Enabling a
Clean Energy
Future
2022 Annual Report
Corporate Profile
Hydro One Limited (TSX: H)
Hydro One Limited, through its wholly-owned
subsidiaries, is Ontario’s largest electricity
transmission and distribution provider with
approximately 1.5 million valued customers,
$31.5 billion in assets as of December 31, 2022,
and annual revenues in 2022 of $7.8 billion.
Our team of approximately 9,300 skilled
and dedicated employees proudly build
and maintain a safe and reliable electricity
system which is essential to supporing
strong and successful communities. In
2022, Hydro One invested $2.1 billion in its
transmission and distribution networks,
and suppored the economy through buying
$1.9 billion of goods and services.
We are commited to the communities
where we live and work, through community
investment, sustainability and diversity
initiatives. We are designated as a Sustainable
Electricity LeaderTM by Electricity Canada.
Hydro One Limited’s common shares are
listed on the TSX and cerain of Hydro One
Inc.’s medium-term notes are listed on the
NYSE. Additional information can be accessed
at www.hydroone.com, www.sedar.com or
www.sec.gov.
2022
Highlights
Guided by our purpose of energizing
life in Ontario, we look to the future
and what we can do today to beneft
all Ontarians in the energy transition.
Outstanding Safety Perormance
We achieved the best safety record in our history, posting a
recordable injury rate of 0.616 per 200,000 hours. Hydro One
saw a signifcant reduction in the number of high-energy serious
injuries from four in 2021 compared to one employee sadly
sustaining a high energy serious injury in 2022. This equates to
a High Energy Serious Injury and Fatality (HSIF) rate of 0.012 per
200,000 hours, well below our annual target of 0.066.
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Parnership with First Nations
We launched our equity parnership model on new capital
transmission line projects with a value exceeding $100 million.
This model will ofer First Nations a 50% equity stake in all new,
future large-scale capital transmission line projects. This model
will be applied to the development of the Waasigan Transmission
Line project in norhwestern Ontario and to fve transmission
lines Hydro One is developing in southwestern Ontario.
Progressive Indigenous Relations
As par of our commitment to being a trusted parner to
Indigenous communities, this year we also increased total
procurement with Indigenous businesses to $95.9 million,
our highest spend to date. This is a signifcant increase from
last year s total of $58.3 million and has us well on our journey
to achieve our procurement target for Indigenous businesses
at 5% of our purchases of materials and services by 2026.
’
All fgures in this document are approximate fgures
that are rounded to the nearest decimal place.
Hydro One Limited Annual Report 2022
Critical Capital Investments
To atract new businesses, create jobs and help communities
grow, we invested $2.1 billion in capital to expand the electricity
grid and renew and modernize existing infrastructure.
The Ontario Energy Board (OEB) approved the setlement
agreement for our 2023 2027 Investment Plan for Hydro One s
transmission and distribution systems. The plan, informed
by feedback from almost 50,000 customers, will reduce
the impacts of power outages, renew and replace critical
transmission and distribution infrastructure, enable economic
growth and prepare for climate change.
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’
Contents
IFC 2022 Highlights
2
4
6
8
A Message from Our Chair
A Message from Our President & CEO
Powering Parnership
Energizing Life Across Ontario
9 Corporate Governance
11 Hydro One’s Business Network
12 Why Invest?
13 Financial Highlights
14 Financial Repor
Energizing Life in Ontario Communities
Our 2022 Power to Give campaign was our most successful
fundraising year for our employee giving program. Thanks to
the generous spirit of Hydro One employees and retirees, we,
including Hydro One s corporate match, increased the total
contribution of Power to Give to $2.2 million. Each and every
one of us has the Power to Give and it is initiatives like these
that build, strengthen and energize life in communities
across Ontario.
’
Focusing on Customer Satisfaction
We continued to demonstrate our commitment to customers
and communities through our restoration work and keeping our
customers informed during major storms, as well as initiatives
including the Energizing Life Community Fund and the Winter
Relief Fund. Residential and small business customer satisfaction
stood at 87%. Large customer satisfaction stood at 88%.
Commitment to Sustainability
In January 2023, we became the frst utility in Canada to
publish a Sustainable Financing Framework, which allows us
to issue sustainable fnancing instruments, such as green
bonds, and allocate the net proceeds to investments in eligible
green and social project categories – such as clean energy
and transporation, biodiversity conservation, climate change
adaptation, socio economic advancement of Indigenous
people and access to essential services i.e. high speed
broadband internet.
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Best Employer, 8th Year
For the eighth year in a row, Hydro One has been recognized
on Forbes’ annual list of Canada s Best Employers. The
company s perormance ranking is based on employees
and other professionals recommending Hydro One as a
desirable employer.
’
’
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More Productivity Savings
In 2022, we achieved an approximately 9% increase in
year over year productivity savings with $373.6 million
saved in 2022 as compared to $343.9 million in 2021. We
also delivered on our multi year commitment to keep costs
as low as possible with a total of $1.5 billion in productivity
savings since 2015.
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13th Emergency Response Award
Hydro One earned two emergency response awards bringing
the total to 13 emergency response awards from the
Edison Electric Institute for restoring power. These awards
demonstrate our longstanding commitment to storm
response and restoration efors.
Hydro One Limited Annual Report 2022
111
A Message from Our
Chair
With the approval of the investment plan, we will be reinvesting in existing
infrastructure to maintain the health of the system, sustain perormance
and address safety and environmental risk.
Timothy Hodgson
Chair
Hydro One is well-
positioned to enable
our clean energy future
while continuing to
deliver exceptional
customer service and
suppor economic
growth for communities
across our service
territories.
It was a year in which Hydro One went from
strength to strength, delivering greater value
for our customers, investors, communities,
and other stakeholders. We delivered strong
perormance; parnered with First Nations on
a landmark equity agreement; and created a
clear path forward for renewing Hydro One’s
aging electricity infrastructure, supporing
economic growth and preparing for
climate change.
On behalf of the Board of Directors, I want to
welcome David Lebeter as Hydro One’s new
President and CEO. David is a highly regarded
leader with a proven record of building
strong teams and improving safety, reliability,
customer experience and productivity. As
a result of Hydro One’s robust succession
planning, we identifed the right candidate
to lead us into the future – an experienced
operator who will deliver the biggest capital
program in Hydro One’s history. I also want
to thank Mark Poweska for his three years of
strategic leadership and Bill Shefeld who
kept our teams aligned on executing our
focused strategy in his role as interim leader.
Safety remains a Board priority and we
recognize there is more work to do to achieve
a workplace free of life-altering injuries and
fatalities. We are pleased that in 2022,
Hydro One posted the best safety results in
the company’s history. This strong perormance
was matched by our sustainability perormance
and enhanced environmental, social and
governance (ESG) reporing, which now also
aligns with the United Nations Sustainable
Development Goals (UN SDGs). We continue
to work with the executive team to ensure the
company is making progress along the pathway
to net-zero, improving workplace diversity
and inclusion and taking meaningful action
toward Reconciliation.
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Hydro One Limited Annual Report 2022
Landmark Equity Agreement
with First Nations
“
Today marks a signifcant step towards
reconciliation for Ontario First Nations. This new
opporunity for parnership with Hydro One that
will see First Nations beneft equally in future
transmission line development. For far too long,
First Nations have not had access to these types
of parnerships and today marks an exciting
change and I am proud of the community Leaders
who have worked with Hydro One to reach this
milestone!
”
- Glen Hare, Ontario Regional Chief
Hydro One’s 50-50 equity parnership
agreement with First Nations on new large-
scale transmission line projects is a signifcant
milestone on our journey of Reconciliation
– one that builds a renewed relationship with
Indigenous people based on the recognition
of rights, respect, and parnership.
We believe this equity model, and collaborative
approach to working with First Nations, will
help unlock future development opporunities
to address energy transition. In the near term,
the OEB’s approval of Hydro One’s 2023-2027
Investment Plan will create regulatory
cerainty, suppor economic growth, and
enable Ontario’s clean energy future.
Hydro One continued to achieve positive
outcomes for stakeholders during a
challenging period in 2022. This resilient
perormance was recognized by our
shareholders with an appreciating stock
price that outperormed most of our peers.
The resulting robust total shareholder return
demonstrated the market’s confdence in our
ability to deliver on our promises.
During the year, we continued to enhance
Board diversity, welcoming Mark Podlasly, a
member of the Nlaka’pamux Nation in British
Columbia, who has extensive experience in
economic policy, major power generation
and transmission project development, and
climate strategy. He joins Cherie Brant in
providing Indigenous perspectives at the
Board level, underscoring our commitment to
act at all levels of our organization to advance
meaningful Reconciliation.
We thank Jessica McDonald, who did not stand
for re-election, for her many years of leadership
and service to the Board of Directors.
