
(602)
3,795
(3,338)
513
(536)
(6)
(27)
(201)
(1,467)
(80)
9
(2)
(1,540)
(25)
50
25
68
Hydro One Limited | Annual Report 2018
Notes to Amended Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
1. DESCRIPTION OF THE BUSINESS
Hydro One Limited (Hydro One or the Company) was incorporated on
August 31, 2015, under the Business Corporations Act (Ontario). On
October 31, 2015, the Company acquired Hydro One Inc., a company
previously wholly-owned by the Province of Ontario (Province). The
acquisition of Hydro One Inc. by Hydro One was accounted for as a
common control transaction and Hydro One is a continuation of business
operations of Hydro One Inc. At December 31, 2018, the Province held
approximately 47.4% (2017 – 47.4%) of the common shares of Hydro One.
The principal businesses of Hydro One are the transmission and
distribution of electricity to customers within Ontario.
In December 2015, the OEB approved B2M LP’s 2015-2019 rates revenue
requirements of $39 million, $36 million, $37 million, $38 million and
$37 million for the respective years. On May 10, 2018, the OEB issued
its decision and rate order on B2M LP’s 2018 transmission application
reflecting revenue requirement of $36 million, effective January 1, 2018.
HOSSM is under a 10-year deferred rebasing period for years 2017-
2026, as approved in the OEB Mergers Acquisitions Amalgamations and
Divestitures (MAAD) decision dated October 13, 2016. In September 2017,
the OEB issued its decision and Order on HOSSM’s 2017 transmission rate
application, denying the requested revenue requirement. HOSSM’s 2016
approved revenue requirement of $41 million remained in effect for 2017
and 2018.
Rate Setting
The Company’s transmission business consists of the transmission system
operated by Hydro One Inc.’s subsidiaries, Hydro One Networks Inc.
(Hydro One Networks) and Hydro One Sault Ste. Marie LP (HOSSM), as
well as an approximately 66% interest in B2M Limited Partnership (B2M
LP), a limited partnership between Hydro One and the Saugeen Ojibway
Nation (SON) in respect of the Bruce-to-Milton transmission line. Hydro
One’s distribution business consists of the distribution system operated
by Hydro One Inc.’s subsidiaries, Hydro One Networks and Hydro One
Remote Communities Inc. (Hydro One Remote Communities).
Ontario Energy Board (OEB) March 7, 2019 Decisions and Amended
Consolidated Financial Statements
Subsequent to year end, on March 7, 2019, the OEB issued a decision on
its reconsideration of its decision and order on Hydro One Networks’ 2017
and 2018 transmission rates revenue requirements dated September 28,
2017 (Original Decision) with respect to the rate-setting treatment of
the benefits of the deferred tax asset resulting from transition from the
payments in lieu of tax regime under the Electricity Act (Ontario) to tax
payments under the federal and provincial tax regime which occurred
when Hydro One Limited became a public company listed on the Toronto
Stock Exchange.
The March 7, 2019 OEB decision has been determined to be a Type I
subsequent event under United States (US) Generally Accepted Accounting
Principles (GAAP) and as such the Company is required to update the
consolidated financial statements previously issued on February 20, 2019,
to reflect the subsequent event in connection with filing its annual report
on Form 40-F with the US Securities and Exchange Commission, so that
they reflect events to the date of approval of the Form 40-F. As a result, the
financial impact of this OEB decision has been reflected in these amended
consolidated financial statements, as more fully discussed in Note 12 –
Regulatory Assets and Liabilities.
Transmission
In December 2017, the OEB approved Hydro One Networks’ 2018 rates
revenue requirement of $1,511 million. See Note 12 – Regulatory Assets and
Liabilities for additional information.
Distribution
In March 2017, Hydro One Networks filed an application with the OEB for
2018-2022 distribution rates. The requested revenue requirements, updated
in June 2018, are $1,514 million for 2018, $1,561 million for 2019,
$1,607 million for 2020, $1,681 million for 2021, and $1,722 million for
2022. The OEB decision was received on March 7, 2019. See Note 32(D) –
Subsequent Events – OEB Regulatory Decisions.
On November 17, 2017, Hydro One filed with the OEB a request for
2018 interim rates based on 2017 OEB-approved rates, adjusted for
an updated load forecast. On December 1, 2017, the OEB denied this
request and set interim 2018 rates based on 2017 OEB- approved rates
with no adjustments.
On August 28, 2017, Hydro One Remote Communities filed an application
with the OEB seeking approval of its 2018 revenue requirement of $57 million
and electricity rates effective May 1, 2018. On March 19, 2018, the OEB
approved the settlement agreement related to the 2018 rates application
reached by Hydro One Remote Communities and the intervenors in the rate
proceeding. On March 26, 2018, a draft rate order was filed with the OEB
for 2018 rates. The OEB approved the draft rate order on April 12, 2018,
and the new rates were implemented effective May 1, 2018.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
These Amended Consolidated Financial Statements (Consolidated Financial
Statements) include the accounts of the Company and its subsidiaries.
Intercompany transactions and balances have been eliminated.
Basis of Accounting
These Consolidated Financial Statements are prepared and presented in
accordance with US GAAP and in Canadian dollars.
Use of Management Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues, expenses, gains and losses during the reporting periods.
69
Hydro One Limited | Annual Report 2018 Management evaluates these estimates on an ongoing basis based upon
historical experience, current conditions, and assumptions believed to be
reasonable at the time the assumptions are made, with any adjustments
being recognized in results of operations in the period they arise. Significant
estimates relate to regulatory assets and regulatory liabilities, environmental
liabilities, pension benefits, post-retirement and post-employment benefits,
asset retirement obligations, goodwill and asset impairments, contingencies,
unbilled revenues, and deferred income tax assets and liabilities. Actual
results may differ significantly from these estimates.
Regulatory Accounting
The OEB has the general power to include or exclude revenues, costs, gains
or losses in the rates of a specific period, resulting in a change in the timing
of accounting recognition from that which would have been applied in
an unregulated company. Such change in timing involves the application
of rate-regulated accounting, giving rise to the recognition of regulatory
assets and liabilities. The Company’s regulatory assets represent amounts
receivable from future customers and costs that have been deferred for
accounting purposes because it is probable that they will be recovered in
future rates. In addition, the Company has recorded regulatory liabilities
that generally represent amounts that are refundable to future customers.
The Company continually assesses the likelihood of recovery of each of its
regulatory assets and continues to believe that it is probable that the OEB
will include its regulatory assets and liabilities in setting future rates. If, at
some future date, the Company judges that it is no longer probable that
the OEB will include a regulatory asset or liability in setting future rates, the
appropriate carrying amount would be reflected in results of operations
prospectively from the date the Company’s assessment is made, unless the
change meets the requirements for a Type I subsequent event.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term investments with
an original maturity of three months or less.
Revenue Recognition
The Company adopted Accounting Standard Codification (ASC) 606
– Revenue from Contracts with Customers on January 1, 2018 using the
retrospective method, without the election of any practical expedients.
There was no material impact to the Company’s revenue recognition policy
as a result of adopting ASC 606, and no adjustments were made to prior
period reported financial statements amounts.
Nature of Revenues
Transmission revenues predominantly consist of transmission tariffs, which
are collected through OEB-approved Uniform Transmission Rates (UTR) and
the monthly peak demand for electricity across Hydro One’s high-voltage
network. OEB-approved UTR is based on an approved revenue requirement
that includes a rate of return. The transmission tariffs are designed to recover
revenues necessary to support the Company’s transmission system with
sufficient capacity to accommodate the maximum expected demand which
is influenced by weather and economic conditions. Transmission revenues
are recognized as electricity is transmitted and delivered to customers.
Distribution revenues attributable to the delivery of electricity are based on
OEB-approved distribution rates and are recognized on an accrual basis
and include billed and unbilled revenues. Billed revenues are based on
electricity delivered as measured from customer meters. At the end of each
month, electricity delivered to customers since the date of the last billed
meter reading is estimated, and the corresponding unbilled revenue is
recorded. The unbilled revenue estimate is affected by energy consumption,
weather, and changes in the composition of customer classes.
Revenues also include amounts related to sales of other services and
equipment. Such revenue is recognized as services are rendered or as
equipment is delivered. Revenues are recorded net of indirect taxes.
Accounts Receivable and Allowance for Doubtful Accounts
Billed accounts receivable are recorded at the invoiced amount, net of
allowance for doubtful accounts. Unbilled accounts receivable are recorded
at their estimated value. Overdue amounts related to regulated billings
bear interest at OEB-approved rates. The allowance for doubtful accounts
reflects the Company’s best estimate of losses on billed accounts receivable
balances. The Company estimates the allowance for doubtful accounts on
billed accounts receivable by applying internally developed loss rates to
the outstanding receivable balances by aging category. Loss rates applied
to the billed accounts receivable balances are based on historical overdue
balances, customer payments and write-offs. Accounts receivable are
written-off against the allowance when they are deemed uncollectible.
The allowance for doubtful accounts is affected by changes in volume,
prices and economic conditions.
Noncontrolling interest
Noncontrolling interest represents the portion of equity ownership
in subsidiaries that is not attributable to shareholders of Hydro One.
Noncontrolling interest is initially recorded at fair value and subsequently
the amount is adjusted for the proportionate share of net income and other
comprehensive income (OCI) attributable to the noncontrolling interest
and any dividends or distributions paid to the noncontrolling interest.
If a transaction results in the acquisition of all, or part, of a
noncontrolling interest in a subsidiary, the acquisition of the
noncontrolling interest is accounted for as an equity transaction.
No gain or loss is recognized in consolidated net income or
comprehensive income as a result of changes in the noncontrolling
interest, unless a change results in the loss of control by the Company.
Income Taxes
Current and deferred income taxes are computed based on the tax rates
and tax laws enacted as at the balance sheet date. Tax benefits associated
with income tax positions are recorded only when the more-likely-than-not
recognition threshold is satisfied and are measured at the largest amount
of benefit that has a greater than 50% likelihood of being realized upon
settlement. Management evaluates each position based solely on the
technical merits and facts and circumstances of the position, assuming the
position will be examined by a taxing authority having full knowledge of
all relevant information. Significant management judgment is required to
determine recognition thresholds and the related amount of tax benefits to
be recognized in the Consolidated Financial Statements. Management re-
evaluates tax positions each period using new information about recognition
or measurement as it becomes available.
70
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements Deferred Income Taxes
Deferred income taxes are provided for using the liability method. Under
this method, deferred income tax assets and liabilities are recognized on
all temporary differences between the tax bases and carrying amounts of
assets and liabilities, including the carry forward unused tax credits and
tax losses to the extent that it is more-likely-than-not that these deductions,
credits, and losses can be utilized. Deferred income tax assets and liabilities
are measured at the tax rates that are expected to apply in the period when
the liability is settled or the asset is realized, based on the tax rates and
tax laws that have been enacted as at the balance sheet date. Deferred
income taxes that are not included in the rate-setting process are charged
or credited to the Consolidated Statements of Operations and
Comprehensive Income.
Management reassesses the deferred income tax assets at each
balance sheet date and reduces the amount to the extent that it is
more-likely-than-not that the deferred income tax asset will not be
realized. Previously unrecognized deferred income tax assets are
reassessed at each balance sheet date and are recognized to the
extent that it has become more-likely-than-not that the tax benefit will
be realized.
As approved by the regulator, the Company’s Canadian subsidiaries
recover income tax expense in customer rates based on income taxes
that are currently payable, except for certain regulatory balances for
which deferred income tax expense is recovered from, or refunded
to, customers in current rates, as prescribed by the regulator. The
Company records regulatory assets and liabilities associated with
deferred income tax assets and liabilities that will be included in the
rate-setting process.
Investment tax credits are recorded as a reduction of the related
expenses or income tax expense in the current or future period to
the extent it is more likely than not that the credits can be utilized.
Materials and Supplies
Materials and supplies represent consumables, small spare parts and
construction materials held for internal construction and maintenance
of property, plant and equipment. These assets are carried at average
cost less any impairments recorded.
Property, Plant and Equipment
Property, plant and equipment is recorded at original cost, net of customer
contributions, and any accumulated impairment losses. The cost of additions,
including betterments and replacement asset components, is included on
the Consolidated Balance Sheets as property, plant and equipment.
The original cost of property, plant and equipment includes direct
materials, direct labour (including employee benefits), contracted
services, attributable capitalized financing costs, asset retirement costs,
and direct and indirect overheads that are related to the capital project
or program. Indirect overheads include a portion of corporate costs
such as finance, treasury, human resources, information technology
and executive costs. Overhead costs, including corporate functions
and field services costs, are capitalized on a fully allocated basis,
consistent with an OEB-approved methodology.
Property, plant and equipment in service consists of transmission, distribution,
communication, administration and service assets and land easements.
Property, plant and equipment also includes future use assets, such as land,
major components and spare parts, and capitalized project development
costs associated with deferred capital projects.
Transmission
Transmission assets include assets used for the transmission of high-voltage
electricity, such as transmission lines, support structures, foundations,
insulators, connecting hardware and grounding systems, and assets used
to step up the voltage of electricity from generating stations for transmission
and to step down voltages for distribution, including transformers, circuit
breakers and switches.
Distribution
Distribution assets include assets related to the distribution of low-voltage
electricity, including lines, poles, switches, transformers, protective devices
and metering systems.
Communication
Communication assets include fibre optic and microwave radio systems,
optical ground wire, towers, telephone equipment and associated buildings.
Administration and Service
Administration and service assets include administrative buildings, personal
computers, transport and work equipment, tools and other minor assets.
Easements
Easements include statutory rights of use for transmission corridors and
abutting lands granted under the Reliable Energy and Consumer Protection
Act, 2002, as well as other land access rights.
Intangible Assets
Intangible assets separately acquired or internally developed are measured
on initial recognition at cost, which comprises purchased software, direct
labour (including employee benefits), consulting, engineering, overheads
and attributable capitalized financing charges. Following initial recognition,
intangible assets are carried at cost, net of any accumulated amortization
and accumulated impairment losses. The Company’s intangible assets
primarily represent major computer applications.
Capitalized Financing Costs
Capitalized financing costs represent interest costs attributable to the
construction of property, plant and equipment or development of intangible
assets. The financing cost of attributable borrowed funds is capitalized as
part of the acquisition cost of such assets. The capitalized financing costs are
a reduction of financing charges recognized in the Consolidated Statements
of Operations and Comprehensive Income. Capitalized financing costs are
calculated using the Company’s weighted average effective cost of debt.
Construction and Development in Progress
Construction and development in progress consists of the capitalized cost of
constructed assets that are not yet complete and which have not yet been
placed in service.
71
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements Depreciation and Amortization
The cost of property, plant and equipment and intangible assets is
depreciated or amortized on a straight-line basis based on the estimated
remaining service life of each asset category, except for transport and
work equipment, which is depreciated on a declining balance basis.
The Company periodically initiates an external independent review of
its property, plant and equipment and intangible asset depreciation and
amortization rates, as required by the OEB. Any changes arising from
OEB approval of such a review are implemented on a remaining service
life basis, consistent with their inclusion in electricity rates. The most recent
reviews resulted in changes to rates effective January 1, 2015 and January 1,
2017 for Hydro One Networks’ distribution and transmission businesses,
respectively. A summary of average service lives and depreciation and
amortization rates for the various classes of assets is included below:
Property, plant and equipment:
Transmission
Distribution
Communication
Administration and service
Intangible assets
Average
Service Life
Rate
Range
Average
55 years
46 years
16 years
20 years
10 years
1% – 3%
1% – 7%
1% – 15%
1% – 20%
10%
2%
2%
6%
6%
10%
In accordance with group depreciation practices, the original cost of
property, plant and equipment, or major components thereof, and
intangible assets that are normally retired, is charged to accumulated
depreciation, with no gain or loss being reflected in results of operations.
Where a disposition of property, plant and equipment occurs through
sale, a gain or loss is calculated based on proceeds and such gain or
loss is included in depreciation expense.
Acquisitions and Goodwill
The Company accounts for business acquisitions using the acquisition
method of accounting and, accordingly, the assets and liabilities of the
acquired entities are primarily measured at their estimated fair value at
the date of acquisition. Costs associated with pending acquisitions are
expensed as incurred. Goodwill represents the cost of acquired companies
that is in excess of the fair value of the net identifiable assets acquired at
the acquisition date. Goodwill is not included in rate base.
Goodwill is evaluated for impairment on an annual basis, or more
frequently if circumstances require. The Company performs a
qualitative assessment to determine whether it is more-likely-than-
not that the fair value of the applicable reporting unit is less than
its carrying amount. If the Company determines, as a result of its
qualitative assessment, that it is not more-likely-than-not that the fair
value of the applicable reporting unit is less than its carrying amount,
no further testing is required. If the Company determines, as a result
of its qualitative assessment, that it is more-likely-than-not that the
fair value of the applicable reporting unit is less than its carrying
amount, a goodwill impairment assessment is performed using a
two-step, fair value-based test. The first step compares the fair value
of the applicable reporting unit to its carrying amount, including
goodwill. If the carrying amount of the applicable reporting unit
exceeds its fair value, a second step is performed. The second step
requires an allocation of fair value to the individual assets and liabilities
using purchase price allocation in order to determine the implied fair
value of goodwill. If the implied fair value of goodwill is less than the
carrying amount, an impairment loss is recorded as a reduction to
goodwill and as a charge to results of operations.
Based on assessment performed as at September 30, 2018, the Company
has concluded that goodwill was not impaired at December 31, 2018.
Long-Lived Asset Impairment
When circumstances indicate the carrying value of long-lived assets may
not be recoverable, the Company evaluates whether the carrying value of
such assets, excluding goodwill, has been impaired. For such long-lived
assets, the Company evaluates whether impairment may exist by estimating
future estimated undiscounted cash flows expected to result from the use
and eventual disposition of the asset. When alternative courses of action to
recover the carrying amount of a long-lived asset are under consideration,
a probability-weighted approach is used to develop estimates of future
undiscounted cash flows. If the carrying value of the long-lived asset is not
recoverable based on the estimated future undiscounted cash flows, an
impairment loss is recorded, measured as the excess of the carrying value
of the asset over its fair value. As a result, the asset’s carrying value is
adjusted to its estimated fair value.
Within its regulated business, the carrying costs of most of Hydro One’s
long-lived assets are included in rate base where they earn an OEB-
approved rate of return. Asset carrying values and the related return
are recovered through approved rates. As a result, such assets are only
tested for impairment in the event that the OEB disallows recovery, in
whole or in part, or if such a disallowance is judged to be probable.
Hydro One regularly monitors the assets of its unregulated Hydro
One Telecom subsidiary for indications of impairment. Management
assesses the fair value of such long-lived assets using commonly
accepted techniques. Techniques used to determine fair value include,
but are not limited to, the use of recent third-party comparable sales
for reference and internally developed discounted cash flow analysis.
Significant changes in market conditions, changes to the condition of
an asset, or a change in management’s intent to utilize the asset are
generally viewed by management as triggering events to reassess the
cash flows related to these long-lived assets. As at December 31, 2018
and 2017, no asset impairment had been recorded for assets within
either the Company’s regulated or unregulated businesses.