Lastly, on behalf of my Board colleagues,
I want to thank all 9,300 talented team
members who continue to inspire and
energize life for the people and communities
we serve. We enter 2023 ready to enable
a clean energy future, deliver exceptional
customer service and suppor economic
growth for communities across this province.
Timothy Hodgson,
Chair
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Hydro One Limited Annual Report 2022
A Message from Our
President
& CEO
David Lebeter
President & Chief
Executive Ofcer
I am proud to lead this remarkable company and strong
team as we maintain our current strategy that focuses on
safety, maintenance & construction, economic growth,
reliability and enabling Ontario’s clean energy future.
Together, we will continue to put people first, improve the
customer experience, and support economic growth for
the people of this province.
I want to thank everyone at Hydro One – our
Board, executive leadership, and employees –
for their valuable guidance as I transition into
the President and CEO role. I look forward
to engaging with our employees, customers,
Indigenous communities, investors and
industry parners as we energize life for
all Ontarians.
Safest & Most Efcient Utility: I am pleased
to repor that in 2022, we achieved the best
safety record in Hydro One’s history and
made signifcant progress to preventing life-
altering injuries and fatalities. However, we
recognize there is more work to do to ensure
our entire team’s safety in the workplace.
We continued to deliver on our multi-
year commitment to keep costs as low as
possible through our ongoing efciency
and productivity initiatives, beating
our productivity targets and achieving
productivity savings of $373.6 million in
2022. Total productivity savings since
2015 now amount to $1.5 billion dollars.
Enable our Customers & Be a Trusted Parner:
We continued to improve the customer
experience and provide more choices that
protect the planet, while helping our most
vulnerable customers fnd the right relief
programs. Whether it was our Winter Relief
Fund or the tireless work of our storm
response crews who restored power for
hundreds of thousands of customers – the
appreciation of Ontarians is refected in
strong customer satisfaction scores.
Hydro One is commited to becoming a
trusted parner to Indigenous communities
by respecting, engaging, and most
imporantly, listening to Indigenous people.
In 2022, following extensive engagements,
we launched our equity parnership model
on major new capital transmission line
projects. This model will ofer First Nations
a 50% equity stake in all new, future large-
scale capital transmission line projects and
transform the benefts of infrastructure
development for First Nation communities
for generations to come.
For too long, First Nations have borne the
impacts of infrastructure development in
their traditional territories without seeing
the benefts. This equity model signals a
signifcant shift in how Hydro One will work
with First Nations.
Plan, Design & Build a Grid for the Future:
Over the coming years, we know that our
customers will make decisions driven by
climate change. We understand the needs of
our customers and we share their concerns
for the climate. The investments we make
today in the grid will serve as a key enabler of
the energy transition and will prepare for the
efects of climate change and the increase
in severe weather events. Our commitment
to investing in our system is anchored on
addressing aging infrastructure, enabling
electrifcation and ensuring resiliency of the
electricity grid.
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Hydro One Limited Annual Report 2022
Our recently approved 2023–2027 Investment
Plan will do just that, helping to reduce the
impacts of power outages, renew or replace
critical infrastructure in almost every
community across Ontario, suppor customer
choice and build a grid for the future. I
commend all paries for the constructive
regulatory and stakeholder outreach process
that resulted in this balanced agreement,
which will see signifcant investments in our
infrastructure to improve reliability, prepare for
climate change and enable economic growth.
In 2022, we invested in critical infrastructure
to meet the growing electricity demand in
Ontario, advancing plans to develop fve new
transmission lines in the southwest and one
in the norh that will fuel industry and job
creation in those regions. We also invested
$2.1 billion to improve the perormance
of Ontario’s electricity transmission and
distribution systems and address aging power
infrastructure, facilitate connectivity to new
load customers and generation sources, and
improve service to customers.
Innovate & Grow the Business: In the coming
years, we expect to see a signifcant increase in
demand for electricity infrastructure and new
customer connections as we help decarbonize
the economy and meet our collective net zero
goals. As par of that expected growth, we
are investing in smarer, more fexible system
infrastructure, which will play an imporant role
in integrating additional electricity-generating
capacity – such as small modular nuclear
reactors, large-scale wind, solar generation
assets, and smaller decentralized renewable
sources and bateries – and ensure security of
supply and a resilient grid.
We also recently introduced an innovative
sustainable fnancing framework, one
that aligns our funding strategy with our
sustainability goals and suppors the shift to
a low-carbon economy through expenditures
that contribute to the well-being of the
people, planet, and communities we serve.
Early in 2023, we issued $1.05 billion of
sustainable bonds, the largest aggregate
amount of sustainable bonds by a corporate
issuer in Canada, under this new framework,
with investments targeting new or existing
eligible green and social projects.
Our fnancial results refect several positive
facets of our business including higher
demand, enhanced relationships with
community parners, reduced risk due
to regulatory approval of our fve year
investment plan, low volatility, a strong
balance sheet and robust credit ratings.
Strong teams: Our ability to deliver greater
value is thanks to the dedication, generous
spirit and resilience of Hydro One employees.
Your remarkable willingness to put the
needs of fellow Ontarians and Canadians
frst – by raising $2.2 million for more than
900 charities and working around the
clock to restore power to your neighbours
– continues to inspire us all. It is no wonder
that for the 8th consecutive year Forbes
recognized Hydro One as one of Canada’s
Best Employers. I look forward to an exciting
2023 as we work together to energize life in
communities across Ontario.
David Lebeter
President & Chief Executive Ofcer
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Hydro One Limited Annual Report 2022
Powering
Partnership
Hydro One, in partnership with First Nation leaders from
across Ontario, set a historic precedent in 2022 that will
transform the benefits of infrastructure development for
First Nation communities for generations to come. This
precedent is a significant milestone in the journey toward
meaningful Reconciliation and in rebuilding economic
prosperity for Indigenous people.
In 2022, we launched a 50% equity
parnership model with First Nations that
allows for joint ownership of all new, future
large-scale transmission line projects with a
value exceeding $100 million. This industry-
leading agreement will increase opporunities
for First Nation communities to work with
Hydro One to atract economic opporunities
to the norh, as we collectively build the
electricity grid of the future.
This new model is already being applied to the
development of the Waasigan Transmission
Line in norhwestern Ontario. Hydro One has
an equity agreement with Gwayakocchigewin
Limited Parnership (GLP), which represents
eight First Nations, as well with Lac des
Mille Lacs First Nation. When completed,
the nine First Nations will own 50% of the
transmission line parnership. The line, which
traverses across the traditional territories of
these First Nations, will bolster capacity and
suppor economic growth in the region, while
providing revenues for their communities for
generations to come.
Waasigan
Transmission Line
Map Legend
Existing Transformer Station (TS)
Preliminary Preferred Route
Existing Transmission Line
Highway
International Border
Red Sky Métis Independent Nation Office
Métis Nation of Ontario (MNO) Council Office
Treaty Boundary
First Nation Reserve
Provincial Park
6
Ojibway Nation
Ojibway Nation
of Saugeen
of Saugeen
Lac Seul
Lac Seul
Sioux Lookout
Sioux Lookout
1 77
1
Dryden TS
Dryden TS
Dryden
Dryden
7272
Eagle Lake
Eagle Lake
MNO No—hwest
MNO Northwest
Métis Council O–ce
Métis Council Ofÿce
Wabigoon Lake
Wabigoon Lake
Treaty No.3
Treaty No.3
d
d
a
o
a
R
o
y
R
a
B
y
e
a
k
B
a
n
e
S
k
a
n
S
Turtle River-
Tu—le River-
White Otter Lake
White O‰er Lake
Provincial Park
Provincial Park
Ignace
Ignace
177
1
TTreaty No.9
reaty No.9
622
622
Lac des Mille Lacs
Lac des Mille Lacs
Robinson Superior
Robinson Superior
Treaty
Treaty
Couchiching
Couchiching
Mitaanjigamiing
Mitaanjigamiing
Nigigoonsiminikaaning
Nigigoonsiminikaaning
Seine River
Seine River
111
1
MNO Sunset Country
MNO Sunset Country
Métis Council Ofÿce
Métis Council O–ce
Lac La Croix
Lac La Croix
Mackenzie TS
Mackenzie TS
Lac des Mille Lacs
Lac des Mille Lacs
1177
Atikokan
Atikokan
MNO Atikokan Métis
MNO Atikokan Métis
Council O–ce
Council Ofÿce
Quetico Provincial Park
Quetico Provincial Park
Red Sky Métis
Red Sky Métis
Independent Nation Office
Independent Nation Office
USA
USA
MNO Thunder Bay
MNO Thunder Bay
Métis Council Office
Métis Council Office
Lakehead TS
Lakehead TS
Shuniah
Shuniah
1717
110022
Thunder Bay
Thunder Bay
1717
6161
113030
6161
Fo—
Fort
WilliamWilliam
Lake
Lake
Superior
Superior
Hydro One Limited Annual Report 2022
Southwestern
Ontario
Transmission
Projects
Under Development and
to be Constructed
1
2
Between Chatham and Lakeshore
230 kV Transmission Line
(before the end of 2025)
St. Clair
230 kV Transmission Line
(before the end of 2028)
Exact route has not been determined
To be Developed and Prioritized
for Construction
3
Between Longwood and Lakeshore
500 kV Transmission Line (2030)
We have commenced development
Exact route has not been determined
To be Developed
4
5
Between Longwood and Lakeshore
500 kV Transmission Line
We have commenced development
Exact route has not been determined
Between Windsor and Lakeshore
230 kV Transmission Line
Pre-Development activities have
commenced
Exact route has not been determined
Map Legend
Transformer Station
City/Town
Highway
First Nation
USA
Aamjiwnaang
First Nation
Lambton TS
Sarnia
COUNTY OF
LAMBTON
COUNTY OF
MIDDLESEX
London
Longwood TS
Munsee-
Delaware
Nation
Oneida
Nation of
the Thames
Chippewas
of the Thames
Walpole Island
First Nation
Lake St. Clair
Windsor
2
Hwy 40
3
4
Moravian of
the Thames
Hwy 401
Chatham
Chatham SS
5
Lakeshore
1
MUNICIPALITY OF
CHATHAM-KENT
Lakeshore TS
COUNTY OF
ESSEX
Leamington
Kingsville
Caldwell First Nation
Lake Erie
Early engagement with Indigenous
communities, municipalities and residents
was vital to the success of this equity
model. Going forward, we are committed
to working with all communities throughout
the lifecycle of development projects as we
advance critical infrastructure. We believe
this approach will create predictability,
consistency, and a greater number of
opportunities for our partners, while
enabling industry and economic growth
in the province.