72
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Costs of Arranging Debt Financing
For financial liabilities classified as other than held-for-trading and for
convertible debentures, the Company defers the external transaction costs
related to obtaining financing and presents such amounts net of related debt
or convertible debentures on the Consolidated Balance Sheets. Deferred
issuance costs are amortized over the contractual life of the related debt or
convertible debentures on an effective-interest basis and the amortization
is included within financing charges in the Consolidated Statements of
Operations and Comprehensive Income. Transaction costs for items
classified as held-for-trading are expensed immediately.
The accounting guidance for derivative instruments requires the
recognition of all derivative instruments not identified as meeting
the normal purchase and sale exemption as either assets or liabilities
recorded at fair value on the Consolidated Balance Sheets. For
derivative instruments that qualify for hedge accounting, the Company
may elect to designate such derivative instruments as either cash flow
hedges or fair value hedges. The Company offsets fair value amounts
recognized on its Consolidated Balance Sheets related to derivative
instruments executed with the same counterparty under the same
master netting agreement.
Comprehensive Income
Comprehensive income is comprised of net income and OCI. Hydro One
presents net income and OCI in a single continuous Consolidated Statement
of Operations and Comprehensive Income.
Financial Assets and Liabilities
All financial assets and liabilities are classified into one of the following five
categories: held-to-maturity; loans and receivables; held-for-trading; other
liabilities; or available-for-sale. Financial assets and liabilities classified
as held-for-trading are measured at fair value. All other financial assets
and liabilities are measured at amortized cost, except accounts receivable
and amounts due from related parties, which are measured at the lower
of cost or fair value. Accounts receivable and amounts due from related
parties are classified as loans and receivables. The Company considers the
carrying amounts of accounts receivable and amounts due from related
parties to be reasonable estimates of fair value because of the short time to
maturity of these instruments. Provisions for impaired accounts receivable
are recognized as adjustments to the allowance for doubtful accounts and
are recognized when there is objective evidence that the Company will
not be able to collect amounts according to the original terms. All financial
instrument transactions are recorded at trade date.
Derivative instruments are measured at fair value. Gains and losses
from fair valuation are included within financing charges in the period
in which they arise. The Company determines the classification of its
financial assets and liabilities at the date of initial recognition. The
Company designates certain of its financial assets and liabilities to
be held at fair value, when it is consistent with the Company’s risk
management policy disclosed in Note 17 – Fair Value of Financial
Instruments and Risk Management.
Derivative Instruments and Hedge Accounting
The Company closely monitors the risks associated with changes in interest
rates on its operations and, where appropriate, uses various instruments to
hedge these risks. Certain of these derivative instruments qualify for hedge
accounting and are designated as accounting hedges, while others either
do not qualify as hedges or have not been designated as hedges
(hereinafter referred to as undesignated contracts) as they are part
of economic hedging relationships.
For derivative instruments that qualify for hedge accounting and which are
designated as cash flow hedges, the effective portion of any gain or loss,
net of tax, is reported as a component of accumulated OCI (AOCI) and
is reclassified to results of operations in the same period or periods during
which the hedged transaction affects results of operations. Any gains or
losses on the derivative instrument that represent either hedge ineffectiveness
or hedge components excluded from the assessment of effectiveness are
recognized in results of operations. For fair value hedges, changes in
fair value of both the derivative instrument and the underlying hedged
exposure are recognized in the Consolidated Statements of Operations
and Comprehensive Income in the current period. The gain or loss on the
derivative instrument is included in the same line item as the offsetting gain
or loss on the hedged item in the Consolidated Statements of Operations
and Comprehensive Income. The changes in fair value of the undesignated
derivative instruments are reflected in results of operations.
Embedded derivative instruments are separated from their host
contracts and are carried at fair value on the Consolidated Balance
Sheets when: (a) the economic characteristics and risks of the
embedded derivative are not clearly and closely related to the
economic characteristics and risks of the host contract; (b) the hybrid
instrument is not measured at fair value, with changes in fair value
recognized in results of operations each period; and (c) the embedded
derivative itself meets the definition of a derivative. The Company does
not engage in derivative trading or speculative activities and had no
embedded derivatives that required bifurcation at December 31, 2018
or 2017.
Hydro One periodically develops hedging strategies taking into
account risk management objectives. At the inception of a hedging
relationship where the Company has elected to apply hedge
accounting, Hydro One formally documents the relationship between
the hedged item and the hedging instrument, the related risk
management objective, the nature of the specific risk exposure being
hedged, and the method for assessing the effectiveness of the hedging
relationship. The Company also assesses, both at the inception of the
hedge and on a quarterly basis, whether the hedging instruments
are effective in offsetting changes in fair values or cash flows of the
hedged items.
73
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements Employee Future Benefits
Employee future benefits provided by Hydro One include pension,
post-retirement and post-employment benefits. The costs of the
Company’s pension, post-retirement and post-employment benefit plans
are recorded over the periods during which employees render service.
The Company recognizes the funded status of its defined benefit pension,
post-retirement and post-employment plans on its Consolidated Balance
Sheets and subsequently recognizes the changes in funded status at the
end of each reporting year. Defined benefit pension, post-retirement
and post-employment plans are considered to be underfunded when the
projected benefit obligation (PBO) exceeds the fair value of the plan assets.
Liabilities are recognized on the Consolidated Balance Sheets for any
net underfunded PBO. The net underfunded PBO may be disclosed as a
current liability, long-term liability, or both. The current portion is the amount
by which the actuarial present value of benefits included in the benefit
obligation payable in the next 12 months exceeds the fair value of plan
assets. If the fair value of plan assets exceeds the PBO of the plan, an asset
is recognized equal to the net overfunded PBO. The post-retirement and
post-employment benefit plans are unfunded because there are no related
plan assets.
Hydro One recognizes its contributions to the defined contribution pension
plan (DC Plan) as pension expense, with a portion being capitalized as part
of labour costs included in capital expenditures. The expensed amount is
included in operation, maintenance and administration (OM&A) costs in
the Consolidated Statements of Operations and Comprehensive Income.
Defined Benefit Pension
Defined benefit pension costs are recorded on an accrual basis for
financial reporting purposes. Pension costs are actuarially determined
using the projected benefit method prorated on service and are based on
assumptions that reflect management’s best estimate of the effect of future
events, including future compensation increases. Past service costs from plan
amendments and all actuarial gains and losses are amortized on a straight-
line basis over the expected average remaining service period of active
employees in the plan, and over the estimated remaining life expectancy of
inactive employees in the plan. Pension plan assets, consisting primarily of
listed equity securities as well as corporate and government debt securities,
are fair valued at the end of each year. Hydro One records a regulatory
asset equal to the net underfunded PBO for its pension plan. Defined benefit
pension costs are attributed to labour costs and a portion directly related to
acquisition and development of capital assets not exceeding the service cost
component of accrual basis defined benefit pension costs is capitalized as
part of the cost of property, plant and equipment and intangible assets. The
remaining defined benefit pension costs are charged to results of operations
(OM&A costs).
Post-retirement and Post-employment Benefits
Post-retirement and post-employment benefits are recorded and included in
rates on an accrual basis. Costs are determined by independent actuaries
using the projected benefit method prorated on service and based on
assumptions that reflect management’s best estimates. Past service costs
from plan amendments are amortized to results of operations based on
the expected average remaining service period.
For post-retirement benefits, all actuarial gains or losses are deferred
using the “corridor” approach. The amount calculated above the
“corridor” is amortized to results of operations on a straight-line
basis over the expected average remaining service life of active
employees in the plan and over the remaining life expectancy of
inactive employees in the plan. The post-retirement benefit obligation
is remeasured to its fair value at each year end based on an annual
actuarial report, with an offset to the associated regulatory asset, to
the extent of the remeasurement adjustment.
For post-employment obligations, the associated regulatory liabilities
representing actuarial gains on transition to US GAAP are amortized to
results of operations based on the “corridor” approach. The actuarial gains
and losses on post-employment obligations that are incurred during the year
are recognized immediately to results of operations. The post-employment
benefit obligation is remeasured to its fair value at each year end based on
an annual actuarial report, with an offset to the associated regulatory asset,
to the extent of the remeasurement adjustment.
All post-retirement and post-employment benefit costs are attributed to
labour costs and are either charged to results of operations (OM&A costs)
or capitalized as part of the cost of property, plant and equipment and
intangible assets for service cost component and to regulatory assets for
all other components of the benefit costs, consistent with their inclusion in
OEB-approved rates.
Stock-Based Compensation
Share Grant Plans
Hydro One measures share grant plans based on fair value of share grants
as estimated based on the grant date common share price. The costs are
recognized in the financial statements using the graded-vesting attribution
method for share grant plans that have both a performance condition and
a service condition. The Company records a regulatory asset equal to the
accrued costs of share grant plans recognized in each period. Costs are
transferred from the regulatory asset to labour costs at the time the share
grants vest and are issued, and are recovered in rates. Forfeitures are
recognized as they occur.
74
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements Deferred Share Unit (DSU) Plans
The Company records the liabilities associated with its Directors’ and
Management DSU Plans at fair value at each reporting date until settlement,
recognizing compensation expense over the vesting period on a straight-line
basis. The fair value of the DSU liability is based on the Company’s common
share closing price at the end of each reporting period.
Long-term Incentive Plan (LTIP)
The Company measures the awards issued under its LTIP, at fair value based
on the grant date common share price. The related compensation expense
is recognized over the vesting period on a straight-line basis. Forfeitures are
recognized as they occur.
Loss Contingencies
Hydro One is involved in certain legal and environmental matters that arise
in the normal course of business. In the preparation of its Consolidated
Financial Statements, management makes judgments regarding the future
outcome of contingent events and records a loss for a contingency based
on its best estimate when it is determined that such loss is probable and the
amount of the loss can be reasonably estimated. Where the loss amount
is recoverable in future rates, a regulatory asset is also recorded. When a
range estimate for the probable loss exists and no amount within the range
is a better estimate than any other amount, the Company records a loss at
the minimum amount within the range.
Management regularly reviews current information available to
determine whether recorded provisions should be adjusted and
whether new provisions are required. Estimating probable losses may
require analysis of multiple forecasts and scenarios that often depend
on judgments about potential actions by third parties, such as federal,
provincial and local courts or regulators. Contingent liabilities are
often resolved over long periods of time. Amounts recorded in the
Consolidated Financial Statements may differ from the actual outcome
once the contingency is resolved. Such differences could have a
material impact on future results of operations, financial position and
cash flows of the Company.
Provisions are based upon current estimates and are subject to greater
uncertainty where the projection period is lengthy. A significant upward
or downward trend in the number of claims filed, the nature of the
alleged injuries, and the average cost of resolving each claim could
change the estimated provision, as could any substantial adverse or
favourable verdict at trial. A federal or provincial legislative outcome or
structured settlement could also change the estimated liability. Legal fees
are expensed as incurred.
Environmental Liabilities
Environmental liabilities are recorded in respect of past contamination when
it is determined that future environmental remediation expenditures are
probable under existing statute or regulation and the amount of the future
expenditures can be reasonably estimated. Hydro One records a liability
for the estimated future expenditures associated with contaminated land
assessment and remediation (LAR) and for the phase-out and destruction
of polychlorinated biphenyl (PCB)-contaminated mineral oil removed from
electrical equipment, based on the present value of these estimated future
expenditures. The Company determines the present value with a discount
rate that produces an amount at which the environmental liabilities could
be settled in an arm’s length transaction with a third party. As the Company
anticipates that the future expenditures will continue to be recoverable in
future rates, an offsetting regulatory asset has been recorded to reflect the
future recovery of these environmental expenditures from customers. Hydro
One reviews its estimates of future environmental expenditures annually, or
more frequently if there are indications that circumstances have changed.
Asset Retirement Obligations
Asset retirement obligations are recorded for legal obligations associated
with the future removal and disposal of long-lived assets. Such obligations
may result from the acquisition, construction, development and/or normal
use of the asset. Conditional asset retirement obligations are recorded when
there is a legal obligation to perform a future asset retirement activity but
where the timing and/or method of settlement are conditional on a future
event that may or may not be within the control of the Company. In such a
case, the obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and/or method of settlement.
This uncertainty is incorporated in the fair value measurement of the obligation.
When recording an asset retirement obligation, the present value of the
estimated future expenditures required to complete the asset retirement
activity is recorded in the period in which the obligation is incurred, if a
reasonable estimate can be made. In general, the present value of the
estimated future expenditures is added to the carrying amount of the
associated asset and the resulting asset retirement cost is depreciated over
the estimated useful life of the asset. The present value is determined with a
discount rate that equates to the Company’s credit-adjusted risk-free rate.
Where an asset is no longer in service when an asset retirement obligation
is recorded, the asset retirement cost is recorded in results of operations.
Some of the Company’s transmission and distribution assets, particularly
those located on unowned easements and rights-of-way, may have
asset retirement obligations, conditional or otherwise. The majority of the
Company’s easements and rights-of-way are either of perpetual duration
or are automatically renewed annually. Land rights with finite terms are
generally subject to extension or renewal. As the Company expects to use
the majority of its facilities in perpetuity, no asset retirement obligations
have been recorded for these assets. If, at some future date, a particular
facility is shown not to meet the perpetuity assumption, it will be reviewed to
determine whether an estimable asset retirement obligation exists. In such a
case, an asset retirement obligation would be recorded at that time.
The Company’s asset retirement obligations recorded to date relate to
estimated future expenditures associated with the removal and disposal
of asbestos-containing materials installed in some of its facilities.
75
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements 3. NEW ACCOUNTING PRONOUNCEMENTS
The following tables present Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board that are applicable to Hydro One:
Recently Adopted Accounting Guidance
Date issued
Description
Effective date
Impact on Hydro One
January 1, 2018 On January 1, 2018, Hydro One adopted
Guidance
ASC 606
May 2014 –
November 2017
ASC 606 Revenue from Contracts with
Customers replaced ASC 605 Revenue
Recognition. ASC 606 provides guidance on
revenue recognition relating to the transfer of
promised goods or services to customers in an
amount that reflects the consideration to which
the entity expects to be entitled in exchange for
those goods and services.
ASU 2017-07 March 2017
January 1, 2018
Service cost components of net benefit
cost associated with defined benefit plans
are required to be reported in the same
line as other compensation costs arising
from services rendered by the Company’s
employees. All other components of net
benefit cost are to be presented in the
income statement separately from the
service cost component. Only the service
cost component is eligible for capitalization
where applicable.
Recently Issued Accounting Guidance Not Yet Adopted
ASC 606 using the retrospective method,
without the election of any practical expedients.
Upon adoption, there was no material impact
to the Company’s revenue recognition policy
and no adjustments were made to prior
period reported financial statements amounts.
The Company has included the disclosure
requirements of ASC 606 for annual and
interim periods in the year of adoption.
Hydro One applied for a regulatory
asset to maintain the capitalization of
post-employment benefit related costs
and as such, there is no material impact
upon adoption. See Note 2 – Significant
Accounting Policies and Note 12 –
Regulatory Assets and Liabilities.
Date issued
Description
Effective date
Impact on Hydro One
February 2016 –
December 2018
Lessees are required to recognize the rights
and obligations resulting from operating
leases as assets (right to use the underlying
asset for the term of the lease) and liabilities
(obligation to make future lease payments)
on the balance sheet. ASU 2018-01 permits
an entity to elect an optional practical
expedient to not evaluate under ASC 842
land easements that exist or expired before
the entity’s adoption of ASC 842 and that
were not previously accounted for as leases
under ASC 840. ASU 2018-10 amends
narrow aspects of ASC 842. ASU 2018-11
provides entities with an additional and
option transition method in adopting ASC
842. ASU 2018-11 also permits lessors to
elect an optional practical expedient to not
separate non-lease components from the
associated lease component by underlying
asset classes. ASU 2018-20 provides relief to
lessors that have lease contracts that either
require lessees to pay lessor costs directly to
a third party or require lessees to reimburse
lessors for costs paid by lessors directly to
third parties.
January 1, 2019
Hydro One reviewed its existing leases and
other contracts that are within the scope of
ASC 842. Apart from the existing leases, no
other contracts contained lease arrangements.
Upon adoption in the first quarter of 2019,
the Company will utilize the modified
retrospective transition approach using the
effective date of January 1, 2019 as its date
of initial application. As a result, comparatives
will not be updated. The Company will
elect the package of practical expedients
and the land easement practical expedient
upon adoption. The impact to Hydro One’s
financial statements will be the recognition of
approximately $27 million Right-of-Use (ROU)
assets and corresponding lease obligations
on the Consolidated Balance Sheet. The ROU
assets and lease obligations represent the
present value of the Company’s remaining
minimum lease payments for leases with
terms greater than 12 months. Discount rates
used in calculating the ROU assets and lease
obligations correspond to the Company’s
incremental borrowing rate.
Guidance
2016-02
2018-01
2018-10
2018-11
2018-20
76
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Guidance
2018-07
Date issued
June 2018
2018-13
August 2018
2018-14
August 2018
2018-15
August 2018
Description
Effective date
Impact on Hydro One
January 1, 2019
No impact upon adoption
January 1, 2020
Under assessment
January 1, 2021
Under assessment
January 1, 2020
Under assessment
Expansion in the scope of ASC 718 to
include share-based payment transactions
for acquiring goods and services from
non-employees. Previously, ASC 718 was
only applicable to share-based payment
transactions for acquiring goods and services
from employees.
Disclosure requirements on fair value
measurements in ASC 820 are modified to
improve the effectiveness of disclosures in
financial statement notes.
Disclosure requirements related to single-
employer defined benefit pension or
other post-retirement benefit plans are
added, removed or clarified to improve
the effectiveness of disclosures in financial
statement notes.
The amendment aligns the requirements
for capitalizing implementation costs
incurred in a hosting arrangement that is a
service contract with the requirements for
capitalizing implementation costs incurred
to develop or obtain internal-use software.
The accounting for the service element of
a hosting arrangement is not affected by
the amendment.
77
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements 4. BUSINESS COMBINATION
Avista Corporation Purchase Agreement
In July 2017, Hydro One reached an agreement to acquire Avista
Corporation (Merger) for approximately $6.7 billion in an all-cash
transaction. Avista Corporation is an investor-owned utility providing electric
generation, transmission, and distribution services. It is headquartered in
Spokane, Washington, with service areas in Washington, Idaho, Oregon,
Montana and Alaska. The closing of the Merger was subject to receipt
of certain regulatory and government approvals, and the satisfaction of
customary closing conditions.
The costs related to the acquisition totalling $69 million (2017 – $42 million)
have been expensed through the consolidated statements of operations.
These costs, net of unrealized gains on the foreign exchange contract of
$25 million in the year ended December 31, 2018 and a loss of $3 million
in the year ended December 31, 2017, resulted in net costs of $44 million
and $45 million, respectively being included in earnings.
On December 5, 2018, the Washington Utilities and Transportation
Commission (Washington UTC) issued an order denying the Merger. On
December 17, 2018, Hydro One filed a petition requesting the Washington
UTC to reconsider its December 5, 2018 order denying the Merger. On
January 3, 2018, the Idaho Public Utilities Commission denied Hydro
One’s application to acquire Avista Corporation. On January 8, 2019,
the Washington UTC issued a notice of denial of Hydro One’s petition for
reconsideration of Washington UTC’s December 5, 2018 order denying the
Merger. On January 14, 2019, the Oregon Public Utility Commission issued
a notice of abeyance until Hydro One and Avista Corporation have sought
a reversal of the two denial decisions.