Progressive Indigenous Relations:
We established procurement targets in
2021 that set a new record for purchases
with Indigenous businesses for materials
and services. In 2022, we increased total
procurement spending with Indigenous
businesses to $95.9 million, our highest
spend to date. This has us well on our way
to achieve Hydro One’s procurement target
for Indigenous businesses at 5% of our
purchases of materials and services by 20261.
Powering Growth in Norhwestern Ontario:
The norhwest has long advocated for
an increase in power to meet growing
electricity demand. Once built, the Waasigan
Transmission Line will bring an additional
350 megawats of low-carbon electricity to
suppor the region’s electricity needs.
The proposed development is for a new
double-circuit 230 kilovolt transmission
line between Thunder Bay, Atikokan and
Dryden in norhwestern Ontario. We are
completing development work now, including
an environmental assessment, so that we’re
ready to power growth for local communities
and businesses.
Powering Growth in Southwestern Ontario:
To meet the growing electricity demand in
southwestern Ontario, we are developing fve
new transmission lines that will fuel industry
and job creation in the Windsor-Essex region.
These lines will meet the needs of new and
growing industries, including batery plants,
the greenhouse sector and the booming agri-
food industry, while ensuring continued local
and global investment. Like Waasigan, these
fve transmission lines will be developed using
the new equity parnership model with First
Nation communities.
1
All Requests for Proposals require a consideration for Indigenous businesses and communities. We informed our suppliers of our
commitment to advance Indigenous procurement and made it clear that we expect the same level of commitment from our suppliers.
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Hydro One Limited Annual Report 2022
Energizing Life
Across Ontario
We are commited to supporing
Hydro One customers and
communities, striving to help
all Ontarians achieve a cleaner,
more equitable and more
inclusive future.
We continue to suppor customers who are
experiencing fnancial difculty by helping
them access the relief, fexibility and choice
available to them. Through our Connected for
Life Program and Winter Relief Fund, we ofer
customized payment plans and other services
to help families stay connected to safe and
reliable power and keep costs down. Since
2020, our customer service team has helped
tens of thousands of customers access
fnancial relief from both Hydro One and
government programs.
Our 2022 Power to Give campaign was our
most successful fundraising year for our
employee giving program. Thanks to the
generous spirit of Hydro One employees and
retirees, we, including Hydro One’s corporate
match, increased the total contribution of
Power to Give to $2.2 million.
Our signature Community Investment
platforms include Building Safe Communities,
Hydro One Energizing Community Life
Community Fund, and Hydro One Indigenous
Entrepreneurship Grant.
Building Safe Communities is dedicated to
teaching young people to play safely and
to save a life in the communities where we
live, work and play. In 2022, we increased our
fnancial suppor to the ACT Foundation to
expand its new Opioid Overdose Response
Training to 80% of Ontario high schools over
the next three years; suppored Jack.org
in breaking down barriers to mental health
resources and education; funded the Return to
Coaching Community Grant to help coaches
cover the rising costs for organized spors and
make them more accessible; and funded 70
Ontario Scout Troops to embark on safe once-
in-a-lifetime outdoor adventures that build
confdence and resilience.
Hydro One Energizing Life Community Fund
suppors initiatives that promote community
safety and wellbeing, providing up to $25,000
in fnancial suppor. Last year, 24 recipients
providing critical local services and driving
positive change in their communities were
selected, including service dog training for
children with autism, diversifed oferings at
a food bank to beter serve Halal residents,
and therapeutic equestrian programming for
students with disabilities and unique needs in
rural communities.
Hydro One Indigenous Entrepreneurship
Grant is our parnership with the Canadian
Council for Aboriginal Business (CCAB)
to invest in the success of Indigenous-
owned businesses and to foster Indigenous
prosperity. In 2022, 28 recipients received
grants, including a wide range of businesses
such as food suppliers, adverising and
marketing specialists, wellness services and
environmental services.
Hydro One is proud to power the
communities where we live, work and play,
but we’re also proud of all the ways in which
our employees suppor the well-being of
those communities.
8
Hydro One Limited Annual Report 2022
Hydro One’s
Corporate Governance
We continue to advance diversity, equity
and inclusion at all levels of Hydro One
to beter refect where we work and the
communities we represent across the
province. We are forunate to beneft from
diverse perspectives, with Indigenous
representation (20%) and near gender parity
at the Board1 level. The current composition
of our Independent Non-Executive Board
is four women (40%) and six men (60%). We
believe this near balance makes us one of
the most gender progressive boards in Norh
America, refecting best practices in board
diversity and surpassing our Catalyst Accord
commitment to maintaining at least 30%
female board members.
Strong corporate governance practices are
the hear 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 imporance
of corporate governance in the efective
management of the company. A governance
agreement between Hydro One and the
Province of Ontario was executed in advance
of the November 2015 Initial Public Ofering
of the company. The agreement suppors
strong corporate governance centered on
independence, integrity and accountability,
which is in the best interests of shareholders and
promotes and strengthens relationships with
our customers, employees, the communities
where we operate and other stakeholders.
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
perormance and the quality, depth and
continuity of management required to meet
the company’s strategic objectives. Hydro One
is commited to establishing and 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.
Board Structure: The Chair is responsible
for leading the Board of Directors in carrying
out its duties and responsibilities efectively,
efciently and independent of management.
The Chair is nominated and confrmed
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 Ofcer and is
independent of Hydro One and the Province
of Ontario.
In 2022, the Board continued to enhance
its oversight of Hydro One’s approach to
ESG maters relating to the long-term health
and sustainability of the company. This
oversight includes reviewing and approving
the company’s key sustainability priorities,
its programs, and its annual sustainability
repor. The sustainability repor is aligned
with the Sustainability Accounting Standards
Board (SASB), United Nations Sustainability
Development Goals (UNSDGs) and the
Global Reporing Initiative (GRI), and prepared
broadly following the recommendations of
the Task Force on Climate-related Financial
Disclosures (TCFD).
Board Gender Diversity1
Board of Directors and Committees (as of February 14, 2023)
40%
Female Directors
40%
Female
60%
Male
Chair • Committee Member
Commitees
Timothy Hodgson2 (Chair)
David Lebeter2 (President & CEO)
Cherie Brant
Blair Cowper-Smith
David Hay
Stacey Mowbray
Mark Podlasly
Russel Roberson
William Shefeld
Melissa Sonberg
Susan Wolburgh Jenah
Audit
Governance &
Regulatory
Human
Resources
Indigenous Peoples,
Safety & Operations
•
•
•
•
•
•
•
•
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•
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•
To learn more about the Directors, commitee mandates and composition, go to
www.hydroone.com/about/corporate-information/governance
Hydro One’s Independent Non-Executive Board Members.
1
2 Timothy Hodgson and David Lebeter are not members of any of the Commitees, but atend all Commitee meetings.
9
Hydro One Limited Annual Report 2022
Board of Directors
1.
Timothy Hodgson, MBA, FCPA, ICD.D
Corporate Director, Chair of Hydro One
Limited and the New Self-Regulatory
Organization of Canada. Director Dialogue
Health Technologies, Ontario Teachers’
Pension Plan and Propery and Casualty
Insurance Compensation Corporation.
Former Director Public Sector Pension
Investment Board (PSP Investments),
Alignvest Acquisition Corporation, Alignvest
Acquisition II Corporation, Sagicor Financial
Corporation, Sagicor Group Jamaica, MEG
Energy, The Global Risk Institute, KGS-
Alpha Capital Markets, Next Canada, the
Ivey School of Business and Bridgepoint
Health. Retired Managing Parner Alignvest
Management Corporation, Former Special
Advisor to the then Bank of Canada
Governor Mark Carney, and Former CEO
Goldman Sachs Canada
2. Cherie Brant, BES, J.D. Parner, Borden
Ladner Gervais LLP, Director Toronto-
Dominion Bank, Canadian Club of Toronto,
Canadian Council for Aboriginal Business.
Former Director Women’s College Hospital,
Director Trillium Gift of Life and Anishnawbe
Health Foundation
3. Blair Cowper-Smith, LLB, LLM, ICD.D
Principal and founder Erin Park Business
Solutions, Former Chief Corporate Afairs
Ofcer OMERS, Former Senior Parner
at McCarhy Tetrault LLP. Director Porer
Airlines, Financial Services Regulatory
Authority of Ontario, Face the Future
Foundation and Advisory Board Chair of
Timbercreek Capital. Faculty, Directors
College McMaster University. Former Public
Policy Commitee Member of the Canadian
Coalition for Good Governance and Former
Member of Securities Advisory Commitee
of the Ontario Securities Commission.
Former Director 407 ETR, Golf Town and
the Global Strategic Investment Alliance
4. David Hay, LLB, ICD.D Managing Director
Delgatie Incorporated, Former President
and CEO New Brunswick Power Corporation,
Former Vice-Chair and Managing Director
of CIBC World Markets Inc., Director EPCOR
Utilities Inc., Member of the Exper Panel on
Churchill Falls 2041 and the Council of Clean
& Reliable Energy. Former Director Toronto
Hydro-Electric System Limited and Former
Director Associated Electric & Gas Insurance
Services Limited (AEGIS). Former Chair
Beaverbrook Ar Gallery and SHAD Canada
5. Stacey Mowbray, MBA, ICD.D Corporate
Director, Former President Norh America
WW International (formerly Weight
Watchers), Former President and CEO at
The Second Cup Ltd., Director Currency
Exchange International/Exchange Bank of
Canada, Sleep Country Canada Holdings
Inc., Bonne O Holdings, Director dentalcorp
Holdings Ltd. Former Director Trillium
Health Parners, Second Cup Cofee, Liquor
Control Board of Ontario and Niagara
Ventures Corporation and Former Chair of
the Cofee Association of Canada
6. Mark Podlasly, Chief Sustainability Ofcer
at the First Nations Major Projects Coalition,
member of the Indigenous Advisory Council
at CN Rail, a member of the External Exper
Panel of the Manitoba Government (Crown
Services), Chair of the First Nations Limited
Parnership (Gas Pipeline), a Trustee of
the Nlaka’pamux Nation Legacy Trust,
and a member of the Climate Strategy
Advisory Board at the Institute of Corporate
Directors, and an Adjunct Professor at
the University of British Columbia Sauder
School of Business
Russel Roberson, FCPA, FCA, ICD
Corporate Director, Director Bausch
Health Companies Inc. and Bausch & Lomb
Corporation. Former Director Turquoise
Hill Resources Ltd. and Virus Investment
Parners Inc., former CFO, BMO Financial
Group, former Vice-Chair, Deloite & Touche
LLP (Canada), former Canadian Managing
Parner, Arhur Andersen LLP (Canada)
7.
8. William Shefeld, BSC, MBA, ICD.D
Corporate Director, Director Atlantic
Packaging, former CEO Sappi Fine Papers,
former Director Ontario Power Generation,
Canada Post Corporation, Velan Inc.,
Houston Wire & Cable Company, Pan Asia
Paper, Corby Distilleries, Royal Group
Technologies, 4iiii Innovations Inc., Family
Enterprise Canada, and SHAD
9. Melissa Sonberg, BSC, MHA, ICD.D
Professor of Practice, McGill University,
Desautels Faculty of Management. Director
Exchange Income Corporation, Athennian,
Enghouse Systems Ltd. and Montreal
Children’s Hospital Foundation. Former
Director Group Touchete, Via Rail Canada,
MD Financial Holdings Inc., Rideau, Inc.,
McGill University Health Centre. Former
Senior Vice President, Human Resources &
Corporate Afairs and Senior Vice President,
Global Brands, Communications and
External Afairs at AIMIA
10. Susan Wolburgh Jenah, J.D., ICD.D
Corporate Director, Former President &
CEO of the Investment Industry Regulatory
Organization of Canada. Director Laurentian
Bank of Canada and Aecon Group Inc.,
Vice-Chair Humber River Hospital. Member
of the Independent Review Commitee of
Vanguard Investments Canada. Former
Public Governor of the U.S. Financial
Industry Regulatory Authority (FINRA),
former Chair of the NEO Exchange, former
Director of The Global Risk Institute, former
Director of Aequitas Innovations. Former
Vice-Chair, Acting Chair, General Counsel
and Head of International Afairs at the
Ontario Securities Commission. Member of
the C.D. Howe National Advisory Council and
former Mentor to the Catalyst Women on
Board Program
Executive Leadership Team
11. David Lebeter, President and Chief Executive Ofcer
12. Brad Bowness, Chief Information Ofcer
13. Paul Harricks, Chief Legal Ofcer
14. Chris Lopez, Chief Financial Ofcer
15. Megan Telford, Chief Human Resources Ofcer
10
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
For detailed biographical information of Hydro One Limited Board
members, visit www.HydroOne.com/Investors. The biographical
information of Hydro One Limited Board members is based on
information available as of February 14, 2023.
Hydro One Limited Annual Report 2022
Hydro One’s Business Network & Role in Ontario’s
Electricity System
Our Rate Regulated Business
Transmission: Our transmission system transmits high-voltage
electricity from nuclear, hydroelectric, natural gas, wind and solar
sources to local distribution companies and industrial customers
across Ontario. Our system accounts for approximately 92%1 of
Ontario’s transmission capacity with approximately 30,000 circuit
kilometres of high-voltage transmission lines. We also own and
operate 25 cross-border interconnections with neighbouring
provinces and the United States, which allow electricity to fow into
and out of Ontario.
Distribution: Our distribution system is the largest2 in Ontario. It
consists of approximately 125,000 circuit kilometres of primary
low-voltage power lines serving approximately 1.5 million customers,
mostly in rural areas. As well, Hydro One Remote Communities
Inc. serves customers in three grid-connected and 19 of-grid
communities in Ontario’s far norh.
Our Other Businesses
In addition to supporing Hydro One’s regulated business segments,
Acronym Solutions Inc. ofers a comprehensive suite of information
and communications technology within a number of categories
including: Network and Internet; Operations; Cloud; Managed
Security; and Voice and Collaboration, that extend beyond its fbre
optic network, in a competitive commercial market. We also invested
in Ivy™ Charging Network (“Ivy”), a joint venture between Hydro One
and Ontario Power Generation Inc. (OPG), which provides electric
vehicle (EV) charging network services. We have also established an
Energy Management Services business and are providing behind-
the-meter batery energy storage system solutions to commercial
and industrial customers, in parnership with PowerFlex, an EDF
Renewables company.
Our Role as a Transmission and Distribution Company
Our transmission and distribution system safely and reliably serves
communities throughout Ontario. Hydro One’s transmission
business operates and maintains most of the high-voltage
transmission system that carries electricity from generators to
local distribution companies or large industrial customers, such
as manufacturers.
Through our distribution business, we also operate and maintain
low-voltage distribution systems that carry electricity from
transformer stations to distribution stations, to pole-top
transformers through power lines, and into homes and businesses.
A mix of private companies and government-owned entities
generate power for all of Ontario and the sources of power are
managed by the Independent Electricity System Operator (IESO).
m
e
t
s
y
s
r
e
w
o
p
c
i
r
t
c
e
e
o
i
r
a
t
n
O
e
h
t
n
l
i
l
e
o
r
s
’
e
n
O
o
r
d
y
H
Electricity Generation Sources
Transformer
(increased to higher voltage)
Transmission System
Transformer
(decreased to medium voltage)
i
i
n
o
s
s
m
s
n
a
r
T
n
o
i
t
u
b
i
r
t
s
D
i
Distribution System
Transformer
(decreased to lower voltage)
Industrial, Commercial and Residential Customers
1 Based on revenue approved by the OEB
2 Based on customers (per OEB yearbook)
The above image shows a typical electricity system with transmission-connected generation.