On January 23, 2019, Hydro One and Avista Corporation announced that
the companies have mutually agreed to terminate the Merger agreement. As
a result of the termination of the Merger agreement, on January 24, 2019,
Hydro One paid a US$103 million termination fee to Avista Corporation
as required by the Merger agreement. On January 24, 2019, the Company
cancelled the $1.0 billion non-revolving equity bridge credit facility and on
January 25, 2019, Hydro One terminated the US$2.6 billion non-revolving
debt bridge credit facility (Acquisition Credit Facilities). No amounts have
been drawn on the Acquisition Credit Facilities. On February 1, 2019,
Hydro One entered into a credit agreement for a $170 million unsecured
demand operating credit facility (Demand Facility) for the purpose of
funding the payment of the termination fee and other Merger related costs.
On February 8, 2019, Hydro One redeemed the convertible debentures and
paid the holders of the Instalment Receipts $513 million ($333 per $1,000
principal amount) plus accrued and unpaid interest of $7 million. The
redemption of the convertible debentures was paid with cash on hand.
As a result of the termination of the Merger agreement, no payment is
due or receivable by Hydro One on the foreign exchange contract.
The following amounts related to the termination of the Merger agreement
will be recorded by the Company in its 2019 first quarter financial statements:
• $138 million OM&A costs for payment of the US$103 million
termination fee;
• $22 million financing charges, due to revaluation of the foreign-exchange
contract to $nil and reversal of previously recorded gains;
• repayment of $513 million convertible debentures and related interest of
$7 million; and
• $24 million financing charges, due to derecognition of the deferred
financing costs related to convertible debentures.
See Note 16 – Convertible Debentures and Note 17 – Fair Value of
Financial Instruments and Risk Management for details of the convertible
debentures and the foreign exchange contract, respectively.
Orillia Power Purchase Agreement
In August 2016, the Company reached an agreement to acquire
Orillia Power Distribution Corporation (Orillia Power), an electricity
distribution company located in Simcoe County, Ontario, from the City
of Orillia for approximately $41 million, including the assumption of
approximately $15 million in outstanding indebtedness and regulatory
liabilities, subject to closing adjustments and regulatory approval by the
OEB. In September 2016, Hydro One filed an application with the OEB
to acquire Orillia Power, which was denied by the OEB on April 12, 2018.
On September 26, 2018, Hydro One filed a new application with the
OEB for approval to acquire Orillia Power.
Peterborough Distribution Purchase Agreement
On July 31, 2018, Hydro One reached an agreement to acquire the business
and distribution assets of Peterborough Distribution Inc. (Peterborough
Distribution), an electricity distribution company located in east central
Ontario, from the City of Peterborough for approximately $105 million.
The acquisition is conditional upon the satisfaction of customary closing
conditions and approval by the OEB and the Competition Bureau. On
October 12, 2018, the Company filed an application with the OEB for
approval of the acquisition. On November 14, 2018, the Competition
Bureau issued no action letter, meaning that transaction can proceed
from the Competition Bureau’s position.
5. DEPRECIATION, AMORTIZATION AND ASSET REMOVAL COSTS
Year ended December 31 (millions of dollars)
Depreciation of property, plant and equipment
Amortization of intangible assets
Amortization of regulatory assets
Depreciation and amortization
Asset removal costs
2018
654
71
22
747
90
837
2017
641
62
24
727
90
817
78
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
6. FINANCING CHARGES
Year ended December 31 (millions of dollars)
Interest on long-term debt
Interest on convertible debentures
Interest on short-term notes
Unrealized loss (gain) on foreign exchange contract (Note 17)
Other
Less: Interest capitalized on construction and development in progress
Interest earned on cash and cash equivalents
2018
447
62
14
(25)
21
(53)
(7)
459
2017
450
24
6
3
14
(56)
(2)
439
7. INCOME TAXES
As a rate regulated utility company, the Company’s effective tax rate excludes temporary differences that are recoverable in future rates charged to customers.
Income tax expense differs from the amount that would have been recorded using the combined Canadian federal and Ontario statutory income tax rate. The
reconciliation between the statutory and the effective tax rates is provided as follows:
Year ended December 31 (millions of dollars)
Income before income taxes
Income taxes at statutory rate of 26.5% (2017 – 26.5%)
Increase (decrease) resulting from:
Net temporary differences recoverable in future rates charged to customers:
Capital cost allowance in excess of depreciation and amortization
Overheads capitalized for accounting but deducted for tax purposes
Interest capitalized for accounting but deducted for tax purposes
Pension contributions in excess of pension expense
Environmental expenditures
Other
Net temporary differences
Net permanent differences
Write-off of unregulated deferred income tax asset (Notes 12, 32)
Non-recurring tax recovery relating to deferred tax asset sharing1 (Notes 12, 32)
Total income taxes
Effective income tax rate
2018
850
225
(68)
(20)
(14)
(11)
(6)
(9)
(128)
1
885
(68)
915
2017
793
210
(55)
(17)
(15)
(13)
(6)
3
(103)
4
—
—
111
107.6%
14.0%
1
This represents the reversal of cumulative deferred tax expenses recorded in 2017 and 2018 relating to temporary differences that are now being allocated to ratepayers. For rate-
setting purposes, the deferred income tax expenses or recovery relating to temporary differences that will be included in the rate-setting process are recorded as regulatory assets
and liabilities on the balance sheet.
The major components of income tax expense are as follows:
Year ended December 31 (millions of dollars)
Current income taxes
Deferred income taxes
Total income taxes
2018
25
890
915
2017
26
85
111
79
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Deferred Income Tax Assets and Liabilities
Deferred income tax assets and liabilities expected to be included in the rate-setting process are offset by regulatory assets and liabilities to reflect the
anticipated recovery or disposition of these balances within future electricity rates. Deferred income tax assets and liabilities arise from differences between
the tax basis and the carrying amounts of the assets and liabilities. At December 31, 2018 and 2017, deferred income tax assets and liabilities consisted of
the following:
December 31 (millions of dollars)
2018
2017
Deferred income tax assets
Post-retirement and post-employment benefits expense in excess of cash payments
Non-capital losses
Non-depreciable capital property
Pension obligations
Investment in subsidiaries
Tax credit carryforwards
Environmental expenditures
Depreciation and amortization in excess of capital cost allowance
Other
Less: valuation allowance
Total deferred income tax assets
Deferred income tax liabilities
Capital cost allowance in excess of depreciation and amortization
Regulatory amounts that are not recognized for tax purposes
Goodwill
Other
Total deferred income tax liabilities
Net deferred income tax assets
The net deferred income tax assets are presented on the Consolidated Balance Sheets as follows:
December 31 (millions of dollars)
Long-term:
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax assets
526
302
271
197
86
71
59
20
24
561
255
271
354
84
49
71
125
23
1,556
(366)
1,190
1,793
(364)
1,429
9
188
10
23
230
960
75
411
10
17
513
916
2018
2017
1,018
(58)
960
987
(71)
916
The valuation allowance for deferred tax assets as at December 31, 2018 was $366 million (2017 – $364 million). The valuation allowance primarily relates
to temporary differences for non-depreciable assets and investments in subsidiaries. As of December 31, 2018 and 2017, the Company had non-capital
losses carried forward available to reduce future years’ taxable income, which expire as follows:
Year of expiry (millions of dollars)
2034
2035
2036
2037
2038
Total losses
80
2018
2
221
551
172
192
1,138
2017
2
222
560
175
—
959
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
8. ACCOUNTS RECEIVABLE
December 31 (millions of dollars)
Accounts receivable – billed
Accounts receivable – unbilled
Accounts receivable, gross
Allowance for doubtful accounts
Accounts receivable, net
The following table shows the movements in the allowance for doubtful accounts for the years ended December 31, 2018 and 2017:
Year ended December 31 (millions of dollars)
Allowance for doubtful accounts – beginning
Write-offs
Additions to allowance for doubtful accounts
Allowance for doubtful accounts – ending
9. OTHER CURRENT ASSETS
December 31 (millions of dollars)
Regulatory assets (Note 12)
Prepaid expenses and other assets
Derivative instrument – foreign exchange contract (Note 17)
Materials and supplies
10. PROPERTY, PLANT AND EQUIPMENT
December 31, 2018 (millions of dollars)
Transmission
Distribution
Communication
Administration and service
Easements
December 31, 2017 (millions of dollars)
Transmission
Distribution
Communication
Administration and service
Easements
2018
292
357
649
(21)
628
2017
298
367
665
(29)
636
2018
2017
(29)
25
(17)
(21)
(35)
25
(19)
(29)
2018
2017
42
41
22
20
125
Property, Plant
and Equipment
Accumulated
Depreciation
Construction
in Progress
16,559
10,580
1,306
1,548
647
30,640
5,449
3,561
922
893
75
10,900
766
75
48
58
—
947
Property, Plant
and Equipment
Accumulated
Depreciation
Construction
in Progress
15,509
10,213
1,266
1,561
638
29,187
5,162
3,513
853
857
70
989
149
31
46
—
10,455
1,215
46
41
—
18
105
Total
11,876
7,094
432
713
572
20,687
Total
11,336
6,849
444
750
568
19,947
Financing charges capitalized on property, plant and equipment under construction were $51 million in 2018 (2017 – $54 million).
81
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
11. INTANGIBLE ASSETS
December 31, 2018 (millions of dollars)
Computer applications software
Other
December 31, 2017 (millions of dollars)
Computer applications software
Other
Intangible
Assets
Accumulated
Amortization
Development
in Progress
790
5
795
440
5
445
60
—
60
Intangible
Assets
Accumulated
Amortization
Development
in Progress
698
5
703
370
5
375
41
—
41
Total
410
—
410
Total
369
—
369
Financing charges capitalized to intangible assets under development were $2 million in 2018 (2017 – $2 million). The estimated annual amortization
expense for intangible assets is as follows: 2019 – $67 million; 2020 – $50 million; 2021 – $48 million; 2022 – $46 million; and 2023 – $35 million.
12. REGULATORY ASSETS AND LIABILITIES
Regulatory assets and liabilities arise as a result of the rate-setting process. Hydro One has recorded the following regulatory assets and liabilities:
December 31 (millions of dollars)
Regulatory assets:
Deferred income tax regulatory asset
Pension benefit regulatory asset
Environmental
Foregone revenue deferral
Stock-based compensation
Post-retirement and post-employment benefits non-service cost
Debt premium
Distribution system code exemption
B2M LP start-up costs
Post-retirement and post-employment benefits
Other
Total regulatory assets
Less: current portion
Regulatory liabilities:
Post-retirement and post-employment benefits
Pension cost differential
Green Energy expenditure variance
Retail settlement variance account
External revenue variance
2015-2017 rate rider
Deferred income tax regulatory liability
Conservation and Demand Management (CDM) deferral variance
Other
Total regulatory liabilities
Less: current portion
82
2018
2017
908
547
165
—
43
39
22
10
2
—
27
1,763
(42)
1,721
130
55
52
39
26
6
86
—
23
417
(91)
326
1,762
981
196
23
40
—
27
10
4
36
16
3,095
(46)
3,049
—
23
60
—
46
6
5
28
17
185
(57)
128
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Deferred Income Tax Regulatory Asset and Liability
Deferred income taxes are recognized on temporary differences between
the carrying amount of assets and liabilities in the financial statements and
the corresponding tax bases used in the computation of taxable income. The
Company has recognized regulatory assets and liabilities that correspond
to deferred income taxes that flow through the rate-setting process. In the
absence of rate-regulated accounting, the Company’s income tax expense
would have been recognized using the liability method and there would be
no regulatory accounts established for taxes to be recovered through future
rates. As a result, the 2018 income tax expense would have been lower by
approximately $686 million (2017 – higher by $113 million).
On September 28, 2017, the OEB issued its decision and order on Hydro
One Networks’ 2017 and 2018 transmission rates revenue requirements
(Original Decision). In its Original Decision, the OEB concluded that the
net deferred tax asset resulting from transition from the payments in lieu of
tax regime under the Electricity Act (Ontario) to tax payments under the
federal and provincial tax regime should not accrue entirely to Hydro One
shareholders and that a portion should be shared with ratepayers. On
November 9, 2017, the OEB issued a decision and order that calculated
the portion of the tax savings that should be shared with ratepayers. The
OEB’s calculation would result in an impairment of a portion of Hydro One
Networks’ transmission deferred income tax regulatory asset. If the OEB
were to apply the same calculation for sharing in Hydro One Networks’
2018-2022 distribution rates, it would also result in an additional impairment
of a portion of Hydro One Networks’ distribution deferred income tax
regulatory asset. In October 2017, the Company filed a Motion to Review
and Vary (Motion) the Original Decision and filed an appeal with the
Divisional Court of Ontario (Appeal). In both cases, the Company’s position
is that the OEB made errors of fact and law in its determination of allocation
of the tax savings between the shareholders and ratepayers. On December
19, 2017, the OEB granted a hearing of the merits of the Motion which
was held on February 12, 2018. On August 31, 2018, the OEB granted the
Motion and returned the portion of the Decision relating to the deferred tax
asset to an OEB panel for reconsideration.
Subsequent to year end, on March 7, 2019, the OEB issued its
reconsideration decision and concluded that their Original Decision was
reasonable and should be upheld. Also, on March 7, 2019 the OEB issued
its decision for Hydro One Networks’ 2018–2022 distribution rates, in
which it directed the Company to apply the Original Decision to Hydro One
Networks’ distribution rates. As a result of this subsequent event that requires
adjustment in the 2018 financial statements, the Company has recognized
an impairment charge of Hydro One Networks’ distribution deferred income
tax regulatory asset of $474 million and Hydro One Networks’ transmission
deferred income tax regulatory asset of $558 million, an increase in
deferred income tax regulatory liability of $81 million, and a decrease in the
foregone revenue deferral regulatory asset of $68 million. After recognition
of the related $314 million deferred tax asset, the Company
has recorded an $867 million one-time decrease in net income as a
reversal of revenues of $68 million, and charge to deferred tax expense
of $799 million. Notwithstanding the recognition of the effects of the
decision in the financial statements, the Company is currently considering
its options under the Appeal.
Pension Benefit Regulatory Asset
In accordance with OEB rate orders, pension costs are recovered on a cash
basis as employer contributions are paid to the pension fund in accordance
with the Pension Benefits Act (Ontario). The Company recognizes the net
unfunded status of pension obligations on the Consolidated Balance Sheets
with an offset to the associated regulatory asset. A regulatory asset is
recognized because management considers it to be probable that pension
benefit costs will be recovered in the future through the rate-setting process.
The pension benefit obligation is remeasured to the present value of the
actuarially determined benefit obligation at each year end based on an
annual actuarial report, with an offset to the associated regulatory asset, to
the extent of the remeasurement adjustment. In the absence of rate-regulated
accounting, OCI would have been higher by $435 million (2017 – lower
by $80 million) and OM&A expenses would have been higher by
$1 million (2017 – $1 million).
Environmental
Hydro One records a liability for the estimated future expenditures
required to remediate environmental contamination. A regulatory asset is
recognized because management considers it to be probable environmental
expenditures will be recovered in the future through the rate-setting process.
The Company has recorded an equivalent amount as a regulatory asset.
In 2018, the environmental regulatory asset decreased by $15 million
(2017 – increased by $8 million) to reflect related changes in the
Company’s PCB and LAR environmental liabilities. The environmental
regulatory asset is amortized to results of operations based on the pattern
of actual expenditures incurred and charged to environmental liabilities.
The OEB has the discretion to examine and assess the xi and the timing of
recovery of all of Hydro One’s actual environmental expenditures. In the
absence of rate-regulated accounting, 2018 OM&A expenses would have
been lower by $15 million (2017 – higher by $8 million). In addition, 2018
amortization expense would have been lower by $22 million (2017 –
$24 million), and 2018 financing charges would have been higher by
$6 million (2017 – $8 million).
Foregone Revenue Deferral
As part of its September 2017 decision on Hydro One Networks’
transmission rate application for 2017 and 2018 rates, the OEB approved
the foregone revenue account to record the difference between revenue
earned under the rates approved as part of the decision, effective January 1,
2017, and revenue earned under the interim rates until the approved 2017
rates were implemented. The OEB approved a similar account for B2M LP
in June 2017 to record the difference between revenue earned under the
newly approved rates, effective January 1, 2017, and the revenue recorded
under the interim 2017 rates. The balances of these accounts were returned
to or recovered from ratepayers, respectively, over a one-year period
ending December 31, 2018. As part of its May 2018 decision, the OEB also
directed B2M LP to record in this account any revenue collected in 2018 in
excess of the final approved 2018 B2M LP revenue requirement.
Stock-based Compensation
The Company recognizes costs associated with share grant plans in a
regulatory asset as management considers it probable that share grant
plans’ costs will be recovered in the future through the rate-setting process.
In the absence of rate-regulated accounting, 2018 OM&A expenses would
have been higher by $1 million (2017 – $8 million). Share grant costs are
transferred to labour costs at the time the share grants vest and are issued,
and are recovered in rates in accordance with recovery of said labour costs.
83
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements Post-Retirement and Post-Employment Benefits
The Company recognizes the net unfunded status of post-retirement and
post-employment obligations on the Consolidated Balance Sheets with an
incremental offset to the associated regulatory assets. A regulatory asset
is recognized because management considers it to be probable that post-
retirement and post-employment benefit costs will be recovered in the future
through the rate-setting process. The post-retirement and post-employment
benefit obligation is remeasured to the present value of the actuarially
determined benefit obligation at each year end based on an annual
actuarial report, with an offset to the associated regulatory liability, to the
extent of the remeasurement adjustment. In the absence of rate-regulated
accounting, 2018 OCI would have been higher by $166 million (2017 –
$207 million).
Post-Retirement and Post-Employment Benefits –
Non-Service Cost
Hydro One applied to the OEB for a regulatory asset to record the
components other than service costs relating to its post-retirement and
post-employment benefits that would have previously been capitalized
to property, plant and equipment and intangible assets prior to adoption
of ASU 2017-07. In May 2018, the OEB approved the regulatory asset
for Hydro One Networks’ Transmission Business. It is expected that the
regulatory asset application for Hydro One Networks’ Distribution business
will be considered as part of Hydro One Networks’ application for
2018-2022 distribution rates, OEB approval of which is currently pending.
Hydro One has recorded the components other than service costs relating
to its post-retirement and post-employment benefits that would have been
capitalized to property, plant and equipment and intangible assets, in
the Post-Retirement and Post-Employment Benefits Non-Service Cost
Regulatory Asset.
Debt Premium
The value of debt assumed in the acquisition of HOSSM has been recorded
at fair value in accordance with US GAAP – Business Combinations. The
OEB allows for recovery of interest at the coupon rate of the Senior Secured
Bonds and a regulatory asset has been recorded for the difference between
the fair value and face value of this debt. The debt premium is recovered
over the remaining term of the debt.