11
Hydro One Limited Annual Report 2022
Why Invest in
Hydro One?
Everyone Uses Electricity
One of the largest electric
utilities in North America, with
significant scale and leadership
position across Canada’s most
populated province.
Strong Balance Sheet
Investment grade balance
sheet with one of the lowest
debt costs in the utility sector.
-
Hydro One is a unique
low risk opportunity to
participate in a premium
large scale electric utility as
it addresses the needs from
energy transition.
-
Pure-play Transmission
and Distribution
Unique combination of electric
power transmission and local
distribution, with no power
generation assets.
Stable Operations
Stable and growing cash
flows with 99% of overall
revenues fully rate-regulated
in a constructive, transparent
and collaborative regulatory
environment.
Attractive Dividend
Annualized dividend of $1.1184
per share with an attractive
70%–80% target payout ratio.
Rate Base Expansion
Opportunity for continued
rate base growth with a
forward approved regulatory
application, new transmission
lines, broadband initiative
and continued consolidation.
Transparent ESG Reporting
Transparency in our environmental,
social and governance reporting
with public policies and
sustainability targets.
Financial Performance
Predictable self-funding organic
growth profile with expanding
rate base and strong cash flows,
together with broad support
for refurbishment of aging
infrastructure. No external equity
required to fund planned growth.
1212
12345678Hydro One Limited Annual Report 2022
Financial Highlights
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, amorization and asset removal costs
Financing charges
Income tax expense (recovery)
Net income to common shareholders of Hydro One
Basic earnings per common share (EPS)
Diluted EPS
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)
As at December 31
Debt to capitalization ratio2
2022
7,780
3,724
4,056
1,258
966
486
288
1,050
$ 1.75
$ 1.75
2,260
2,189
2,132
2,267
20,368
30,803
2022
56.4%
2021
7,225
3,579
3,646
1,112
922
461
178
965
$ 1.61
$ 1.61
2,149
2,041
2,125
1,757
19,915
29,966
2021
56.5%
1 The Company prepares and presents its fnancial statements in accordance with United States (US) generally accepted accounting principles (GAAP). The Company also utilizes non-GAAP fnancial measures to
assess its business and measure overall underlying business perormance. Revenues, net of purchased power and FFO are non-GAAP fnancial measures. Non-GAAP fnancial measures do not have a standardized
meaning under GAAP, which is used to prepare the Company’s fnancial statements and might not be comparable to similar fnancial measures presented by other entities. Additional disclosure for these non-
GAAP fnancial measures is incorporated by reference herein and can be found in the section titled “Non-GAAP Financial Measures” of Hydro One Limited’s management’s discussion and analysis for the years
ended December 31, 2022 and 2021 (the Annual MD&A) available on SEDAR under the company’s profle at www.sedar.com.
2 Debt to capitalization ratio is a non-GAAP ratio. Non-GAAP ratios do not have a standardized meaning under GAAP, which is used to prepare the Company’s Consolidated Financial Statements, and might not be
comparable to similar fnancial measures presented by other entities. The Debt to capitalization ratio has been calculated as total debt (including total long-term debt and shor-term borrowings, net of cash and
cash equivalents) divided by total debt plus total shareholders’ equity, but excluding any amounts related to non-controlling interest. Additional disclosure for this non-GAAP ratio is incorporated by reference
herein and can be found under the section titled “Non-GAAP Financial Measures” in the Annual MD&A available on SEDAR under the Company’s profle at www.sedar.com.
Total Assets
Rate Base
2% 60%
39% 61%
Revenues1
(Net of purchased
power costs)
1% 51%
Regulated Earnings
(Before financing charges
and income taxes)
40% 60%
$31.5b
$23.6b
$4.1b
$1.9b
38%
Transmission
Distribution
Other
48%
Total Shareholder Return
(TSR)
January 1, 2022 to
December 31, 2022
Hydro One
+13.7%
S&P/TSX Capped Utilities Index
-10.6%
S&P/TSX Composite Index
-5.8%
S&P 500 Electric Utilities Index
S&P 500 Index
-18.1%
+2.3%
This repor contains forward-looking information within the meaning of applicable Canadian securities laws that are based on current expectations, estimates, forecasts and projections about our business and the
industry in which we operate, and includes beliefs and assumptions made by the management of Hydro One. Such information includes, but is not limited to, statements relating to: Hydro One’s new equity parnership
model with First Nations and expected infrastructure benefts for First Nation communities; expectations regarding Hydro One’s 2023–2027 Investment Plan for our transmission and distribution systems and expected
outcomes and impacts; Hydro One’s commitments to increasing Indigenous procurement spend, including the company’s procurement target for Indigenous businesses at 5% of our purchases of materials and
services by 2026; the company’s expectations to becoming the safest and most efcient utility, and to diversity, equity and inclusion; Hydro One’s investments in infrastructure, technology and innovation to build a
more sustainable and resilient grid, and expected outcomes; Hydro One’s stable and growing cash fows, our 70%–80% target dividend payout ratio, continued dividend growth, organic growth profle, expanding rate
base, and expectations regarding funding of planned growth; Hydro One’s strategy and focus, including anticipated outcomes and impacts. Words such as “expect” and “will” are intended to identify such forward-
looking statements. These statements are not guarantees of future perormance and involve assumptions and risks and uncerainties that are difcult to predict. Therefore, actual outcomes and results may difer
materially from what is expressed, implied or forecasted in such forward-looking statements. Some of the factors that could cause actual results or outcomes to difer materially from the results expressed, implied
or forecasted by such forward-looking information, including some of the assumptions used in making such statements, are discussed more fully in Hydro One Limited’s and Hydro One Inc.’s flings with the securities
regulatory authorities in Canada, which are available on SEDAR at www.sedar.com. We do not intend, and we disclaim any obligation, to update any forward-looking statements, except as required by law.
All fgures in this document are approximate fgures that are rounded to the nearest decimal place.
13
Hydro One Limited Annual Report 2022
Financial Report
Contents
15 Management’s Discussion and Analysis
52 Consolidated Financial Statements
56 Notes to Consolidated Financial Statements
97 Corporate and Shareholder Information
14
Hydro One Limited Annual Report 2022
Management’s Discussion and Analysis
For the years ended December 31, 2022 and 2021
The following Management’s Discussion and Analysis (MD&A) of the
fnancial condition and results of operations should be read together
with the consolidated fnancial statements and accompanying notes
thereto of Hydro One Limited (Hydro One or the Company) for the
year ended December 31, 2022 (together, the Consolidated Financial
Statements). The Consolidated Financial Statements have been
prepared in accordance with United States (US) Generally Accepted
Accounting Principles (GAAP). All fnancial information in this MD&A is
presented in Canadian dollars, unless otherwise indicated.
Consolidated Financial Highlights and Statistics
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, amorization and asset removal costs
Financing charges
Income tax expense
Net income to common shareholders of Hydro One
Basic earnings per common share (EPS)
Diluted EPS
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)
As at December 31
Debt to capitalization ratio2
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 permited to prepare this MD&A in
accordance with the disclosure requirements of Canadian securities
laws and regulations, which can vary from those of the US. This MD&A
provides information as at and for the year ended December 31, 2022,
based on information available to management as of February 13, 2023.
2022
7,780
3,724
4,056
1,258
966
486
288
1,050
2021
7,225
3,579
3,646
1,112
922
461
178
965
$ 1.75
$ 1.75
$ 1.61
$ 1.61
2,260
2,189
2,132
2,267
20,368
30,803
2022
56.4%
2,149
2,041
2,125
1,757
19,915
29,966
2021
56.5%
Change
7.7%
4.1%
11.2%
13.1%
4.8%
5.4%
61.8%
8.8%
8.7%
8.7%
5.2%
7.3%
0.3%
29.0%
2.3%
2.8%
1 The Company prepares and presents its fnancial statements in accordance with US GAAP. The Company also utilizes non-GAAP fnancial measures to assess its business and measure
overall underlying business perormance. Revenues, net of purchased power and FFO are non-GAAP fnancial measures. Non-GAAP fnancial measures do not have a standardized
meaning under GAAP, which is used to prepare the Company’s Consolidated Financial Statements and might not be comparable to similar fnancial measures presented by other
entities. See section “Non-GAAP Financial Measures” for a discussion of these non-GAAP fnancial measures and a reconciliation of such measures to the most directly comparable
GAAP measure.
2 Debt to capitalization ratio is a non-GAAP ratio. Non-GAAP ratios do not have a standardized meaning under GAAP, which is used to prepare the Company’s Consolidated Financial
Statements, and might not be comparable to similar fnancial measures presented by other entities. See section “Non-GAAP Financial Measures” for a discussion of this non-GAAP
ratio and its component elements.