Distribution System Code (DSC) Exemption
In June 2010, Hydro One Networks filed an application with the OEB
regarding the OEB’s new cost responsibility rules contained in the OEB’s
October 2009 Notice of Amendment to the DSC, with respect to the
connection of certain renewable generators that were already connected
or that had received a connection impact assessment prior to October 21,
2009. The application sought approval to record and defer the unanticipated
costs incurred by Hydro One Networks that resulted from the connection
of certain renewable generation facilities. The OEB ruled that identified
specific expenditures can be recorded in a deferral account subject to the
OEB’s review in subsequent Hydro One Networks distribution applications.
In 2015, the OEB also approved Hydro One’s request to discontinue this
deferral account. There were no additions to this regulatory account in
2018 or 2017. The remaining balance in this account at December 31,
2016, including accrued interest, was requested for recovery through
the 2018-2022 distribution rate application.
B2M LP Start-up Costs
In December 2015, OEB issued its decision on B2M LP’s application
for 2015-2019 and as part of the decision approved the recovery of
$8 million of start-up costs relating to B2M LP. The costs are being
recovered over a four-year period which began in 2016, in accordance
with the OEB decision.
Pension Cost Differential
A pension cost differential account was established for Hydro One
Networks’ transmission and distribution businesses to track the difference
between the actual pension expenses incurred and estimated pension
costs approved by the OEB. In September 2017, the OEB approved the
disposition of the transmission business portion of the total pension cost
differential account as at December 31, 2015, including accrued interest,
which was recovered over a two-year period ended December 31,
2018. The distribution business portion of the balance as at December 31,
2016, including accrued interest, was requested for recovery through the
2018-2022 distribution rate application. In the absence of rate-regulated
accounting, 2018 revenue would have been higher by $29 million (2017 –
$24 million).
Green Energy Expenditure Variance
In April 2010, the OEB requested the establishment of deferral
accounts which capture the difference between the revenue recorded
on the basis of Green Energy Plan expenditures incurred and the actual
recoveries received.
Retail Settlement Variance Account (RSVA)
Hydro One has deferred certain retail settlement variance amounts
under the provisions of Article 490 of the OEB’s Accounting Procedures
Handbook. The balance as at December 31, 2014, including accrued
interest, was requested for recovery through the 2018-2022 distribution
rate application.
External Revenue Variance
In May 2009, the OEB approved forecasted amounts related to export
service revenue, external revenue from secondary land use, and external
revenue from station maintenance and engineering and construction work.
In November 2012, the OEB again approved forecasted amounts related
to these revenue categories and extended the scope to encompass all other
external revenues. In September 2017, the OEB approved the disposition of
the external revenue variance account as at December 31, 2015, including
accrued interest, which was returned to customers over a two-year period
ended December 31, 2018. The external revenue variance account balance
reflects the excess of actual external revenues compared to the OEB-approved
forecasted amounts.
2015-2017 Rate Rider
In March 2015, as part of its decision on Hydro One Networks’ distribution
rate application for 2015-2019, the OEB approved the disposition of certain
deferral and variance accounts, including RSVAs and accrued interest.
The 2015-2017 Rate Rider account included the balances approved for
disposition by the OEB and was disposed of in accordance with the OEB
decision over a 32-month period ended December 31, 2017. The balance
remaining in the account represents an over-collection to be returned to
ratepayers in a future rate application and has not been requested in the
current distribution rate application.
84
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements CDM Deferral Variance Account
As part of Hydro One Networks’ application for 2013 and 2014 transmission
rates, Hydro One agreed to establish a new regulatory deferral variance
account to track the impact of actual CDM and demand response results on
the load forecast compared to the estimated load forecast included in the
revenue requirement. The balance in the CDM deferral variance account
related to the actual 2013 and 2014 CDM and demand response results
on load forecasts, which are inputs in the UTR, compared to the amounts
included in 2013 and 2014 revenue requirements, respectively. The balance
of the account at December 31, 2015, including interest, was approved
for disposition in the 2017-2018 transmission rate decision and returned
to customers over a 2-year period ended December 31, 2018.
13. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
December 31 (millions of dollars)
Accounts payable
Accrued liabilities
Accrued interest
Regulatory liabilities (Note 12)
14. OTHER LONG-TERM LIABILITIES
December 31 (millions of dollars)
Post-retirement and post-employment benefit liability (Note 19)
Pension benefit liability (Note 19)
Environmental liabilities (Note 20)
Long-term accounts payable
Asset retirement obligations (Note 21)
Other liabilities
15. DEBT AND CREDIT AGREEMENTS
2018
179
590
96
91
956
2018
1,417
547
139
12
10
10
2,135
2017
177
572
99
57
905
2017
1,519
981
168
13
9
17
2,707
Short-Term Notes and Credit Facilities
Hydro One meets its short-term liquidity requirements in part through the issuance of commercial paper under Hydro One Inc.’s Commercial Paper Program
which has a maximum authorized amount of $1.5 billion. These short-term notes are denominated in Canadian dollars with varying maturities up to 365 days.
The Commercial Paper Program is supported by Hydro One Inc.’s committed revolving credit facilities totalling $2.3 billion.
At December 31, 2018, Hydro One’s consolidated committed, unsecured and undrawn credit facilities (Operating Credit Facilities) totalling $2,550 million
consisted of the following:
(millions of dollars)
Hydro One Inc.
Revolving standby credit facility
Hydro One
Five-year senior, revolving term credit facility
Total
Maturity
Total
Amount
Amount
Drawn
June 2022
2,300
November 2021
250
2,550
—
—
—
The Company may use the credit facilities for working capital and general
corporate purposes. If used, interest on the credit facilities would apply
based on Canadian benchmark rates. The obligation of each lender to make
any credit extension under its credit facility is subject to various conditions
including that no event of default has occurred or would result from such
credit extension.
Subsidiary Debt Guarantee
Hydro One Holdings Limited (HOHL) is an indirect wholly-owned subsidiary
of Hydro One that may offer and sell debt securities. Any debt securities
issued by HOHL are fully and unconditionally guaranteed by the Company.
At December 31, 2018, no debt securities have been issued by HOHL.
85
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Long-Term Debt
The following table presents long-term debt outstanding at December 31, 2018 and 2017:
December 31 (millions of dollars)
2.78% Series 28 notes due 2018
Floating-rate Series 31 notes due 20191
1.48% Series 37 notes due 20192
4.40% Series 20 notes due 2020
1.62% Series 33 notes due 20202
1.84% Series 34 notes due 2021
2.57% Series 39 notes due 20212
3.20% Series 25 notes due 2022
2.97% Series 40 notes due 2025
2.77% Series 35 notes due 2026
7.35% Debentures due 2030
6.93% Series 2 notes due 2032
6.35% Series 4 notes due 2034
5.36% Series 9 notes due 2036
4.89% Series 12 notes due 2037
6.03% Series 17 notes due 2039
5.49% Series 18 notes due 2040
4.39% Series 23 notes due 2041
6.59% Series 5 notes due 2043
4.59% Series 29 notes due 2043
4.17% Series 32 notes due 2044
5.00% Series 11 notes due 2046
3.91% Series 36 notes due 2046
3.72% Series 38 notes due 2047
3.63% Series 41 notes due 2049
4.00% Series 24 notes due 2051
3.79% Series 26 notes due 2062
4.29% Series 30 notes due 2064
Hydro One Inc. long-term debt (a)
6.6% Senior Secured Bonds due 2023 (Principal amount – $107 million)
4.6% Note Payable due 2023 (Principal amount – $36 million)
HOSSM long-term debt (b)
Add: Net unamortized debt premiums
Add: Unrealized mark-to-market gain2
Less: Deferred debt issuance costs
Total long-term debt
2018
2017
—
228
500
300
350
500
300
600
350
500
400
500
385
600
400
300
500
300
315
435
350
325
350
450
750
225
310
50
750
228
500
300
350
500
—
600
—
500
400
500
385
600
400
300
500
300
315
435
350
325
350
450
—
225
310
50
10,573
9,923
129
39
168
136
40
176
10,741
10,099
13
(5)
(40)
14
(9)
(37)
10,709
10,067
1 The interest rates of the floating-rate notes are referenced to the three-month Canadian dollar bankers’ acceptance rate, plus a margin.
2
The unrealized mark-to-market net gain relates to $50 million of the Series 33 notes due 2020, $500 million Series 37 notes due 2019, and $300 million Series 39 notes due 2021.
The unrealized mark-to-market net gain is offset by a $5 million (2017 – $9 million) unrealized mark-to-market net loss on the related fixed-to-floating interest-rate swap agreements,
which are accounted for as fair value hedges.
86
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
(a) Hydro One Inc. long-term debt
At December 31, 2018, long-term debt of $10,573 million (2017 –
$9,923 million) was outstanding, the majority of which was issued under
Hydro One Inc.’s Medium Term Note (MTN) Program. The maximum
authorized principal amount of notes issuable under the current MTN
Program prospectus filed in March 2018 is $4.0 billion. At December 31,
2018, $2.6 billion remained available for issuance until April 2020.
In 2018, Hydro One Inc. issued long-term debt totalling $1.4 billion
(2017 – $nil) and repaid long-term debt of $750 million (2017 –
$600 million) under its MTN Program.
(b) HOSSM long-term debt
At December 31, 2018, long-term debt of $168 million (2017 –
$176 million), with a principal amount of $143 million (2017 –
$146 million) was issued by HOSSM. In 2018, no long-term debt
was issued (2017 – $nil), and $3 million (2017 – $2 million) of
long-term debt was repaid.
The total long-term debt is presented on the consolidated balance sheets as follows:
December 31 (millions of dollars)
Current liabilities:
Long-term debt payable within one year
Long-term liabilities:
Long-term debt
Total long-term debt
2018
2017
731
752
9,978
10,709
9,315
10,067
Principal and Interest Payments
Principal repayments, interest payments, and related weighted-average interest rates are summarized by year in the following table:
Years
2019
2020
2021
2022
2023
2024-2028
2029 and thereafter
Long-term
Debt Principal
Repayments
Interest
Payments
(millions of dollars) (millions of dollars)
Weighted
Average
Interest Rate
(%)
731
653
803
603
131
2,921
850
6,945
10,716
448
429
411
393
379
2,060
1,806
4,315
8,181
1.9
2.9
2.1
3.2
6.1
2.6
2.9
5.1
4.2
16. CONVERTIBLE DEBENTURES
As a result of the termination of the Merger agreement (see Note 4 – Business Combinations), on February 8, 2019, Hydro One redeemed the Convertible
Debentures and paid the holders of the instalment receipts $513 million ($333 per $1,000 principal amount) plus accrued and unpaid interest of $7 million.
The following table presents the change in convertible debentures during the years ended December 31, 2018 and 2017:
Year ended December 31 (millions of dollars)
Carrying value – beginning
Receipt of Initial Instalment, net of deferred financing costs
Amortization of deferred financing costs
Carrying value – ending
Face value – ending
2018
487
—
2
489
513
2017
—
486
1
487
513
87
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
On August 9, 2017, in connection with the Merger (see Note 4 – Business
Combinations), the Company completed the sale of $1,540 million
aggregate principal amount of 4.00% convertible unsecured subordinated
debentures (Convertible Debentures) represented by instalment receipts,
which included the exercise in full of the over-allotment option granted to
the underwriters to purchase an additional $140 million aggregate principal
amount of the Convertible Debentures (Debenture Offering).
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
AND RISK MANAGEMENT
Fair value is considered to be the exchange price in an orderly transaction
between market participants to sell an asset or transfer a liability at the
measurement date. The fair value definition focuses on an exit price, which
is the price that would be received in the sale of an asset or the amount that
would be paid to transfer a liability.
The Convertible Debentures were sold on an instalment basis at a price of
$1,000 per Convertible Debenture, of which $333 (Initial Instalment) was
paid on closing of the Debenture Offering and the remaining $667 (Final
Instalment) was payable on a date (Final Instalment Date) to be fixed by
the Company following satisfaction of conditions precedent to the closing
of the acquisition of Avista Corporation. The gross proceeds received from
the Initial Instalment were $513 million. The Company incurred financing
costs of $27 million, which were being amortized to financing charges over
approximately 10 years, the contractual term of the Convertible Debentures,
using the effective interest rate method.
Hydro One classifies its fair value measurements based on the following
hierarchy, as prescribed by the accounting guidance for fair value, which
prioritizes the inputs to valuation techniques used to measure fair value into
three levels:
Level 1 inputs are unadjusted quoted prices in active markets for identical
assets or liabilities that Hydro One has the ability to access. An active
market for the asset or liability is one in which transactions for the asset
or liability occur with sufficient frequency and volume to provide ongoing
pricing information.
The Convertible Debentures maturity date was September 30, 2027. A
coupon rate of 4% was paid on the $1,540 million aggregate principal
amount of the Convertible Debentures, and based on the carrying value of
the Initial Instalment, this translated into an effective annual yield of 12%.
After the Final Instalment Date, the interest rate would be 0%. The interest
expense recorded in 2018 was $62 million (2017 – $24 million).
At the option of the holders and provided that payment of the Final
Instalment had been made, each Convertible Debenture would be
convertible into common shares of the Company at any time on or after the
Final Instalment Date, but prior to the earlier of maturity or redemption by
the Company, at a conversion price of $21.40 per common share, being a
conversion rate of 46.7290 common shares per $1,000 principal amount
of Convertible Debentures.
The conversion feature met the definition of a Beneficial Conversion Feature
(BCF), with an intrinsic value of approximately $92 million at the date of
issuance. Due to the contingency associated with the debentureholders’
ability to exercise the conversion, the BCF has not been recognized, and
as a result of the subsequent redemption of the Convertible Debentures on
February 8, 2019, there will be no recognition.
Level 2 inputs are those other than quoted market prices that are observable,
either directly or indirectly, for an asset or liability. Level 2 inputs include, but
are not limited to, quoted prices for similar assets or liabilities in an active
market, quoted prices for identical or similar assets or liabilities in markets
that are not active and inputs other than quoted market prices that are
observable for the asset or liability, such as interest-rate curves and yield
curves observable at commonly quoted intervals, volatilities, credit risk and
default rates. A Level 2 measurement cannot have more than an insignificant
portion of the valuation based on unobservable inputs.
Level 3 inputs are any fair value measurements that include unobservable
inputs for the asset or liability for more than an insignificant portion of the
valuation. A Level 3 measurement may be based primarily on Level 2 inputs.
Non-Derivative Financial Assets and Liabilities
At December 31, 2018 and 2017, the Company’s carrying amounts of
cash and cash equivalents, accounts receivable, due from related parties,
short-term notes payable, accounts payable, and due to related parties are
representative of fair value due to the short-term nature of these instruments.
Fair Value Measurements of Long-Term Debt
The fair values and carrying values of the Company’s long-term debt at December 31, 2018 and 2017 are as follows:
December 31 (millions of dollars)
Long-term debt measured at fair value:
$50 million of MTN Series 33 notes
$500 million MTN Series 37 notes
$300 million MTN Series 39 notes
Other notes and debentures
Long-term debt, including current portion
88
2018
Carrying Value
2018
Fair Value
2017
Carrying Value
2017
Fair Value
49
495
301
9,864
10,709
49
495
301
10,820
11,665
49
492
—
9,526
10,067
49
492
—
11,027
11,568
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Fair Value Measurements of Derivative Instruments
At December 31, 2018, Hydro One Inc. had interest-rate swaps with a total
notional amount of $850 million (2017 – $550 million) that were used to
convert fixed-rate debt to floating-rate debt. These swaps are classified
as fair value hedges. Hydro One Inc.’s fair value hedge exposure was
approximately 8% (2017 – 6%) of its total long-term debt. At December 31,
2018, Hydro One Inc. had the following interest-rate swaps designated as
fair value hedges:
• a $50 million fixed-to-floating interest-rate swap agreement to convert
$50 million of the $350 million MTN Series 33 notes maturing April 30,
2020 into three-month variable rate debt;
• two $125 million and one $250 million fixed-to-floating interest-rate swap
agreements to convert the $500 million MTN Series 37 notes maturing
November 18, 2019 into three-month variable rate debt; and
• a $300 million fixed-to-floating interest-rate swap agreement to convert
the $300 million MTN Series 39 notes maturing June 25, 2021 into
three-month variable rate debt.
At December 31, 2018 and 2017, the Company had no interest-rate swaps
classified as undesignated contracts.
In October 2017, the Company entered into a deal-contingent foreign
exchange forward contract (foreign exchange contract) to convert
$1.4 billion Canadian to US dollars at an initial forward rate of 1.27486
Canadian per 1.00 US dollars, and a range up to 1.28735 Canadian per
1.00 US dollars based on the settlement date. The contract was contingent
on the Company closing the proposed Merger (see Note 4 – Business
Combinations) and was intended to mitigate the foreign currency risk related
to the portion of the Merger purchase price financed with the issuance of
Convertible Debentures. This contract is an economic hedge and does not
qualify for hedge accounting. It has been accounted for as an undesignated
contract with changes in fair value being recorded in earnings as they
occur. As a result of the termination of the Merger agreement (see Note 4 –
Business Combinations), no payment is due or payable by Hydro One on
the foreign exchange contract.
Fair Value Hierarchy
The fair value hierarchy of financial assets and liabilities at December 31, 2018 and 2017 is as follows:
December 31, 2018 (millions of dollars)
Assets:
Cash and cash equivalents
Derivative instrument
Foreign exchange contract
Liabilities:
Short-term notes payable
Long-term debt, including current portion
Convertible debentures
Derivative instruments
Fair value hedges – interest-rate swaps
December 31, 2017 (millions of dollars)
Assets:
Cash and cash equivalents
Liabilities:
Short-term notes payable
Long-term debt, including current portion
Convertible debentures
Derivative instruments
Fair value hedges – interest-rate swaps
Foreign exchange contract
5
5
—
5
12,455
13,413
1,743
11,670
Carrying
Value
483
22
505
Fair
Value
483
22
505
1,252
10,709
489
1,252
11,665
491
Carrying
Value
25
25
926
10,067
487
9
3
Fair
Value
25
25
926
11,568
574
9
3
Level 1
Level 2
Level 3
483
—
483
1,252
—
491
—
—
—
—
11,665
—
Level 1
Level 2
Level 3
25
25
926
—
574
—
—
—
—
—
11,568
—
9
—
—
22
22
—
—
—
—
—
—
—
—
—
—
—
3
3
89
11,492
13,080
1,500
11,577
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Cash and cash equivalents include cash and short-term investments. The
carrying values are representative of fair value because of the short-term
nature of these instruments.
The fair value of the hedged portion of the long-term debt is primarily
based on the present value of future cash flows using a swap yield curve to
determine the assumption for interest rates. The fair value of the unhedged
portion of the long-term debt is based on unadjusted period-end market
prices for the same or similar debt of the same remaining maturities.
The fair value of the convertible debentures is based on their closing price
on December 31, 2018, as posted on the Toronto Stock Exchange.
The Company uses derivative instruments as an economic hedge for foreign
exchange risk. The value of the foreign exchange contract is derived using
valuation models commonly used for derivatives. These valuation models
require a variety of inputs, including contractual terms, forward price yield
curves, probability of closing the Merger, and the contract settlement date.
The Company’s valuation models also reflect measurements for credit
risk. The fair value of the foreign exchange contract includes significant
unobservable inputs, and therefore has been classified accordingly
as Level 3. The significant unobservable inputs used in the fair value
measurement of the foreign exchange contract relates to the assessment
of probability of closing the Merger and the contract settlement date.
Changes in the Fair Value of Financial Instruments Classified in Level 3
The following table summarizes the changes in fair value of financial instruments classified in Level 3 for the years ended December 31, 2018 and 2017.
Year ended December 31 (millions of dollars)
Fair value of asset (liability) – beginning
Unrealized gain (loss) on foreign exchange contract included in financing charges
Fair value of asset (liability) – ending
2018
2017
(3)
25
22
—
(3)
(3)
There were no transfers between any of the fair value levels during the years
ended December 31, 2018 or 2017.
Risk Management
Exposure to market risk, credit risk and liquidity risk arises in the normal
course of the Company’s business.
Market Risk
Market risk refers primarily to the risk of loss which results from changes in
costs, foreign exchange rates and interest rates. The Company is exposed
to fluctuations in interest rates, as its regulated return on equity is derived
using a formulaic approach that takes anticipated interest rates into account.
The Company is not currently exposed to material commodity price risk.
The Company uses a combination of fixed and variable-rate debt to
manage the mix of its debt portfolio. The Company also uses derivative
financial instruments to manage interest-rate risk. The Company utilizes
interest-rate swaps, which are typically designated as fair value hedges,
as a means to manage its interest rate exposure to achieve a lower cost
of debt. The Company may also utilize interest-rate derivative instruments
to lock in interest-rate levels in anticipation of future financing.
A hypothetical 100 basis points increase in interest rates associated with
variable-rate debt would not have resulted in a significant decrease in
Hydro One’s net income for the years ended December 31, 2018 and 2017.
The Company was exposed to foreign exchange fluctuations as a result of
entering into a foreign exchange contract. This agreement was intended
to mitigate the foreign currency risk related to the portion of the Avista
Corporation acquisition purchase price financed with the issuance of
Convertible Debentures. As a result of the termination of the Merger
agreement (see Note 4 – Business Combinations), no payment is due
or receivable by Hydro One on the foreign exchange contract.
For derivative instruments that are designated and qualify as fair value
hedges, the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged
risk are recognized in the Consolidated Statements of Operations and
Comprehensive Income. The net unrealized loss (gain) on the hedged debt
and the related interest-rate swaps for the years ended December 31, 2018
and 2017 was not material.
Credit Risk
Financial assets create a risk that a counterparty will fail to discharge an
obligation, causing a financial loss. At December 31, 2018 and 2017, there
were no significant concentrations of credit risk with respect to any class
of financial assets. The Company’s revenue is earned from a broad base
of customers. As a result, Hydro One did not earn a material amount of
revenue from any single customer. At December 31, 2018 and 2017, there
was no material accounts receivable balance due from any single customer.
At December 31, 2018, the Company’s provision for bad debts was $21 million
(2017 – $29 million). Adjustments and write-offs are determined on the
basis of a review of overdue accounts, taking into consideration historical
experience. At December 31, 2018, approximately 5% (2017 – 5%) of
the Company’s net accounts receivable were outstanding for more than
60 days.
90
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Hydro One manages its counterparty credit risk through various techniques
including: entering into transactions with highly rated counterparties; limiting
total exposure levels with individual counterparties; entering into master
agreements which enable net settlement and the contractual right of offset;
and monitoring the financial condition of counterparties. The Company
monitors current credit exposure to counterparties both on an individual and
an aggregate basis. The Company’s credit risk for accounts receivable is
limited to the carrying amounts on the Consolidated Balance Sheets.
Derivative financial instruments result in exposure to credit risk since there
is a risk of counterparty default. The credit exposure of derivative contracts,
before collateral, is represented by the fair value of contracts at the reporting
date. At December 31, 2018 and 2017, the counterparty credit risk exposure
on the fair value of these interest-rate swap contracts was not material.
At December 31, 2018, Hydro One’s credit exposure for all derivative
instruments, and applicable payables and receivables, had a credit rating
of investment grade, with four financial institutions as the counterparties.
Liquidity Risk
Liquidity risk refers to the Company’s ability to meet its financial obligations
as they come due. Hydro One meets its short-term operating liquidity
requirements using cash and cash equivalents on hand, funds from
18. CAPITAL MANAGEMENT
operations, the issuance of commercial paper, and the Operating Credit
Facilities. The short-term liquidity under the Commercial Paper Program,
Operating Credit Facilities, and anticipated levels of funds from operations
are expected to be sufficient to fund normal operating requirements.
On June 18, 2018, Hydro One filed a short form base shelf prospectus
(Universal Base Shelf Prospectus) with securities regulatory authorities in
Canada to replace the universal base shelf prospectus that expired on
April 30, 2018. The Universal Base Shelf Prospectus allows Hydro One to
offer, from time to time in one or more public offerings, up to $4.0 billion
of debt, equity or other securities, or any combination thereof, during the
25-month period ending on July 18, 2020. On November 23, 2018, HOHL,
an indirect wholly-owned subsidiary of Hydro One, filed a short form
base shelf prospectus (US Debt Shelf Prospectus) with securities regulatory
authorities in Canada and the US for the purposes of, but not limited to,
funding a portion of the cash purchase price of the Merger. The US Debt
Shelf Prospectus allows HOHL to offer, from time to time in one or more
public offerings, up to US$3.0 billion of debt securities, unconditionally
guaranteed by Hydro One, during the 25-month period ending on
December 23, 2020. At December 31, 2018, no securities have been issued
under the Universal Base Shelf Prospectus or the US Debt Shelf Prospectus.
The Company’s objectives with respect to its capital structure are to maintain effective access to capital on a long-term basis at reasonable rates, and to deliver
appropriate financial returns. In order to ensure ongoing access to capital, the Company targets to maintain strong credit quality. At December 31, 2018 and
2017, the Company’s capital structure was as follows:
December 31 (millions of dollars)
Long-term debt payable within one year
Short-term notes payable
Less: cash and cash equivalents
Long-term debt
Convertible debentures
Preferred shares
Common shares
Retained earnings
Total capital
2018
731
1,252
(483)
1,500
9,978
489
418
5,643
3,459
2017
752
926
(25)
1,653
9,315
487
418
5,631
4,090
21,487
21,594
Hydro One Inc. and HOSSM have customary covenants typically
associated with long-term debt. Long-term debt and credit facility covenants
limit permissible debt to 75% of its total capitalization, limit the ability to
sell assets and impose a negative pledge provision, subject to customary
exceptions. At December 31, 2018, the Company was in compliance with
all financial covenants and limitations associated with the outstanding
borrowings and credit facilities.
91
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
19. PENSION AND POST-RETIREMENT
AND POST-EMPLOYMENT BENEFITS
Hydro One has a defined benefit pension plan (Pension Plan), a DC Plan,
a supplemental pension plan (Supplemental Plan), and post-retirement
and post-employment benefit plans.
DC Plan
Hydro One established a DC Plan effective January 1, 2016. The DC Plan
covers eligible management employees hired on or after January 1, 2016,
as well as management employees hired before January 1, 2016 who were
not eligible or had not irrevocably elected to join the Pension Plan as of
September 30, 2015. Members of the DC Plan have an option to contribute
4%, 5% or 6% of their pensionable earnings, with matching contributions by
Hydro One up to an annual contribution limit. There is also a Supplemental
DC Plan that provides members of the DC Plan with employer contributions
beyond the limitations imposed by the Income Tax Act (Canada) in the form
of credits to a notional account. Hydro One contributions to the DC Plan for
the year ended December 31, 2018 were $1 million (2017 – $1 million).
Pension Plan, Supplemental Plan, and Post-Retirement
and Post-Employment Plans
The Pension Plan is a defined benefit contributory plan which covers
eligible regular employees of Hydro One and its subsidiaries. The Pension
Plan provides benefits based on highest three-year average pensionable
earnings. For management employees who commenced employment on
or after January 1, 2004, and for the Society of United Professionals
(Society)-represented staff hired after November 17, 2005, benefits are
based on highest five-year average pensionable earnings. After retirement,
pensions are indexed to inflation. Membership in the Pension Plan was
closed to management employees who were not eligible or had not
irrevocably elected to join the Pension Plan as of September 30, 2015.
These employees are eligible to join the DC Plan.
Company and employee contributions to the Pension Plan are based on
actuarial reports, including valuations performed at least every three years,
and actual or projected levels of pensionable earnings, as applicable.
Annual Pension Plan contributions for 2018 were $75 million (2017 –
$87 million). Estimated annual Pension Plan contributions for the years
2019, 2020, 2021, 2022, 2023 and 2024 are approximately $78 million,
$77 million, $78 million, $79 million, $81 million and $83 million,
respectively. The most recent actuarial valuation was performed effective
December 31, 2017, and the next actuarial valuation will be performed no
later than effective December 31, 2020. Contributions are payable one month
in arrears. All of the contributions are expected to be in the form of cash.
The Supplemental Plan provides members of the Pension Plan with benefits
that would have been earned and payable under the Pension Plan beyond
the limitations imposed by the Income Tax Act (Canada). The Supplemental
Plan obligation is included with other post-retirement and post-employment
benefit obligations on the Consolidated Balance Sheets.
Hydro One recognizes the overfunded or underfunded status of the Pension
Plan, and post-retirement and post-employment benefit plans (Plans) as
an asset or liability on its Consolidated Balance Sheets, with offsetting
regulatory assets and liabilities as appropriate. The underfunded benefit
obligations for the Plans, in the absence of regulatory accounting, would
be recognized in AOCI. The impact of changes in assumptions used to
measure pension, post-retirement and post-employment benefit obligations
is generally recognized over the expected average remaining service period
of the employees. The measurement date for the Plans is December 31.
The following tables provide the components of the unfunded status of the Company’s Plans at December 31, 2018 and 2017:
Year ended December 31 (millions of dollars)
Change in projected benefit obligation
Projected benefit obligation, beginning of year
Current service cost
Employee contributions
Interest cost
Benefits paid
Net actuarial loss (gain)
Recognition of prior service
Projected benefit obligation, end of year
Change in plan assets
Fair value of plan assets, beginning of year
Actual return on plan assets
Benefits paid
Employer contributions
Employee contributions
Administrative expenses
Fair value of plan assets, end of year
Unfunded status
92
Pension Benefits
2017
2018
Post-Retirement and
Post-Employment Benefits
2017
2018
8,258
176
52
282
(362)
(654)
—
7,752
7,277
190
(362)
75
52
(27)
7,205
547
7,774
147
49
304
(368)
352
—
8,258
6,874
662
(368)
87
49
(27)
7,277
981
1,565
50
—
54
(49)
(158)
3
1,465
—
—
(49)
49
—
—
—
1,690
49
—
67
(44)
(197)
—
1,565
—
—
(34)
34
—
—
—
1,465
1,565
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Hydro One presents its benefit obligations and plan assets net on its Consolidated Balance Sheets as follows:
December 31 (millions of dollars)
Other assets1
Accrued liabilities
Pension benefit liability
Post-retirement and post-employment benefit liability2
Net unfunded status
1 Represents the funded status of HOSSM defined benefit pension plan.
2 Includes $7 million (2017 – $7 million) relating to HOSSM post-employment benefit plans.
Pension Benefits
2017
Post-Retirement and
Post-Employment Benefits
2017
2018
1
—
981
—
980
—
55
—
1,417
1,472
—
53
—
1,519
1,572
2018
3
—
547
—
544
The funded or unfunded status of the Plans refers to the difference between the fair value of plan assets and the PBO for the Plans. The funded/unfunded status
changes over time due to several factors, including contribution levels, assumed discount rates and actual returns on plan assets.
The following table provides the PBO, accumulated benefit obligation (ABO) and fair value of plan assets for the Pension Plan:
December 31 (millions of dollars)
PBO
ABO
Fair value of plan assets
2018
7,752
7,144
7,205
2017
8,258
7,614
7,277
On an ABO basis, the Pension Plan was funded at 101% at December 31, 2018 (2017 – 96%). On a PBO basis, the Pension Plan was funded at 93% at
December 31, 2018 (2017 – 88%). The ABO differs from the PBO in that the ABO includes no assumption about future compensation levels.
Components of Net Periodic Benefit Costs
The following table provides the components of the net periodic benefit costs for the years ended December 31, 2018 and 2017 for the Pension Plan:
Year ended December 31 (millions of dollars)
Current service cost
Interest cost
Expected return on plan assets, net of expenses
Amortization of actuarial losses
Net periodic benefit costs
Charged to results of operations1
2018
176
282
(467)
84
75
32
2017
147
304
(442)
79
88
39
1
The Company accounts for pension costs consistent with their inclusion in OEB-approved rates. During the year ended December 31, 2018, pension costs of $75 million (2017 – $87
million) were attributed to labour, of which $32 million (2017 – $39 million) was charged to operations, and $43 million (2017 – $48 million) was capitalized as part of the cost of
property, plant and equipment and intangible assets.
The following table provides the components of the net periodic benefit costs for the years ended December 31, 2018 and 2017 for the post-retirement and
post-employment benefit plans:
Year ended December 31 (millions of dollars)
Current service cost
Interest cost
Amortization of actuarial losses
Recognition of prior service
Net periodic benefit costs
Charged to results of operations
2018
2017
50
53
15
3
121
52
49
67
16
—
132
59
93
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Assumptions
The measurement of the obligations of the Plans and the costs of providing
benefits under the Plans involves various factors, including the development
of valuation assumptions and accounting policy elections. When developing
the required assumptions, the Company considers historical information as
well as future expectations. The measurement of benefit obligations and
costs is impacted by several assumptions including the discount rate applied
to benefit obligations, the long-term expected rate of return on plan assets,
Hydro One’s expected level of contributions to the Plans, the incidence of
mortality, the expected remaining service period of plan participants, the
level of compensation and rate of compensation increases, employee age,
length of service, and the anticipated rate of increase of health care costs,
among other factors. The impact of changes in assumptions used to measure
the obligations of the Plans is generally recognized over the expected
average remaining service period of the plan participants. In selecting
the expected rate of return on plan assets, Hydro One considers historical
economic indicators that impact asset returns, as well as expectations
regarding future long-term capital market performance, weighted by
target asset class allocations. In general, equity securities, real estate
and private equity investments are forecasted to have higher returns than
fixed-income securities.
The following weighted average assumptions were used to determine the benefit obligations at December 31, 2018 and 2017:
Year ended December 31
Significant assumptions:
Weighted average discount rate
Rate of compensation scale escalation (long-term)
Rate of cost of living increase
Rate of increase in health care cost trends1
Pension Benefits
2017
2018
Post-Retirement and
Post-Employment Benefits
2017
2018
3.90%
2.50%
2.00%
—
3.40%
2.50%
2.00%
—
4.00%
2.50%
2.00%
4.04%
3.40%
2.50%
2.00%
4.04%
1 5.19% per annum in 2019, grading down to 4.04% per annum in and after 2031 (2017 – 5.26% per annum in 2018, grading down to 4.04% per annum in and after 2031).
The following weighted average assumptions were used to determine the net periodic benefit costs for the years ended December 31, 2018 and 2017.
Assumptions used to determine current year-end benefit obligations are the assumptions used to estimate the subsequent year’s net periodic benefit costs.
Year ended December 31
Pension Benefits:
Weighted average expected rate of return on plan assets
Weighted average discount rate
Rate of compensation scale escalation (long-term)
Rate of cost of living increase
Average remaining service life of employees (years)
Post-Retirement and Post-Employment Benefits:
Weighted average discount rate
Rate of compensation scale escalation (long-term)
Rate of cost of living increase
Average remaining service life of employees (years)
Rate of increase in health care cost trends1
2018
2017
6.50%
3.40%
2.50%
2.00%
15
3.40%
2.50%
2.00%
15.5
4.04%
6.50%
3.90%
2.50%
2.00%
15
3.90%
2.50%
2.00%
15.2
4.36%
1 5.26% per annum in 2018, grading down to 4.04% per annum in and after 2031 (2017 – 6.25% per annum in 2017, grading down to 4.36% per annum in and after 2031).
The discount rate used to determine the current year pension obligation and the subsequent year’s net periodic benefit costs is based on a yield curve
approach. Under the yield curve approach, expected future benefit payments for each plan are discounted by a rate on a third-party bond yield curve
corresponding to each duration. The yield curve is based on “AA” long-term corporate bonds. A single discount rate is calculated that would yield the
same present value as the sum of the discounted cash flows.
The effect of a 1% change in health care cost trends on the PBO for the post-retirement and post-employment benefits at December 31, 2018 and 2017
is as follows:
December 31 (millions of dollars)
Projected benefit obligation:
Effect of a 1% increase in health care cost trends
Effect of a 1% decrease in health care cost trends
2018
2017
230
(175)
250
(189)
94
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
The effect of a 1% change in health care cost trends on the service cost and interest cost for the post-retirement and post-employment benefits for the years
ended December 31, 2018 and 2017 is as follows:
Year ended December 31 (millions of dollars)
Service cost and interest cost:
Effect of a 1% increase in health care cost trends
Effect of a 1% decrease in health care cost trends
2018
2017
23
(16)
29
(20)
The following approximate life expectancies were used in the mortality assumptions to determine the PBO for the pension and post-retirement and post-
employment plans at December 31, 2018 and 2017:
December 31, 2018
Life expectancy at 65 for a member currently at
December 31, 2017
Life expectancy at 65 for a member currently at
Age 65
Age 45
Age 65
Age 45
Male
22
Female
25
Male
23
Female
25
Male
22
Female
24
Male
23
Female
24
Estimated Future Benefit Payments
At December 31, 2018, estimated future benefit payments to the participants of the Plans were:
(millions of dollars)
2019
2020
2021
2022
2023
2024 through to 2028
Total estimated future benefit payments through to 2028
Post-Retirement
and
Pension Post-Employment
Benefits
Benefits
335
343
352
360
367
1,915
3,672
56
58
59
60
61
326
620
Components of Regulatory Assets
A portion of actuarial gains and losses and prior service costs is recorded within regulatory assets on Hydro One’s Consolidated Balance Sheets to reflect the
expected regulatory inclusion of these amounts in future rates, which would otherwise be recorded in OCI. The following table provides the actuarial gains
and losses and prior service costs recorded within regulatory assets:
Year ended December 31 (millions of dollars)
Pension Benefits:
Actuarial loss (gain) for the year
Amortization of actuarial losses
Post-Retirement and Post-Employment Benefits:
Actuarial loss (gain) for the year
Amortization of actuarial losses
Amortization of prior service cost
Amounts not subject to regulatory treatment
2018
2017
(350)
(84)
(434)
(158)
(15)
(3)
10
(166)
159
(79)
80
(197)
(16)
—
6
(207)
95
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
The following table provides the components of regulatory assets that have not been recognized as components of net periodic benefit costs for the years
ended December 31, 2018 and 2017:
Year ended December 31 (millions of dollars)
Pension Benefits:
Actuarial loss
Post-Retirement and Post-Employment Benefits:
Actuarial loss (gain)
2018
2017
547
(130)
981
36
The following table provides the components of regulatory assets at December 31 that are expected to be amortized as components of net periodic benefit
costs in the following year:
December 31 (millions of dollars)
Actuarial loss (gain)
Pension Plan Assets
Investment Strategy
On a regular basis, Hydro One evaluates its investment strategy to ensure
that Pension Plan assets will be sufficient to pay Pension Plan benefits when
due. As part of this ongoing evaluation, Hydro One may make changes
to its targeted asset allocation and investment strategy. The Pension Plan is
managed at a net asset level. The main objective of the Pension Plan is to
sustain a certain level of net assets in order to meet the pension obligations
of the Company. The Pension Plan fulfills its primary objective by adhering
to specific investment policies outlined in its Summary of Investment Policies
Pension Benefits
2017
Post-Retirement and
Post-Employment Benefits
2017
2018
84
(1)
2
2018
55
and Procedures (SIPP), which is reviewed and approved by the Human
Resource Committee of Hydro One’s Board of Directors. The Company
manages net assets by engaging knowledgeable external investment
managers who are charged with the responsibility of investing existing
funds and new funds (current year’s employee and employer contributions)
in accordance with the approved SIPP. The performance of the managers
is monitored through a governance structure. Increases in net assets are
a direct result of investment income generated by investments held by the
Pension Plan and contributions to the Pension Plan by eligible employees
and by the Company. The main use of net assets is for benefit payments to
eligible Pension Plan members.