15
Hydro One Limited Annual Report 2022
Overview
Through its wholly-owned subsidiary Hydro One Inc., Hydro One
is Ontario’s largest electricity transmission and distribution utility.
Hydro One owns and operates substantially all of Ontario’s electricity
transmission network and is the largest electricity distributor in Ontario
by number of customers. The Company’s regulated transmission and
distribution operations are owned by Hydro One Inc. Hydro One delivers
electricity safely and reliably to approximately 1.5 million customers across
the province of Ontario, and to large industrial customers and municipal
utilities. Through its subsidiaries, Hydro One Inc. owns and operates
approximately 30,000 circuit kilometres of high-voltage transmission
lines and approximately 125,000 circuit kilometres of primary low-voltage
distribution lines. Hydro One has three segments: (i) transmission;
(ii) distribution; and (iii) other.
For the years ended December 31, 2022 and 2021, Hydro One's segments accounted for the Company's total revenues, as follows:
Year ended December 31
Transmission
Distribution
Other
2022
26%
73%
1%
2021
25%
74%
1%
When adjusted for the recovery of purchased power costs, Hydro One’s segments accounted for the Company’s total revenues, net of purchased
power,1 for the years ended December 31, 2022 and 2021 as follows:
Year ended December 31
Transmission
Distribution
Other
At December 31, 2022 and 2021, Hydro One’s segments accounted for the Company’s total assets as follows:
Year ended December 31
Transmission
Distribution
Other
2022
51%
48%
1%
2022
60%
38%
2%
2021
50%
49%
1%
2021
60%
38%
2%
Transmission Segment
Hydro One’s transmission business owns, operates and maintains
Hydro One's transmission system, which accounts for approximately
92% (2021 - 98%) of Ontario’s transmission capacity based on revenue
approved by the Ontario Energy Board (OEB). As at December 31, 2022,
the Company's transmission business consists of the transmission
system operated by subsidiaries of Hydro One Inc. (a wholly owned
subsidiary of the Company), 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 Parnership (B2M LP),
and an approximately 55% interest in Niagara Reinforcement Limited
Parnership (NRLP). The Company’s transmission business is rate-
regulated and earns revenues mainly by charging transmission rates
that are approved by the OEB.
As at and for the year ended December 31
Electricity transmited1 (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 transmited represents total electricity transmited in Ontario by all transmiters.
2022
2021
137,569,865
133,844,210
29,910
14,450
1,209
1,405
30,023
13,745
1,320
1,008
1
Revenues, net of purchased power, is a non-GAAP fnancial measure. See section “Non-GAAP Financial Measures”.
16
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Distribution Segment
Hydro One’s distribution business is the largest in Ontario and consists
of the distribution systems operated by Hydro One Inc.'s subsidiaries,
Hydro One Networks, and Hydro One Remote Communities Inc.
(Hydro One Remotes). The Company’s distribution business is rate-
regulated and earns revenues mainly by charging distribution rates that
are approved by the OEB, as well as amounts to recover the cost of
purchased power.
As at and for the year ended December 31
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)
2022
30,803
40,875
125,013
1,492,404
9,155
899
853
2021
29,966
40,433
124,825
1,476,491
8,854
787
738
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).
2022 Distribution Revenues
Residential 57%
General Service 27%
Large Users 9%
Embedded Distributors 7%
Other Segment
Hydro One's other segment consists principally of its telecommunications
business, which provides telecommunications suppor for the
Company’s transmission and distribution businesses, as well as cerain
corporate activities.
The telecommunication business is carried out by Hydro One's wholly-
owned subsidiary, Acronym Solutions Inc. (Acronym). In addition to
supporing Hydro One's regulated business segments, Acronym ofers
a comprehensive suite of Information Communications Technology
solutions within a number of categories (including: Internet & Network,
Security, Voice & Collaboration, Cloud and Managed IT) that extend
beyond its fbre optic network, in a competitive commercial market.
Acronym is not regulated by the OEB, however Acronym is registered
with the Canadian Radio-television and Telecommunications
Commission as a non-dominant, facilities-based carrier, providing
broadband telecommunications services in Ontario with connections to
Montreal, Quebec; Bufalo, New York; and Detroit, Michigan.
Hydro One's other segment also includes the deferred tax asset which
arose from the revaluation of the tax bases of Hydro One’s assets to
fair market value when the Company transitioned from the provincial
payments in lieu of tax regime to the federal tax regime at the time of
the Company’s initial public ofering in 2015. Furhermore, Hydro One's
other segment also includes Aux Energy Inc., a wholly-owned subsidiary
that provides energy solutions to commercial and industrial clients, and
Ontario Charging Network LP, a joint venture that owns and operates
electric vehicle fast charging stations across Ontario under the Ivy
Charging Network brand, as well as cerain corporate activities, and is
not rate-regulated.
Primary Factors Afecting 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 suppor a transmission system with
sufcient capacity to accommodate maximum forecasted demand
and a regulated return on the Company’s investment. Peak electricity
demand is primarily infuenced by weather and economic conditions.
Transmission revenues also include expor revenues associated with
transmiting electricity to markets outside of Ontario as well as ancillary
revenues associated with providing maintenance services to power
generators and from third-pary land use.
Distribution Revenues
Distribution revenues primarily consist of regulated distribution rates
approved by the OEB, as well as the recovery of purchased power
costs. Distribution rates are designed to generate revenues necessary
to construct and suppor the local distribution system with sufcient
capacity to accommodate existing and new customer demand and a
regulated return on the Company’s investment. Accordingly, distribution
revenues are infuenced 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: (i) the wholesale commodity cost of
energy; (ii) the Global Adjustment, which is the diference between the
guaranteed price and the money the generators earn in the wholesale
17
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
marketplace; and (iii) the wholesale market service and transmission
charges levied by the IESO. Hydro One passes on 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 suppor the operation and maintenance
of the transmission and distribution systems, and include other costs
such as propery taxes related to transmission and distribution stations
and buildings, and the operation of information technology (IT) systems.
Transmission OM&A costs are required 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 distances 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 efciency and
productivity initiatives, while continuing to complete planned work
programs associated with the development and maintenance of its
transmission and distribution networks.
Depreciation, Amorization and Asset Removal Costs
Depreciation and amorization costs relate primarily to depreciation
of the Company’s propery, plant and equipment, and amorization of
cerain intangible assets and regulatory assets. Asset removal costs
consist of costs incurred to remove propery, plant and equipment
where no asset retirement obligations have been recorded on the
balance sheet.
Financing Charges
Financing charges relate to the Company’s fnancing activities, and
include interest expense on the Company’s long-term debt and shor-
term borrowings, as well as gains and losses on interest rate swap
agreements, foreign exchange or other similar contracts, net of interest
earned on shor-term investments. A porion of fnancing charges
incurred by the Company is capitalized to the cost of propery, plant
and equipment associated with the periods during which such assets
are under construction before being placed in-service.
Results of Operations
Net Income
Net income atributable to common shareholders of Hydro One for
the year ended December 31, 2022 of $1,050 million is an increase
of $85 million, or 8.8%, from the prior year. Signifcant infuences on
the change in net income atributable to common shareholders of
Hydro One included:
● higher revenues, net of purchased power,2 resulting from:
— an increase in transmission revenues due to OEB-approved 2022
transmission rates, higher peak demand and the recognition
of conservation and demand management (CDM) revenues
following receipt of the OEB's Decision and Order approving
Hydro One's Joint Rate Application (JRAP) Setlement Proposal in
November 2022 (JRAP Decision); and
— an increase in distribution revenues, net of purchased power,2
mainly due to OEB-approved 2022 distribution rates.
● higher OM&A costs primarily resulting from higher work program
expenditures including environmental management, stations and
lines maintenance, and IT initiatives.
● higher depreciation, amorization and asset removal costs due to
growth in capital assets as the Company continues to place new
assets in-service, consistent with its ongoing capital investment
program, as well as higher asset removal costs primarily resulting
from storm restoration efors, parially ofset by a gain realized on
the sale of surplus propery.
● higher fnancing charges atributable to the recognition of carrying
charges associated with the recovery of deferred tax asset (DTA)
amounts previously shared with ratepayers (DTA Recovery Amounts)
pursuant to the OEB's decision in April 2021 (DTA Implementation
Decision) in the second quarer of 2021, as well as higher weighted-
average interest rates on shor-term notes.
● higher income tax expense primarily atributable to:
— higher pre-tax earnings adjusted for the impact of the DTA
Recovery Amounts pursuant to the DTA Implementation
Decision; parially ofset by
— higher deductible timing diferences compared to the prior year.