Pension Plan Asset Mix
At December 31, 2018, the Pension Plan target asset allocations and weighted average asset allocations were as follows:
Equity securities
Debt securities
Other1
1 Other investments include real estate and infrastructure investments.
At December 31, 2018, the Pension Plan held $18 million (2017 –
$11 million) Hydro One corporate bonds and $546 million (2017 –
$415 million) of debt securities of the Province.
Concentrations of Credit Risk
Hydro One evaluated its Pension Plan’s asset portfolio for the existence
of significant concentrations of credit risk as at December 31, 2018 and
2017. Concentrations that were evaluated include, but are not limited to,
investment concentrations in a single entity, concentrations in a type of
industry, and concentrations in individual funds. At December 31, 2018
and 2017, there were no significant concentrations (defined as greater
than 10% of plan assets) of risk in the Pension Plan’s assets.
Target
Allocation (%)
Pension
Plan Assets (%)
45
35
20
100
50
41
9
100
The Pension Plan’s Statement of Investment Beliefs and Guidelines provides
guidelines and restrictions for eligible investments taking into account credit
ratings, maximum investment exposure and other controls in order to limit the
impact of this risk. The Pension Plan manages its counterparty credit risk with
respect to bonds by investing in investment-grade and government bonds
and with respect to derivative instruments by transacting only with highly
rated financial institutions, and also by ensuring that exposure is diversified
across counterparties. The risk of default on transactions in listed securities
is considered minimal, as the trade will fail if either party to the transaction
does not meet its obligation.
96
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Fair Value Measurements
The following tables present the Pension Plan assets and liabilities measured and recorded at fair value on a recurring basis and their level within the fair value
hierarchy at December 31, 2018 and 2017:
December 31, 2018 (millions of dollars)
Pooled funds
Cash and cash equivalents
Short-term securities
Derivative instruments
Corporate shares – Canadian
Corporate shares – Foreign
Bonds and debentures – Canadian
Bonds and debentures – Foreign
Total fair value of plan assets1
Level 1
—
210
—
—
115
3,222
—
—
3,547
Level 2
21
—
78
(7)
—
183
2,506
197
2,978
Level 3
651
—
—
—
—
—
—
—
651
Total
672
210
78
(7)
115
3,405
2,506
197
7,176
1
At December 31, 2018, the total fair value of Pension Plan assets and liabilities excludes $35 million of interest and dividends receivable, $10 million of pension administration expenses
payable, $6 million of sold investments receivable, and $2 million of purchased investments payable.
December 31, 2017 (millions of dollars)
Pooled funds
Cash and cash equivalents
Short-term securities
Derivative instruments
Corporate shares – Canadian
Corporate shares – Foreign
Bonds and debentures – Canadian
Bonds and debentures – Foreign
Total fair value of plan assets1
Level 1
—
153
—
—
921
3,307
—
—
4,381
Level 2
16
—
109
5
—
125
1,879
194
2,328
Level 3
549
—
—
—
—
—
—
—
549
Total
565
153
109
5
921
3,432
1,879
194
7,258
1
At December 31, 2017, the total fair value of Pension Plan assets and liabilities excludes $28 million of interest and dividends receivable, $10 million of pension administration expenses
payable, $1 million of sold investments receivable, and $1 million of purchased investments payable.
See Note 17 – Fair Value of Financial Instruments and Risk Management for a description of levels within the fair value hierarchy.
Changes in the Fair Value of Financial Instruments Classified in Level 3
The following table summarizes the changes in fair value of financial instruments classified in Level 3 for the years ended December 31, 2018 and 2017. The
Pension Plan classifies financial instruments as Level 3 when the fair value is measured based on at least one significant input that is not observable in the
markets or due to lack of liquidity in certain markets. The gains and losses presented in the table below could, therefore, include changes in fair value based on
both observable and unobservable inputs. The Level 3 financial instruments are comprised of pooled funds whose valuations are provided by the investment
managers. Sensitivity analysis is not provided as the underlying assumptions used by the investment managers are not available.
Year ended December 31 (millions of dollars)
Fair value, beginning of year
Realized and unrealized gains (losses)
Purchases
Sales and disbursements
Fair value, end of year
2018
549
59
90
(47)
651
2017
425
(31)
171
(16)
549
There were no significant transfers between any of the fair value levels
during the years ended December 31, 2018 and 2017.
Valuation Techniques Used to Determine Fair Value
Pooled funds mainly consist of private equity, real estate and infrastructure
investments. Private equity investments represent private equity funds that
invest in operating companies that are not publicly traded on a stock
exchange. Investment strategies in private equity include limited partnerships
in businesses that are characterized by high internal growth and operational
efficiencies, venture capital, leveraged buyouts and special situations such
as distressed investments. Real estate and infrastructure investments represent
funds that invest in real assets which are not publicly traded on a stock
exchange. Investment strategies in real estate include limited partnerships
that seek to generate a total return through income and capital growth by
investing primarily in global and Canadian limited partnerships. Investment
strategies in infrastructure include limited partnerships in core infrastructure
assets focusing on assets that generate stable, long-term cash flows and
deliver incremental returns relative to conventional fixed-income investments.
97
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Private equity, real estate and infrastructure valuations are reported by the
fund manager and are based on the valuation of the underlying investments
which includes inputs such as cost, operating results, discounted future cash
flows and market-based comparable data. Since these valuation inputs are
not highly observable, private equity and infrastructure investments have
been categorized as Level 3 within pooled funds.
Cash equivalents consist of demand cash deposits held with banks and
cash held by the investment managers. Cash equivalents are categorized
as Level 1.
Short-term securities are valued at cost plus accrued interest, which
approximates fair value due to their short-term nature. Short-term securities
are categorized as Level 2.
Derivative instruments are used to hedge the Pension Plan’s foreign
currency exposure back to Canadian dollars. The notional principal
amount of contracts outstanding as at December 31, 2018 was $299 million
(2017 – $279 million), the most significant currencies being hedged against
the Canadian dollar are the United States dollar, Euro, and Japanese
Yen. The net realized loss on contracts for the year ended December 31,
2018 was $7 million (2017 – $1 million net realized gain). The terms to
maturity of the forward exchange contracts at December 31, 2018 are
within three months. The fair value is determined using standard interpolation
methodology primarily based on the World Markets exchange rates.
Derivative instruments are categorized as Level 2.
Corporate shares are valued based on quoted prices in active markets
and are categorized as Level 1. Corporate shares which are valued based
on quoted prices in active markets, but held within a pension investment
holding company, are categorized as Level 2. Investments denominated in
foreign currencies are translated into Canadian currency at year-end rates
of exchange.
Bonds and debentures are presented at published closing trade quotations,
and are categorized as Level 2.
20. ENVIRONMENTAL LIABILITIES
The following tables show the movements in environmental liabilities for the years ended December 31, 2018 and 2017:
Year ended December 31, 2018 (millions of dollars)
Environmental liabilities – beginning
Interest accretion
Expenditures
Revaluation adjustment
Environmental liabilities – ending
Less: current portion
Year ended December 31, 2017 (millions of dollars)
Environmental liabilities – beginning
Interest accretion
Expenditures
Revaluation adjustment
Environmental liabilities – ending
Less: current portion
PCB
134
5
(16)
(15)
108
(15)
93
PCB
143
6
(16)
1
134
(20)
114
LAR
62
1
(6)
—
57
(11)
46
LAR
61
2
(8)
7
62
(8)
54
Total
196
6
(22)
(15)
165
(26)
139
Total
204
8
(24)
8
196
(28)
168
The following tables show the reconciliation between the undiscounted basis of the environmental liabilities and the amount recognized on the Consolidated
Balance Sheets after factoring in the discount rate:
December 31, 2018 (millions of dollars)
Undiscounted environmental liabilities
Less: discounting environmental liabilities to present value
Discounted environmental liabilities
December 31, 2017 (millions of dollars)
Undiscounted environmental liabilities
Less: discounting environmental liabilities to present value
Discounted environmental liabilities
98
PCB
118
(10)
108
PCB
142
(8)
134
LAR
58
(1)
57
LAR
64
(2)
62
Total
176
(11)
165
Total
206
(10)
196
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
At December 31, 2018, the estimated future environmental expenditures were as follows:
(millions of dollars)
2019
2020
2021
2022
2023
Thereafter
26
29
32
31
28
30
176
Hydro One records a liability for the estimated future expenditures for
LAR and for the phase-out and destruction of PCB-contaminated mineral
oil removed from electrical equipment when it is determined that future
environmental remediation expenditures are probable under existing
statute or regulation and the amount of the future expenditures can be
reasonably estimated.
There are uncertainties in estimating future environmental costs due to
potential external events such as changes in legislation or regulations, and
advances in remediation technologies. In determining the amounts to be
recorded as environmental liabilities, the Company estimates the current
cost of completing required work and makes assumptions as to when the
future expenditures will actually be incurred, in order to generate future cash
flow information. A long-term inflation rate assumption of approximately
2% has been used to express these current cost estimates as estimated
future expenditures. Future expenditures have been discounted using factors
ranging from approximately 2.0% to 6.3%, depending on the appropriate
rate for the period when expenditures are expected to be incurred. All
factors used in estimating the Company’s environmental liabilities represent
management’s best estimates of the present value of costs required to meet
existing legislation or regulations. However, it is reasonably possible that
numbers or volumes of contaminated assets, cost estimates to perform work,
inflation assumptions and the assumed pattern of annual cash flows may
differ significantly from the Company’s current assumptions. In addition,
with respect to the PCB environmental liability, the availability of critical
resources such as skilled labour and replacement assets and the ability
to take maintenance outages in critical facilities may influence the timing
of expenditures.
PCBs
The Environment Canada regulations, enacted under the Canadian
Environmental Protection Act, 1999, govern the management, storage and
disposal of PCBs based on certain criteria, including type of equipment,
in-use status, and PCB-contamination thresholds. Under current regulations,
Hydro One’s PCBs have to be disposed of by the end of 2025, with the
exception of specifically exempted equipment. Contaminated equipment
will generally be replaced, or will be decontaminated by removing PCB-
contaminated insulating oil and retro filling with replacement oil that contains
in concentrations of less than 2 ppm.
The Company’s best estimate of the total estimated future expenditures to
comply with current PCB regulations is $118 million (2017 – $142 million).
These expenditures are expected to be incurred over the period from 2019
to 2024. As a result of its annual review of environmental liabilities, the
Company recorded a revaluation adjustment in 2018 to decrease the PCB
environmental liability by $15 million (2017 – increase by $1 million).
LAR
The Company’s best estimate of the total estimated future expenditures
to complete its LAR program is $58 million (2017 – $64 million). These
expenditures are expected to be incurred over the period from 2019
to 2044. As a result of its annual review of environmental liabilities, no
revaluation adjustment to the LAR environmental liability was recorded in
2018 (2017 – revaluation adjustment was recorded to increase the LAR
environmental liability by $7 million).
21. ASSET RETIREMENT OBLIGATIONS
Hydro One records a liability for the estimated future expenditures for the
removal and disposal of asbestos-containing materials installed in some of
its facilities. Asset retirement obligations, which represent legal obligations
associated with the retirement of certain tangible long-lived assets, are
computed as the present value of the projected expenditures for the future
retirement of specific assets and are recognized in the period in which
the liability is incurred, if a reasonable estimate can be made. If the asset
remains in service at the recognition date, the present value of the liability
is added to the carrying amount of the associated asset in the period the
liability is incurred and this additional carrying amount is depreciated over
the remaining life of the asset. If an asset retirement obligation is recorded
in respect of an out-of-service asset, the asset retirement cost is charged
to results of operations. Subsequent to the initial recognition, the liability
is adjusted for any revisions to the estimated future cash flows associated
with the asset retirement obligation, which can occur due to a number of
factors including, but not limited to, cost escalation, changes in technology
applicable to the assets to be retired, changes in legislation or regulations,
as well as for accretion of the liability due to the passage of time until the
obligation is settled. Depreciation expense is adjusted prospectively for
any increases or decreases to the carrying amount of the associated asset.
In determining the amounts to be recorded as asset retirement obligations,
the Company estimates the current fair value for completing required work
and makes assumptions as to when the future expenditures will actually
be incurred, in order to generate future cash flow information. A long-term
inflation assumption of approximately 2% has been used to express these
current cost estimates as estimated future expenditures. Future expenditures
have been discounted using factors ranging from approximately 2.0% to
4.0%, depending on the appropriate rate for the period when expenditures
are expected to be incurred. All factors used in estimating the Company’s
asset retirement obligations represent management’s best estimates of
the cost required to meet existing legislation or regulations. However, it is
reasonably possible that numbers or volumes of contaminated assets, cost
estimates to perform work, inflation assumptions and the assumed pattern
of annual cash flows may differ significantly from the Company’s current
99
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
assumptions. Asset retirement obligations are reviewed annually or more
frequently if significant changes in regulations or other relevant factors occur.
Estimate changes are accounted for prospectively. As a result of its annual
review of asset retirement obligations, the Company recorded a revaluation
adjustment in 2018 to increase the asset retirement liability by $1 million
(2017 – $nil).
22. SHARE CAPITAL
Common Shares
The Company is authorized to issue an unlimited number of common
shares. At December 31, 2018, the Company had 595,938,975
(2017 – 595,386,711) common shares issued and outstanding.
At December 31, 2018, Hydro One had recorded asset retirement
obligations of $10 million (2017 – $9 million), primarily consisting of the
estimated future expenditures associated with the removal and disposal of
asbestos-containing materials installed in some of its facilities. The amount
of interest recorded is nominal.
The amount and timing of any dividends payable by Hydro One is at the
discretion of the Hydro One Board of Directors and is established on the
basis of Hydro One’s results of operations, maintenance of its deemed
regulatory capital structure, financial condition, cash requirements, the
satisfaction of solvency tests imposed by corporate laws for the declaration
and payment of dividends and other factors that the Board of Directors
may consider relevant.
The following tables present the changes to common shares during the years ended December 31, 2018 and 2017:
Year ended December 31, 2018 (number of shares)
Common shares – beginning
Common shares issued – share grants1
Common shares issued – LTIP2
Common shares – ending
Ownership by
Public
Province
Total
312,974,063 282,412,648 595,386,711
481,460
70,804
481,460
70,804
—
—
313,526,327
52.6%
282,412,648 595,938,975
100%
47.4%
1
In 2018, Hydro One issued from treasury 481,460 common shares in accordance with provisions of the Power Workers’ Union (PWU) and the Society Share Grant Plans.
2 In 2018, Hydro One issued from treasury 70,804 common shares in accordance with provisions of the LTIP.
Year ended December 31, 2017 (number of shares)
Common shares – beginning
Secondary offering1
Common shares issued – share grants2
Common shares issued – LTIP3
Sale of common shares4
Common shares – ending
Ownership by
Public
Province
Total
178,196,340 416,803,660 595,000,000
—
120,000,000 (120,000,000)
371,611
—
15,100
—
—
(14,391,012)
371,611
15,100
14,391,012
312,974,063 282,412,648 595,386,711
100%
52.6%
47.4%
1
In May 2017, Hydro One announced the closing of a secondary offering by the Province, on a bought deal basis, of 120 million common shares of Hydro One on the Toronto Stock
Exchange. Hydro One did not receive any of the proceeds from the sale of the common shares by the Province.
2 In 2017, Hydro One issued from treasury 371,611 common shares in accordance with provisions of the PWU Share Grant Plan.
3 In 2017, Hydro One issued from treasury 15,100 common shares in accordance with provisions of the LTIP.
4
In December 2017, the Province sold 14,391,012 common shares of Hydro One to OFN Power Holdings LP, a limited partnership wholly-owned by Ontario First Nations Sovereign
Wealth LP, which is in turn owned by 129 First Nations in Ontario. Hydro One did not receive any of the proceeds from the sale of the common shares by the Province.
Preferred Shares
The Company is authorized to issue an unlimited number of preferred shares,
issuable in series. At December 31, 2018 and 2017, two series of preferred
shares were authorized for issuance: the Series 1 preferred shares and the
Series 2 preferred shares. At December 31, 2018 and 2017, the Company
had 16,720,000 Series 1 preferred shares and no Series 2 preferred shares
issued and outstanding.
Hydro One may from time to time issue preferred shares in one or more
series. Prior to issuing shares in a series, the Hydro One Board of Directors
is required to fix the number of shares in the series and determine the
designation, rights, privileges, restrictions and conditions attaching to that
series of preferred shares. Holders of Hydro One’s preferred shares are
not entitled to receive notice of, to attend or to vote at any meeting of the
shareholders of Hydro One except that votes may be granted to a series of
preferred shares when dividends have not been paid on any one or more
series as determined by the applicable series provisions. Each series of
preferred shares ranks on parity with every other series of preferred shares,
and are entitled to a preference over the common shares and any other
shares ranking junior to the preferred shares, with respect to dividends and
the distribution of assets and return of capital in the event of the liquidation,
dissolution or winding up of Hydro One.
100
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
For the period commencing from the date of issue of the Series 1 preferred
shares and ending on and including November 19, 2020, the holders of
Series 1 preferred shares are entitled to receive fixed cumulative preferential
dividends of $1.0625 per share per year, if and when declared by the
Board of Directors, payable quarterly. The dividend rate will reset on
November 20, 2020 and every five years thereafter at a rate equal to the
sum of the then five-year Government of Canada bond yield and 3.53%.
The Series 1 preferred shares will not be redeemable by Hydro One
prior to November 20, 2020, but will be redeemable by Hydro One on
November 20, 2020 and on November 20 of every fifth year thereafter
at a redemption price equal to $25.00 for each Series 1 preferred share
redeemed, plus any accrued or unpaid dividends. The holders of Series 1
preferred shares will have the right, at their option, on November 20, 2020
and on November 20 of every fifth year thereafter, to convert all or any of
their Series 1 preferred shares into Series 2 preferred shares on a one-for-
one basis, subject to certain restrictions on conversion. At December 31,
2018, no preferred share dividends were in arrears.
The holders of Series 2 preferred shares will be entitled to receive quarterly
floating rate cumulative dividends, if and when declared by the Board of
Directors, at a rate equal to the sum of the then three-month Government
of Canada treasury bill rate and 3.53% as reset quarterly. The Series 2
preferred shares will not be redeemable by Hydro One prior to
November 20, 2020, but will be redeemable by Hydro One at a
redemption price equal to $25.00 for each Series 2 preferred share
redeemed, if redeemed on November 20, 2025 or on November 20
24. EARNINGS PER COMMON SHARE
of every fifth year thereafter, or $25.50 for each Series 2 preferred share
redeemed, if redeemed on any other date after November 20, 2020, in
each case plus any accrued or unpaid dividends. The holders of Series 2
preferred shares will have the right, at their option, on November 20, 2025
and on November 20 of every fifth year thereafter, to convert all or any of
their Series 2 preferred shares into Series 1 preferred shares on a one-for-
one basis, subject to certain restrictions on conversion.
Share Ownership Restrictions
The Electricity Act imposes share ownership restrictions on securities of Hydro
One carrying a voting right (Voting Securities). These restrictions provide
that no person or company (or combination of persons or companies acting
jointly or in concert) may beneficially own or exercise control or direction
over more than 10% of any class or series of Voting Securities, including
common shares of the Company (Share Ownership Restrictions). The
Share Ownership Restrictions do not apply to Voting Securities held by the
Province, nor to an underwriter who holds Voting Securities solely for the
purpose of distributing those securities to purchasers who comply with the
Share Ownership Restrictions.
23. DIVIDENDS
In 2018, preferred share dividends in the amount of $18 million (2017 –
$18 million) and common share dividends in the amount of $542 million
(2017 – $518 million) were declared.
Basic earnings per common share (EPS) is calculated by dividing net income (loss) attributable to common shareholders of Hydro One by the weighted-
average number of common shares outstanding.
Diluted EPS is calculated by dividing net income (loss) attributable to common shareholders of Hydro One by the weighted-average number of common
shares outstanding adjusted for the effects of potentially dilutive stock-based compensation plans, including the share grant plans and the LTIP, which are
calculated using the treasury stock method.
Year ended December 31
Net income (loss) attributable to common shareholders (millions of dollars)
Weighted average number of shares
Basic
Effect of dilutive stock-based compensation plans
Diluted
EPS
Basic
Diluted
2018
(89)
2017
658
595,756,470 595,287,586
2,234,665
2,147,473
597,903,943 597,522,251
$
$
(0.15) $
(0.15) $
1.11
1.10
The common shares contingently issuable as a result of the Convertible Debentures are not included in diluted EPS as conditions for closing the Merger were
not met as at December 31, 2018. As a result of the termination of the Merger agreement (see Note 4 – Business Combinations), the Convertible Debentures
were redeemed on February 8, 2019.
25. STOCK-BASED COMPENSATION
Share Grant Plans
Hydro One has two share grant plans (Share Grant Plans), one for the
benefit of certain members of the PWU (PWU Share Grant Plan) and one for
the benefit of certain members of the Society (formerly the Society of Energy
Professionals) (Society Share Grant Plan).
The PWU Share Grant Plan provides for the issuance of common shares of
Hydro One from treasury to certain eligible members of the PWU annually,
commencing on April 1, 2017 and continuing until the earlier of April 1,
2028 or the date an eligible employee no longer meets the eligibility
criteria of the PWU Share Grant Plan. To be eligible, an employee must be
a member of the Pension Plan on April 1, 2015, be employed on the date
annual share issuance occurs and continue to have under 35 years
101
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
of service. The requisite service period for the PWU Share Grant Plan began
on July 3, 2015, which is the date the share grant plan was ratified by
the PWU. The number of common shares issued annually to each eligible
employee will be equal to 2.7% of such eligible employee’s salary as at
April 1, 2015, divided by $20.50, being the price of the common shares
of Hydro One in its Initial Public Offering (IPO). The aggregate number of
common shares issuable under the PWU Share Grant Plan shall not exceed
3,981,763 common shares. In 2015, 3,979,062 common shares were
granted under the PWU Share Grant Plan.
have under 35 years of service. Therefore the requisite service period for
the Society Share Grant Plan began on September 1, 2015. The number of
common shares issued annually to each eligible employee will be equal to
2.0% of such eligible employee’s salary as at September 1, 2015, divided
by $20.50, being the price of the common shares of Hydro One in its
IPO. The aggregate number of common shares issuable under the Society
Share Grant Plan shall not exceed 1,434,686 common shares. In 2015,
1,433,292 common shares were granted under the Society Share
Grant Plan.
The Society Share Grant Plan provides for the issuance of common shares
of Hydro One from treasury to certain eligible members of The Society
annually, commencing on April 1, 2018 and continuing until the earlier
of April 1, 2029 or the date an eligible employee no longer meets the
eligibility criteria of the Society Share Grant Plan. To be eligible, an
employee must be a member of the Pension Plan on September 1, 2015,
be employed on the date annual share issuance occurs and continue to
The fair value of the Hydro One 2015 share grants of $111 million was
estimated based on the grant date share price of $20.50 and is recognized
using the graded-vesting attribution method as the share grant plans have
both a performance condition and a service condition. In 2018, 481,460
common shares were issued under the Share Grant Plans (2017 – 371,611).
Total share based compensation recognized during 2018 was $12 million
(2017 – $17 million) and was recorded as a regulatory asset.
A summary of share grant activity under the Share Grant Plans during years ended December 31, 2018 and 2017 is presented below:
Year ended December 31, 2018
Share grants outstanding – beginning
Vested and issued1
Forfeited
Share grants outstanding – ending
Share Grants
(number of
common shares)
Weighted-
Average
Price
4,825,732 $
(481,460)
(110,117) $
4,234,155 $
20.50
—
20.50
20.50
1
In 2018, Hydro One issued from treasury 481,460 common shares to eligible employees in accordance with provisions of the PWU and the Society Share Grant Plans.
Year ended December 31, 2017
Share grants outstanding – beginning
Vested and issued1
Forfeited
Share grants outstanding – ending
Share Grants
(number of
common shares)
Weighted-
Average
Price
5,334,415 $
(371,611)
(137,072) $
4,825,732 $
20.50
—
20.50
20.50
1 In 2017, Hydro One issued from treasury 371,611 common shares to eligible employees in accordance with provisions of the PWU Share Grant Plan.
Directors’ DSU Plan
Under the Directors’ DSU Plan, directors can elect to receive credit for their annual cash retainer in a notional account of DSUs in lieu of cash. Hydro One’s
Board of Directors may also determine from time to time that special circumstances exist that would reasonably justify the grant of DSUs to a director as
compensation in addition to any regular retainer or fee to which the director is entitled. Each DSU represents a unit with an underlying value equivalent to
the value of one common share of the Company and is entitled to accrue common share dividend equivalents in the form of additional DSUs at the time
dividends are paid, subsequent to declaration by Hydro One’s Board of Directors.
A summary of DSU awards activity under the Director’ DSU Plan during the years ended December 31, 2018 and 2017 is presented below:
Year ended December 31 (number of DSUs)
DSUs outstanding – beginning
Granted
Settled
DSUs outstanding – ending
102
2018
187,090
82,375
(222,768)
2017
99,083
88,007
—
46,697
187,090
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
For the year ended December 31, 2018, an expense of $1 million (2017 –
$2 million) was recognized in earnings with respect to the Directors’ DSU
Plan. At December 31, 2018, a liability of $1 million (2017 – $4 million)
related to Directors’ DSUs has been recorded at the December 31, 2018
closing price of the Company’s common shares of $20.25. This liability
is included in long-term accounts payable and other liabilities on the
Consolidated Balance Sheets.
DSUs related to the Company’s former Board of Directors were settled
at the June 29, 2018 (last business day in June 2018) closing price of the
Company’s common shares of $20.04, with an amount of approximately
$5 million paid during the fourth quarter of 2018.
Management DSU Plan
Under the Management DSU Plan, eligible executive employees can elect
to receive a specified proportion of their annual short-term incentive in a
notional account of DSUs in lieu of cash. Each DSU represents a unit with
an underlying value equivalent to the value of one common share of the
Company and is entitled to accrue common share dividend equivalents in
the form of additional DSUs at the time dividends are paid, subsequent to
declaration by Hydro One’s Board of Directors.
A summary of DSU awards activity under the Management DSU Plan during the years ended December 31, 2018 and 2017 is presented below:
Year ended December 31 (number of DSUs)
DSUs outstanding – beginning
Granted
Paid
DSUs outstanding – ending
2018
67,829
40,467
—
108,296
2017
—
68,897
(1,068)
67,829
For the year ended December 31, 2018, an expense of $1 million
(2017 – $2 million) was recognized in earnings with respect to the
Management DSU Plan. At December 31, 2018, a liability of $2 million
(2017 – $2 million) consisted of the following:
• $1 million recorded at the June 29, 2018 (last business day in June
2018) closing price of the Company’s common shares of $20.04 (2017
– $22.40) related to previously awarded Management DSUs to the
Company’s former President and Chief Executive Officer (CEO) included
in accounts payable and other current liabilities (2017 – $1 million
included in long-term accounts payable and other liabilities; and
• $1 million recorded at the December 31, 2018 closing price of the
Company’s common shares of $20.25 (2017 – $22.40) related to other
Management DSUs included in long-term accounts payable and other
liabilities (2017 – $1 million).
Employee Share Ownership Plan
In 2015, Hydro One established Employee Share Ownership Plans
(ESOP) for certain eligible management and non-represented employees
(Management ESOP) and for certain eligible Society-represented staff
(Society ESOP). Under the Management ESOP, the eligible management
and non-represented employees may contribute between 1% and 6%
of their base salary towards purchasing common shares of Hydro One.
The Company matches 50% of their contributions, up to a maximum
Company contribution of $25,000 per calendar year. Under the Society
ESOP, the eligible Society-represented staff may contribute between 1%
and 4% of their base salary towards purchasing common shares of Hydro
One. The Company matches 25% of their contributions, with no maximum
Company contribution per calendar year. In 2018, Company contributions
made under the ESOP were $2 million (2017 – $2 million).
LTIP
Effective August 31, 2015, the Board of Directors of Hydro One adopted an
LTIP. Under the LTIP, long-term incentives are granted to certain executive
and management employees of Hydro One and its subsidiaries, and all
equity-based awards will be settled in newly issued shares of Hydro One
from treasury, consistent with the provisions of the plan which also permit
the participants to surrender a portion of their awards to satisfy related
withholding taxes requirements. The aggregate number of shares issuable
under the LTIP shall not exceed 11,900,000 shares of Hydro One.
The LTIP provides flexibility to award a range of vehicles, including
Performance Share Units (PSUs), Restricted Share Units (RSUs), stock
options, share appreciation rights, restricted shares, DSUs, and other share-
based awards. The mix of vehicles is intended to vary by role to recognize
the level of executive accountability for overall business performance.
PSUs and RSUs
A summary of PSU and RSU awards activity under the LTIP during the years ended December 31, 2018 and 2017 is presented below:
Year ended December 31 (number of units)
Units outstanding – beginning
Granted
Vested and issued
Forfeited
Settled
Units outstanding – ending
PSUs
RSUs
2018
2017
2018
2017
429,980
445,120
(123)
(31,767)
(238,030)
230,600
303,240
(609)
(103,251)
—
393,430
345,790
(106,591)
(31,849)
(158,310)
254,150
242,860
(14,079)
(89,501)
—
605,180
429,980
442,470
393,430
103
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
The grant date total fair value of the awards granted in 2018 was
$16 million (2017 – $13 million). The compensation expense related to
the PSU and RSU awards recognized by the Company during 2018 was
$15 million (2017 – $6 million). The expense recognized in 2018 included
$5 million related to previously awarded PSUs and RSUs to the Company’s
former President and CEO for which costs had not previously been recognized.
These awards, consisting of 238,030 PSUs and 158,310 RSUs, were settled
in 2018 through a one-time cash settlement arrangement.
Stock Options
The Company is authorized to grant stock options under its LTIP to certain
eligible employees. During 2018, the Company granted 1,450,880 stock
options (2017 – nil). The stock options granted are exercisable for a period
not to exceed seven years from the date of grant and vest evenly over a
three-year period on each anniversary of the date of grant.
The fair value based method is used to measure compensation expense
related to stock options and the expense is recognized over the vesting
period on a straight-line basis. The fair value of the stock option awards
granted was estimated on the date of grant using a Black-Scholes
valuation model.
Stock options granted and the weighted-average assumptions used in the valuation model for options granted during 2018 are as follows:
Exercise price1
Grant date fair value per option
Valuation assumptions:
Expected dividend yield2
Expected volatility3
Risk-free interest rate4
Expected option term5
1 Hydro One common share price on the date of the grant.
2 Based on dividend and Hydro One common share price on the date of the grant.
3 Based on average daily volatility of peer entities for a 4.5-year term.
4 Based on bond yield for an equivalent Canadian government bond.
5 Determined using the option term and the vesting period.
A summary of stock options activity during 2018 and 2017 is presented below:
Year ended December 31 (number of stock options)
Stock options outstanding – beginning
Granted1
Cancelled2
Stock options outstanding – ending1
$
$
20.70
1.66
3.78%
15.01%
2.00%
4.5 years
2018
2017
—
1,450,880
(500,970)
949,910
—
—
—
—
1 All stock options granted and outstanding at December 31, 2018 are non-vested.
2
During 2018, 500,970 stock options previously awarded to the Company’s former President and CEO were cancelled. The unrecognized compensation expense related to the cancelled
stock options was $1 million.
The compensation expense related to stock options recognized by the
Company during 2018 was $1 million. At December 31, 2018, there was
$1 million of unrecognized compensation expense related to stock options
not yet vested, which is expected to be recognized over a weighted-
average period of approximately three years.
26. NONCONTROLLING INTEREST
On December 16, 2014, transmission assets totalling $526 million were
transferred from Hydro One Networks to B2M LP. This was financed by 60%
debt ($316 million) and 40% equity ($210 million). On December 17, 2014,
the SON acquired a 34.2% equity interest in B2M LP for consideration of
$72 million, representing the fair value of the equity interest acquired. The
SON’s initial investment in B2M LP consists of $50 million of Class A units
and $22 million of Class B units.
The Class B units have a mandatory put option which requires that upon
the occurrence of an enforcement event (i.e. an event of default such as
a debt default by the SON or insolvency event), Hydro One purchase
the Class B units of B2M LP for net book value on the redemption date.
The noncontrolling interest relating to the Class B units is classified on the
Consolidated Balance Sheet as temporary equity because the redemption
feature is outside the control of the Company. The balance of the
noncontrolling interest is classified within equity.
104
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
The following tables show the movements in noncontrolling interest during the years ended December 31, 2018 and 2017:
Year ended December 31, 2018 (millions of dollars)
Noncontrolling interest – beginning
Distributions to noncontrolling interest
Net income attributable to noncontrolling interest
Noncontrolling interest – ending
Year ended December 31, 2017 (millions of dollars)
Noncontrolling interest – beginning
Distributions to noncontrolling interest
Net income attributable to noncontrolling interest
Noncontrolling interest – ending
27. RELATED PARTY TRANSACTIONS
Temporary Equity
Equity
Total
22
(3)
2
21
50
(5)
4
49
Temporary Equity
Equity
22
(2)
2
22
50
(4)
4
50
72
(8)
6
70
Total
72
(6)
6
72
The Province is a shareholder of Hydro One with approximately 47.4% ownership at December 31, 2018. The Independent Electricity System Operator (IESO),
Ontario Power Generation Inc. (OPG), Ontario Electricity Financial Corporation (OEFC), and the OEB, are related parties to Hydro One because they are
controlled or significantly influenced by the Province.
Year ended December 31 (millions of dollars)
Related Party
Transaction
Province
Dividends paid
IESO
OPG
OEFC
OEB
Power purchased
Revenues for transmission services
Amounts related to electricity rebates
Distribution revenues related to rural rate protection
Distribution revenues related to the supply of electricity to remote northern communities
Funding received related to CDM programs
Power purchased
Revenues related to provision of services and supply of electricity
Costs related to the purchase of services
Power purchased from power contracts administered by the OEFC
OEB fees
2018
275
1,636
1,615
477
239
35
62
10
9
—
2
8
2017
301
1,583
1,521
357
247
32
59
9
8
1
2
8
Sales to and purchases from related parties are based on the requirements of the OEB’s Affiliate Relationships Code. Outstanding balances at period end are
interest-free and settled in cash.
28. CONSOLIDATED STATEMENTS OF CASH FLOWS
The changes in non-cash balances related to operations consist of the following:
Year ended December 31 (millions of dollars)
Accounts receivable
Due from related parties
Other assets
Accounts payable
Accrued liabilities
Due to related parties
Accrued interest
Long-term accounts payable and other liabilities
Post-retirement and post-employment benefit liability
2018
11
(2)
2
2
17
(68)
(3)
(7)
25
(23)
2017
195
(95)
8
7
(89)
10
(6)
(2)
85
113
105
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Capital Expenditures
The following tables reconcile investments in property, plant and equipment and intangible assets and the amounts presented in the Consolidated Statements
of Cash Flows for the years ended December 31, 2018 and 2017. The reconciling items include net change in accruals and capitalized depreciation.
Year ended December 31, 2018 (millions of dollars)
Capital investments
Reconciling items
Cash outflow for capital expenditures
Year ended December 31, 2017 (millions of dollars)
Capital investments
Reconciling items
Cash outflow for capital expenditures
Property, Plant
and Equipment
Intangible
Assets
(1,454)
36
(1,418)
(121)
1
(120)
Property, Plant
and Equipment
Intangible
Assets
(1,493)
26
(1,467)
(74)
(6)
(80)
Total
(1,575)
37
(1,538)
Total
(1,567)
20
(1,547)
Capital Contributions
Hydro One enters into contracts governed by the OEB Transmission
System Code when a transmission customer requests a new or upgraded
transmission connection. The customer is required to make a capital
contribution to Hydro One based on the shortfall between the present
value of the costs of the connection facility and the present value of
revenues. The present value of revenues is based on an estimate of load
forecast for the period of the contract with Hydro One. Once the connection
facility is commissioned, in accordance with the OEB Transmission System
Code, Hydro One will periodically reassess the estimated of load forecast
which will lead to a decrease, or an increase in the capital contributions
from the customer. The increase or decrease in capital contributions is
recorded directly to fixed assets in service. In 2018, capital contributions
from these reassessments totalled $7 million (2017 – $9 million), which
represents the difference between the revised load forecast of electricity
transmitted compared to the load forecast in the original contract, subject
to certain adjustments.
Supplementary Information
Year ended December 31 (millions of dollars)
Net interest paid
Income taxes paid
29. CONTINGENCIES
Legal Proceedings
Hydro One is involved in various lawsuits and claims in the normal course
of business. In the opinion of management, the outcome of such matters will
not have a material adverse effect on the Company’s consolidated financial
position, results of operations or cash flows.