Revenue was also positively impacted by the DTA Implementation
Decision. In its decision, the OEB approved recovery of DTA amounts
allocated to ratepayers and included in customer rates for the 2017
to 2021 period plus carrying charges over a two-year recovery period
commencing on July 1, 2021. In addition, the DTA Implementation
Decision required that Hydro One adjust the transmission revenue
requirement and base distribution rates efective January 1, 2022 to
eliminate any furher tax savings fowing to customers. These impacts
are parially ofset by the impact of a regulatory adjustment recognized
following receipt of the JRAP decision which resulted from the
deduction of capitalized overheads for tax purposes in excess of those
deducted for rate making purposes (Capitalized Overhead Tax Variance).
Together these items are ofset by a net increase in tax expense and are
therefore net income neutral in the period. See section "Regulation" for
additional details.
EPS
EPS was $1.75 for the year ended December 31, 2022, compared to EPS
of $1.61 in 2021. The increase in EPS was primarily driven by the impact
of higher earnings year over year, as noted above.
2 Revenues, net of purchased power, is a non-GAAP fnancial measure. See the section
“Non-GAAP Financial Measures”.
18
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Revenues
Year ended December 31 (millions of dollars, except as otherwise noted)
Transmission
Distribution
Other
Total revenues
Transmission
Distribution revenues, net of purchased power1
Other
Total revenues, net of purchased power1
2022
2,077
5,660
43
7,780
2,077
1,936
43
4,056
2021
1,824
5,359
42
7,225
1,824
1,780
42
3,646
Transmission: Average monthly Ontario 60-minute peak demand (MW)
Distribution:
Electricity distributed to Hydro One customers (GWh)
20,368
30,803
19,915
29,966
1 Revenues, net of purchased power, is a non-GAAP fnancial measure. See section “Non-GAAP Financial Measures”.
Change
13.9%
5.6%
2.4%
7.7%
13.9%
8.8%
2.4%
11.2%
2.3%
2.8%
Transmission Revenues
Transmission revenues increased by 13.9% compared to the year ended
December 31, 2021, primarily due to the following:
Distribution Revenues
Distribution revenues increased by 5.6% compared to the year ended
December 31, 2021, primarily due to the following:
● higher revenues resulting from OEB-approved 2022 rates;
● higher purchased power costs, which are fully recovered from
● higher peak demand; and
● positive regulatory adjustments, including the recognition of CDM
revenues following the receipt of the JRAP Decision which was
parially ofset by a deferred adjustment associated with the OEB-
approved Earnings Sharing Mechanism; parially ofset by
● net income neutral items, including DTA Recovery Amounts and the
adjustment to transmission revenue requirement efective January 1,
2022 to cease sharing of DTA amounts going forward, pursuant
to the DTA Implementation Decision which was parially ofset by a
regulatory adjustment associated with the Capitalized Overhead Tax
Variance. The net increase in revenue is ofset by a corresponding
net increase in tax expense..
OM&A Costs
Year ended December 31 (millions of dollars)
Transmission
Distribution
Other
ratepayers and are thus net income neutral;
● higher revenues resulting from OEB-approved 2022 rates; and
● a lower deferred regulatory adjustment associated with the Earnings
Sharing Mechanism in 2022; parially ofset by
● net income neutral items, including DTA Recovery Amounts and the
adjustment to base distribution rates efective January 1, 2022 to
cease sharing of DTA amounts going forward, pursuant to the DTA
Implementation Decision which was parially ofset by a regulatory
adjustment associated with the Capitalized Overhead Tax Variance.
The net increase in revenue is ofset by a corresponding net increase
in tax expense.
Distribution revenues, net of purchased power,3 increased by 8.8%
during the year ended December 31, 2022, primarily due to the reasons
noted above, adjusted for the recovery of purchased power costs.
3 Revenues, net of purchased power, is a non-GAAP fnancial measure. See section
“Non-GAAP Financial Measures”.
2022
445
739
74
1,258
2021
397
658
57
1,112
Change
12.1%
12.3%
29.8%
13.1%
Transmission OM&A Costs
Transmission OM&A costs were 12.1% higher than the year ended
December 31, 2021, primarily due to:
Distribution OM&A Costs
Distribution OM&A costs were 12.3% higher than the year ended
December 31, 2021, primarily due to:
● higher work program expenditures including those related to a
higher volume of maintenance work on stations, lines and facilities;
● higher propery taxes; and
● higher corporate suppor costs; parially ofset by
●
lower project write-ofs.
● higher work program expenditures related to emergency restoration,
environmental management, IT initiatives and customer programs as
well as increased spend on technical studies;
● costs related to storm restoration efors that have been recovered
from third paries and are ofset in revenue, therefore net
income neutral;
19
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
● higher project write-ofs; and
● higher allowance for doubtful accounts; parially ofset by
● costs associated with the integration of the Peterborough
Distribution and Orillia Power operations in the prior year.
Depreciation, Amorization and Asset Removal Costs
Depreciation, amorization and asset removal costs increased by
$44 million, or 4.8%, for the year ended December 31, 2022, primarily
due to growth in capital assets as the Company continues to place
new assets in-service, consistent with its ongoing capital investment
program, and higher asset removal costs primarily resulting from
storm-related asset replacements. These increases were parially ofset
by a gain realized on the sale of surplus propery in the fourh quarer
of 2022.
Financing Charges
Financing charges increased by $25 million, or 5.4%, for the year ended
December 31, 2022, primarily due to higher weighted-average interest
rates on shor-term notes and the recognition of carrying charges
associated with the DTA Recovery Amounts pursuant to the DTA
Implementation Decision in the prior year, which were parially ofset by
the change in gains and losses on interest-rate swap agreements year
over year.
Income Tax Expense
Income taxes are accounted for using the asset and liability method.
Current taxes are recorded based on the taxes expected to be paid in
respect of the current and prior years’ taxable income. Deferred tax
assets and liabilities are recognized for the future tax consequences
atributable to temporary diferences between the fnancial statement
carrying amounts and the respective tax basis of assets and liabilities
including carryforward unused tax losses and credits.
As prescribed by the regulators, the Company recovers income taxes in
revenues from ratepayers based on estimate of current tax expense in
respect of regulated operations. The amounts of deferred income taxes
related to regulated operations, which are considered to be more likely-
than-not of recovery from, or refund to, ratepayers in future periods
are recognized as deferred income tax regulatory assets or liabilities,
with an ofset to deferred tax expense. Therefore the consolidated tax
expense or recovery for the current period is based on the total current
and deferred tax expense or recovery, net of the regulatory accounting
ofset to deferred tax expense arising from temporary diferences
recoverable from or refundable to customers in the future.
Income tax expense was $288 million for the year ended December 31,
2022, compared to $178 million in 2021. The $110 million increase
in income tax expense for the year ended December 31, 2022 was
primarily atributable to:
● net income neutral items, including incremental tax expense relating
to the DTA Implementation Decision which was parially ofset by the
tax recovery relating to Capitalized Overhead Tax Variance. The net
tax expense is ofset by a corresponding net increase in revenue; and
● higher pre-tax earnings adjusted for the DTA Implementation
Decision and Capitalized Overhead Tax Variance; parially ofset by
● higher deductible timing diferences compared to the prior year.
The Company realized an efective tax rate (ETR) of approximately 21.4%
for the year ended December 31, 2022 compared to approximately 15.5%
realized in 2021. The increase of 5.9% was primarily atributable to the
factors noted above.
Common Share Dividends
In 2022, the Company declared and paid cash dividends to common shareholders as follows:
Date Declared
February 24, 2022
May 4, 2022
August 8, 2022
November 10, 2022
Record Date
March 16, 2022
June 8, 2022
September 14, 2022
December 14, 2022
Payment Date
March 31, 2022
June 30, 2022
September 29, 2022
December 30, 2022
Amount per Share
Total Amount
(millions of dollars)
$ 0.2663
$ 0.2796
$ 0.2796
$ 0.2796
159
168
167
168
662
Following the conclusion of the fourh quarer of 2022, the Company declared a cash dividend to common shareholders as follows:
Date Declared
February 13, 2023
Record Date
March 15, 2023
Payment Date
March 31, 2023
Amount per Share
$ 0.2796
Total Amount
(millions of dollars)
167
20
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Selected Annual Financial Statistics
Year ended December 31 (millions of dollars, except per share amounts)
Revenues
Net income to common shareholders of Hydro One
Basic EPS
Diluted EPS
Basic Adjusted EPS1
Diluted Adjusted EPS1
Dividends per common share declared
Dividends per preferred share declared2
As at December 31 (millions of dollars)
Total assets
Total non-current financial liabilities3
2022
7,780
1,050
$ 1.75
$ 1.75
$ 1.75
$ 1.75
$ 1.11
n/a
2022
31,457
13,073
2021
7,225
965
$ 1.61
$ 1.61
$ 1.61
$ 1.61
$ 1.05
n/a
2021
30,383
13,066
2020
7,290
1,770
$ 2.96
$ 2.95
$ 1.51
$ 1.51
$ 1.00
$ 1.20
2020
30,294
12,813
1 Adjusted EPS (basic and diluted) are non-GAAP fnancial measures. See the section "Non-GAAP Financial Measures".
2 Preferred dividends per share are calculated using the weighted average number of preferred shares outstanding during each year. The preferred share dividends paid in 2020 were
$18 million. All the preferred shares were redeemed on November 20, 2020.