Hydro One Inc., Hydro One Networks, Hydro One Remote Communities,
and Norfolk Power Distribution Inc. are defendants in a class action
suit in which the representative plaintiff is seeking up to $125 million in
damages related to allegations of improper billing practices. The action was
commenced in the Superior Court of Ontario on September 9, 2015. The
plaintiff’s motion for certification was dismissed by the court in November
2017. The plaintiff appealed the court’s decision to the Divisional Court.
The appeal was heard in October 2018; the Divisional Court dismissed the
appeal in December 2018; and in January 2019, the plaintiff applied for
leave to appeal to the Ontario Court of Appeal.
To date, four putative class action lawsuits were filed by purported Avista
Corporation shareholders in relation to the Merger. First, Fink v. Morris, et
al., was filed in Washington state court and the amended complaint names
as defendants Avista Corporation’s directors, Hydro One, Olympus Holding
Corp., Olympus Corp., and Bank of America Merrill Lynch. The suit alleges
2018
519
17
2017
475
12
that Avista Corporation’s directors breached their fiduciary duties in relation
to the Merger, aided and abetted by Hydro One, Olympus Holding Corp.,
Olympus Corp. and Bank of America Merrill Lynch. The Washington state
court issued an order staying the litigation until after the Merger has closed.
Counsel for the plaintiffs in Fink has informally indicated that, in light of
the termination of the Merger, the lawsuit will be dismissed, but no formal
dismissal papers have been filed with the court at this time. Second, Jenß
v. Avista Corp., et al., Samuel v. Avista Corp., et al., and Sharpenter v.
Avista Corp., et al., were each filed in the US District Court for the Eastern
District of Washington and named as defendants Avista Corporation and its
directors; Sharpenter also named Hydro One, Olympus Holding Corp., and
Olympus Corp. The lawsuits alleged that the preliminary proxy statement
omitted material facts necessary to make the statements therein not false or
misleading. Jenß, Samuel, and Sharpenter were all voluntarily dismissed by
the respective plaintiffs with no consideration paid by any of the defendants.
Transfer of Assets
The transfer orders by which the Company acquired certain of Ontario
Hydro’s businesses as of April 1, 1999 did not transfer title to some assets
located on Reserves (as defined in the Indian Act (Canada)). Currently,
the OEFC holds these assets. Under the terms of the transfer orders, the
Company is required to manage these assets until it has obtained all
consents necessary to complete the transfer of title of these assets to itself.
106
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
The Company cannot predict the aggregate amount that it may have to pay,
either on an annual or one-time basis, to obtain the required consents. In
2018, the Company paid approximately $2 million (2017 – $2 million) in
respect of consents obtained. If the Company cannot obtain the required
consents, the OEFC will continue to hold these assets for an indefinite
period of time. If the Company cannot reach a satisfactory settlement,
it may have to relocate these assets to other locations at a cost that could
be substantial or, in a limited number of cases, to abandon a line and
replace it with diesel-generation facilities. The costs relating to these assets
could have a material adverse effect on the Company’s results of operations
if the Company is not able to recover them in future rate orders.
30. COMMITMENTS
The following table presents a summary of Hydro One’s commitments under leases, outsourcing and other agreements due in the next 5 years and thereafter:
December 31, 2018 (millions of dollars)
Outsourcing and other agreements
Long-term software/meter agreement
Operating lease commitments
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
161
17
7
104
16
11
29
2
4
2
1
1
3
2
1
11
1
4
Outsourcing Agreements
Hydro One has agreements with Inergi LP (Inergi) for the provision of back
office and IT outsourcing services, including settlements, source to pay
services, pay operations services, information technology and finance
and accounting services. The agreement expires on February 28, 2021
for information technology services, on October 31, 2021 for supply chain
services, and on December 31, 2019 for the remaining back-office services.
On March 1, 2018, Hydro One insourced its customer service operations,
which had been previously outsourced to Inergi and Vertex Customer
Management (Canada) Limited since 2002.
Brookfield Global Integrated Solutions (formerly Brookfield Johnson
Controls Canada LP) (Brookfield) provides services to Hydro One, including
facilities management and execution of certain capital projects as deemed
required by the Company. The agreement with Brookfield for these services
expires in December 2024, with an option for the Company to renew the
agreement for an additional term of three years.
Long-term Software/Meter Agreement
Trilliant Holdings Inc. and Trilliant Networks (Canada) Inc. (collectively
Trilliant) provide services to Hydro One for the supply, maintenance and
support services for smart meters and related hardware and software,
including additional software licences, as well as certain professional
services. The agreement with Trilliant for these services expires in December
2025, but Hydro One has the option to renew for an additional term of five
years at its sole discretion.
Operating Leases
Hydro One is committed as lessee to irrevocable operating lease contracts
for buildings used in administrative and service-related functions and
storing telecommunications equipment. These leases have typical terms of
between three and five years, but several leases have lesser or greater terms
to address special circumstances and/or opportunities. Renewal options,
which are generally prevalent in most leases, have similar terms of three to
five years. All leases include a clause to enable upward revision of the
rental charge on an annual basis or on renewal according to prevailing
market conditions or pre-established rents. There are no restrictions
placed upon Hydro One by entering into these leases. During the year
ended December 31, 2018, the Company made lease payments totalling
$12 million (2017 – $12 million).
Other Commitments
The following table presents a summary of Hydro One’s other commercial commitments by year of expiry in the next 5 years and thereafter:
December 31, 2018 (millions of dollars)
Year 1
Year 2
Year 3
Operating Credit Facilities
Letters of credit1
Guarantees2
—
182
325
—
—
—
250
—
—
Year 4
2,300
—
—
Year 5
Thereafter
—
—
—
—
—
—
1 Letters of credit consist of letters of credit totalling $163 million related to retirement compensation arrangements, a $13 million letter of credit provided to the IESO for prudential
support, $5 million in letters of credit to satisfy debt service reserve requirements, and $1 million in letters of credit for various operating purposes.
2
Guarantees consist of prudential support provided to the IESO by Hydro One Inc. on behalf of its subsidiaries.
107
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
Prudential Support
Purchasers of electricity in Ontario, through the IESO, are required to
provide security to mitigate the risk of their default based on their expected
activity in the market. The IESO could draw on these guarantees and/or
letters of credit if these purchasers fail to make a payment required by a
default notice issued by the IESO. The maximum potential payment is the
face value of any letters of credit plus the amount of the parental guarantees.
Retirement Compensation Arrangements
Bank letters of credit have been issued to provide security for Hydro One
Inc.’s liability under the terms of a trust fund established pursuant to the
supplementary pension plan for eligible employees of Hydro One Inc. The
supplementary pension plan trustee is required to draw upon these letters of
credit if Hydro One Inc. is in default of its obligations under the terms of this
plan. Such obligations include the requirement to provide the trustee with an
annual actuarial report as well as letters of credit sufficient to secure Hydro
One Inc.’s liability under the plan, to pay benefits payable under the plan
and to pay the letter of credit fee. The maximum potential payment is the
face value of the letters of credit. A bank letter of credit has also been issued
to provide security for Hydro One’s retirement compensation arrangement
trust agreement.
31. SEGMENTED REPORTING
Hydro One has three reportable segments:
• The Transmission Segment, which comprises the transmission of high
voltage electricity across the province, interconnecting more than
70 local distribution companies and certain large directly connected
industrial customers throughout the Ontario electricity grid;
• The Distribution Segment, which comprises the delivery of electricity to
end customers and certain other municipal electricity distributors; and
• Other Segment, which includes certain corporate activities and the
operations of the Company’s telecommunications business.
The designation of segments has been based on a combination of regulatory
status and the nature of the services provided. Operating segments of the
Company are determined based on information used by the chief operating
decision maker in deciding how to allocate resources and evaluate the
performance of each of the segments. The Company evaluates segment
performance based on income before financing charges and income
taxes from continuing operations (excluding certain allocated corporate
governance costs).
Year ended December 31, 2018 (millions of dollars)
Revenues
Purchased power
Operation, maintenance and administration
Depreciation and amortization
Income (loss) before financing charges and income taxes
Capital investments
Year ended December 31, 2017 (millions of dollars)
Revenues
Purchased power
Operation, maintenance and administration
Depreciation and amortization
Income (loss) before financing charges and income taxes
Capital investments
Total Assets by Segment:
December 31 (millions of dollars)
Transmission
Distribution
Other
Total assets
Total Goodwill by Segment:
December 31 (millions of dollars)
Transmission
Distribution
Total goodwill
Transmission
Distribution
Other
Consolidated
1,686
—
409
435
842
985
4,422
2,899
602
395
526
577
42
—
94
7
(59)
13
6,150
2,899
1,105
837
1,309
1,575
Transmission
Distribution
Other
Consolidated
1,578
—
375
420
783
968
4,366
2,875
593
390
508
588
46
—
98
7
(59)
11
2018
13,973
9,325
2,359
25,657
2018
157
168
325
5,990
2,875
1,066
817
1,232
1,567
2017
13,608
9,259
2,834
25,701
2017
157
168
325
All revenues, assets and substantially all costs, as the case may be, are earned, held or incurred in Canada.
108
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements
32. SUBSEQUENT EVENTS
(A) Dividends
On February 20, 2019, preferred share dividends of $5 million and common share dividends of $137 million ($0.23 per common share) were declared.
(B) LTIP
On January 29, 2019, Hydro One issued from treasury 1,905 common shares in accordance with provisions of the LTIP.
(C) Lake Superior Link Project
On February 15, 2018, Hydro One filed an application with the OEB to construct a transmission line (East-West Tie Line) in northwestern Ontario (Lake
Superior Link Project). During 2018, the Company capitalized costs totaling approximately $11 million associated with this project. On February 11, 2019,
the OEB awarded the project to a competitor, as directed by the Province on January 30, 2019. As a result, in the first quarter of 2019, Hydro One recognized
an impairment loss of approximately $11 million associated with previously capitalized costs related to this project.
(D) OEB Regulatory Decisions
Deferred Income Tax Regulatory Asset
Subsequent to year end, on March 7, 2019, the OEB issued a decision on its reconsideration of its Original Decision with respect to the rate-setting treatment
of the benefits of the deferred tax asset resulting from transition from the payments in lieu of tax regime under the Electricity Act (Ontario) to tax payments
under the federal and provincial tax regime. The OEB’s Original Decision concluded that these benefits should not accrue entirely to Hydro One shareholders
and that a portion should be shared with ratepayers. The OEB has concluded that the Original Decision was reasonable and should be upheld. The
March 7, 2019 OEB decision has been determined to be a Type I subsequent event under US GAAP and as such the Company is required to update
the consolidated financial statements to reflect the subsequent event in connection with filing its annual report on Form 40-F with the US Securities and
Exchange Commission, so that they reflect events to the date of approval of the Form 40-F. As a result, the financial impact of this OEB decision has been
reflected in these amended consolidated financial statements, as more fully discussed in Note 12 – Regulatory Assets and Liabilities.
Hydro One Networks’ 2018-2022 Distribution Rates
Also, on March 7, 2019, the OEB issued its decision for Hydro One Networks’ 2018-2022 distribution rates, in which it directed the Company to apply
the Original Decision to Hydro One Networks’ distribution rates. This aspect of the decision has been reflected in the adjustments discussed in Note 12 –
Regulatory Assets and Liabilities. The other impacts from the OEB decision for Hydro One Networks’ 2018-2022 distribution rates will be reflected
prospectively in 2019.
109
Hydro One Limited | Annual Report 2018Notes to Amended Consolidated Financial Statements Board of Directors and Senior Leadership Team
Board of Directors
2
5
8
3
6
9
1
4
7
10
Senior Leadership Team
11
12
13
14
15
16
17
1. Tom Woods, BASc, MBA, ICD.D
Former Head of Canadian Corporate
Banking, CFO, CRO, Vice Chair CIBC,
Director Bank of America Corporation
and Alberta Investment Management
Corporation, Chair, Unity Health Toronto
2. Cherie Brant, JD
Partner, Borden Ladner Gervais LLP,
Director Anishnawbe Health Foundation,
Member Canadian Council for
Aboriginal Business, Research Advisory
Board, Aboriginal Energy Working
Group-IESO
3. Blair Cowper-Smith, LLM, ICD.D
Principal and founder Erin Park Business
Solutions, Former Chief Corporate
Affairs Officer OMERS
4. Anne Giardini, O.C., O.B.C, Q.C, LLM
Chancellor, Simon Fraser University,
Former Canadian President
Weyerhaeuser Company Limited,
Former Director Nevsun Resources LTD
5. David Hay, LLB, ICD.D
Managing Director Delgatie
Incorporated, Former CEO New
Brunswick Power Corporation, Former
Vice-Chair and Managing Director
of CIBC World Markets Inc., Director
EPCOR, Council Member of the
Council for Clean and Reliable Energy
6. Timothy Hodgson, MBA, FCPA, ICD.D
Managing Partner Alignvest
Management Corporation, Former
Special Advisor to Bank of Canada
Governor Mark Carney, Former
CEO Goldman Sachs Canada,
Director Public Sector Pension
Investment Board (PSP Investments),
Director MEG Energy, Director
Alignvest Acquisition II Corporation
7. Jessica McDonald, ICD.D
Chair, Canada Post Corporation,
Former President & CEO BC Hydro &
Power Authority, Director Coeur Mining
Inc., Chair Trevali Mining Corporation,
Member Council of Sustainable
Development Technology Canada
8. Russel Robertson, FCPA, FCA, ICD.D
Director, Former EVP and Head,
Anti-Money Laundering, BMO Financial
Group, Former Vice-Chair, Deloitte
& Touche LLP, Director Bausch Health
Companies Inc., Director Turquoise
Hill Resources
9. William Sheffield, BSC, MBA, ICD.D
Director, Former CEO Sappi Fine
Papers, Director, Houston Wire &
Cable Company, Director, Velan Inc.,
Former Board Member OPG
10. Melissa Sonberg, BSC, MHA, ICD.D
Adjunct Professor, Executive-in-
Residence, McGill University, Desautel
Faculty of Management, Director
Exchange Income Corporation,
Former Senior Vice President, Human
Resources & Corporate Affairs and
Senior Vice President, Global Brands,
Communications and External Affairs
at AIMIA
11. Paul Dobson
Acting President and CEO
12. Jason Fitzsimmons
Chief Corporate Affairs and Customer
Care Officer
13. Greg Kiraly
Chief Operating Officer
14. Chris Lopez
Acting Chief Financial Officer
15. Judy McKellar
EVP, Chief Human Resources Officer
16. Patrick Meneley
EVP, Chief Corporate
Development Officer
17. James (Jamie) Scarlett
EVP, Chief Legal Officer
For detailed biographical information of Hydro One Limited Board members and senior leadership, go to www.HydroOne.com/Investors.
The biographical information of Hydro One Limited Board members is based on information available to management as of March 8, 2019.
110
Hydro One Limited | Annual Report 2018
Corporate and Shareholder Information
Corporate Offices
483 Bay Street, South Tower
Toronto, ON
M5G 2P5
1.416.345.5000
www.HydroOne.com
Customer Inquiries
Customer Service:
1.888.664.9376 or
CustomerCommunications@HydroOne.com
Report an Emergency (24 hours):
1.800.434.1235
Shareholder Services
If you are a registered shareholder and have
inquiries regarding your account, wish to change
your name or address, or have questions about
dividends, duplicate mailings, lost stock certificates,
share transfers or estate settlements, contact our
transfer agent and registrar:
Computershare Trust Company of Canada
100 University Avenue, 8th Floor
Toronto, ON
M5J 2Y1
1.514.982.7555 or 1.800.564.6253
service@computershare.com
Institutional Investors and Analysts
Institutional investors, securities analysts and others
requiring additional financial information can visit
www.HydroOne.com/Investors or contact us at:
1.416.345.6867
Investor.Relations@HydroOne.com or
Omar.Javed@HydroOne.com
Media Inquiries
1.416.345.6868 or 1.877.506.7584
Media.Relations@HydroOne.com
Sustainability
Hydro One is committed to continuing to
grow responsibly and we focus our social and
environmental sustainability efforts where we can
make the most meaningful impacts on both. To learn
more, visit www.HydroOne.com/OurCommitment
or email CSR@HydroOne.com.
Stock Exchange Listing
Toronto Stock Exchange (TSX): H
(CUSIP #448811208)
Independent Auditors
KPMG LLP
Equity Index Inclusions
Dow Jones Select Utilities (Canada) Index
FTSE All-World Index Series
MSCI World (Canada) Index
S&P/TSX Composite Index
S&P/TSX Utilities Index
S&P/TSX Composite Dividend Index
S&P/TSX Composite Low Volatility Index
S&P/TSX Composite High Dividend Index
Debt Securities
For details of the public debt securities of
Hydro One and its subsidiaries, please
refer to the “Debt Information” section under
www.HydroOne.com/Investors.
Online Information
Hydro One is committed to open and full financial
disclosure and best practices in corporate
governance. We invite you to visit the Investor
Relations section of www.HydroOne.com/Investors
where you will find additional information about our
business, including events and presentations, news
releases, regulatory filings, governance practices,
corporate social responsibility and our continuous
disclosure materials, including quarterly financial
releases, annual information forms and management
information circulars. You may also subscribe to
our news by email to automatically receive Hydro
One news releases electronically.
Common Share Dividend Information
2019 Expected Dividend Dates*
Record Date
Payment Date
March 13, 2019
June 12, 2019
September 12, 2019
December 11, 2019
*Subject to Board approval
March 29, 2019
June 28, 2019
September 30, 2019
December 31, 2019
Unless indicated otherwise, all common share
dividends paid by Hydro One are designated
as “eligible” dividends for the purposes of the
Income Tax Act (Canada) and any similar
provincial legislation.
Dividend Reinvestment Plan (DRIP)
Hydro One offers a convenient dividend reinvestment
program for eligible shareholders to purchase
additional Hydro One shares by reinvesting their
cash dividends without incurring brokerage or
administration fees. For plan information and
enrolment materials or to learn more about the
Hydro One DRIP, visit www.HydroOne.com/DRIP
or Computershare Trust Company of Canada at
www.InvestorCentre.com/HydroOne.
Regulatory Stakeholders
Hydro One is committed to
understanding the interests of
maintaining and enhancing
long-term relationships with
its regulatory stakeholders.
Provincial Government,
Ministry of Energy
Policy, legislation, regulations
Ontario Energy Board (OEB)
Independent electric utility price
and service quality regulation
Independent Electricity System Operator
Wholesale power market rules,
intermediary, North American
reliability standards
National Energy Board
Federal regulator, international
power lines and substations
North American Electric
Reliability Corporation
Continent-wide bulk power reliability
standards, certification, monitoring
For more information, visit:
www.HydroOne.com/Regulatory
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OntarioOffice nationalde l’énergieNational EnergyBoardCert no. XXX-XXX-000
Why Invest in Hydro One?
• Utility business in a stable and rate-regulated environment
• Pure-play electric company with no commodity price exposure
• Solid investment grade balance sheet
• Fully independent Board
• Stable and growing dividend
www.HydroOne.com
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