3 Total non-current fnancial liabilities include long-term debt, long-term lease obligations, derivative liabilities, and long-term accounts payable.
Net Income - 2021 compared to 2020
Net income atributable to common shareholders of Hydro One for
the year ended December 31, 2021 of $965 million is a decrease of
$805 million, or 45.5%, from the prior year. Signifcant infuences on net
income included:
● higher depreciation, amorization and asset removal costs due to
growth in capital assets as the Company continues to place new
assets in-service, consistent with its ongoing capital investment
program, as well as higher environmental spend and higher asset
removal cost.
● higher revenues, net of purchased power4, primarily resulting from:
● higher income tax expense primarily atributable to:
—
—
an increase in distribution revenues, net of purchased power4 ,
primarily due to OEB-approved distribution rates, DTA Recovery
Amounts pursuant to the DTA Implementation Decision, and
the temporary suspension of late payment charges in the prior
year, which were accompanied by the Company's efors to help
customers access relief programs, including fexible payment
options; and
an increase in transmission revenues mainly due to OEB-
approved 2021 transmission rates and DTA Recovery Amounts
pursuant to the DTA Implementation Decision, parially ofset
by the recognition of CDM revenues in the prior year following
receipt of the 2020 OEB's Decision on transmission rates as well
as higher regulatory adjustments.
● higher OM&A costs primarily resulting from:
—
higher work program expenditures including IT initiatives,
emergency restoration efors, and vegetation management;
—
higher project write-ofs in 2021; and
—
lower insurance proceeds received in 2021; parially ofset by
—
lower costs related to COVID-19.
—
—
—
income tax recovery recorded in the prior year following the July
2020 decision of the Ontario Divisional Cour (ODC Decision)
(see section "Regulation - Deferred Tax Asset");
income tax expense relating to the DTA Recovery Amounts
pursuant to the DTA Implementation Decision; and
higher pre-tax earnings and lower net deductible timing
diferences.
Furher contributing to the year-over-year impact on net income
atributable to common shareholders was the redemption of the
Series 1 Preferred Shares announced in the third quarer of 2020.
EPS and Adjusted EPS - 2021 compared to 2020
EPS was $1.61 for the year ended December 31, 2021, compared to
EPS of $2.96 in 2020. The decrease in EPS was primarily driven by the
impact of lower earnings year over year, as noted above. Adjusted EPS5,
which adjusts for impacts of the ODC Decision, was $1.61 for the year
ended December 31, 2021 compared to $1.51 in 2020. The increase in
Adjusted EPS5 was driven by changes in net income for the year ended
December 31, 2021, as discussed above, but excluding the impacts of
the ODC Decision.
4 Revenues, net of purchased power, is a non-GAAP fnancial measure. See section
“Non-GAAP Financial Measures”.
5 Adjusted EPS, is a non-GAAP fnancial measure. See section “Non-GAAP
Financial Measures”.
21
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Quarerly Results of Operations
Quarer ended
(millions of dollars, except EPS and ratio)
Revenues
Purchased power
Revenues, net of purchased power1
Net income to common
shareholders
Dec 31, 2022 Sep 30, 2022
Jun 30, 2022 Mar 31, 2022
Dec 31, 2021
Sep 30, 2021
Jun 30, 2021 Mar 31, 2021
1,862
895
967
178
2,031
963
1,068
307
1,840
852
988
255
2,047
1,014
1,033
310
1,779
1,913
1,722
1,811
914
865
159
933
980
300
838
884
238
894
917
268
Basic EPS
Diluted EPS
$ 0.30
$ 0.30
$ 0.51
$ 0.51
$ 0.43
$ 0.42
$ 0.52
$ 0.52
$ 0.27
$ 0.26
$ 0.50
$ 0.50
$ 0.40
$ 0.40
$ 0.45
$ 0.45
Earnings coverage ratio2
3.3
3.3
3.3
3.2
3.1
3.1
3.0
2.9
1 Revenues, net of purchased power is a non-GAAP fnancial measure. See section “Non-GAAP Financial Measures”.
2 Earnings coverage ratio is a non-GAAP ratio. Non-GAAP ratios do not have a standardized meaning under GAAP, which is used to prepare the Company’s Consolidated Financial
Statements and might not be comparable to similar fnancial measures presented by other entities. See section “Non-GAAP Financial Measures” for a discussion of this non-GAAP ratio
and its component elements.
Variations in revenues and net income over the quarers are primarily due to the impact of seasonal weather conditions on customer demand and
market pricing, as well as timing of regulatory decisions.
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 suppor the continued operation of Hydro One’s
existing assets, and development capital investments, which involve additions to both 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 years ended December 31, 2022 and 2021:
Year ended December 31 (millions of dollars)
Transmission
Distribution
Other
Total assets placed in-service
2022
1,405
853
9
2,267
2021
1,008
738
11
1,757
Change
39.4%
15.6%
(18.2%)
29.0%
Transmission Assets Placed In-Service
Transmission assets placed in-service increased by $397 million, or
39.4%, during the year ended December 31, 2022, compared to the year
ended December 31, 2021, primarily due to the following:
Distribution Assets Placed In-Service
Distribution assets placed in-service increased by $115 million, or 15.6%,
during the year ended December 31, 2022, compared to the year ended
December 31, 2021, primarily due to the following:
●
●
substantial completion of the end-of-life air blast circuit breakers
replacement at Bruce B Switching Station;
timing of assets placed in-service for major development projects
including the new Lakeshore Transmission Station (TS) and the
Wataynikaneyap Line to Pickle Lake Connection, parially ofset by
the East-West Tie Connection;
● higher investments associated with customer connections placed
in-service; and
● higher volume of transmission line refurbishments and
replacements; parially ofset by
●
substantial completion of the new Ontario grid control centre in the
City of Orillia in 2021.
● higher volume of storm-related asset replacements following storms
in May and December 2022;
● parial in-service of the South Middle Road feeder development
project;
● higher volume of assets placed in-service associated with customer
connections; and
●
●
●
investment placed in-service for the Dunnville Operation Centre;
parially ofset by
substantial completion of the new Ontario grid control centre in the
City of Orillia in 2021; and
lower volume of work on line refurbishments and wood pole
replacements.
22
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Capital Investments
The following table presents Hydro One’s capital investments during the years ended December 31, 2022 and 2021:
Year ended December 31 (millions of dollars)
2022
2021
Change
Transmission
Sustaining
Development
Other
Distribution
Sustaining
Development
Other
Other
Total capital investments
897
214
98
1,209
433
383
83
899
24
906
296
118
1,320
335
332
120
787
18
2,132
2,125
(1.0%)
(27.7%)
(16.9%)
(8.4%)
29.3%
15.4%
(30.8%)
14.2%
33.3%
0.3%
Total 2022 capital investments of $2,132 million were largely in-line with the previously disclosed expected amount of $2,045 million.
Transmission Capital Investments
Transmission capital investments decreased by $111 million, or 8.4%,
in the year ended December 31, 2022 compared to the year ended
December 31, 2021, primarily due to the following:
●
●
●
timing of work on major development projects;
lower volume of station refurbishments and replacements;
investment in the new Ontario grid control centre in the City of Orillia
in 2021; and
●
lower volume of work on customer connections; parially ofset by
● higher spend on demand capital investment.
Distribution Capital Investments
Distribution capital investments increased by $112 million, or 14.2%,
in the year ended December 31, 2022 compared to the year ended
December 31, 2021, primarily due to the following:
● higher spend on storm-related asset replacements following the
storms in May and December 2022;
● higher volume of work on customer connections; and
● higher spend on system capability reinforcement projects; parially
● higher volume of transmission line refurbishments and
ofset by
replacements;
● higher spend on minor fxed asset and spare transformer
purchases; and
●
●
lower volume of line refurbishments and wood pole replacements; and
investment in the new Ontario grid control centre in the City of Orillia
in the prior year.
Major Transmission Capital Investment Projects
The following table summarizes the status of signifcant transmission projects at December 31, 2022:
Project Name
Location
Type
Development Projects:
Barrie Area Transmission
Upgrade
Barrie-Innisfl
Southern Ontario
Upgraded transmission line
and stations
Anticipated
In-Service Date
Estimated
Cost
Capital Cost
To Date
(year)
2023
(millions of dollars)
62
125
East-West Tie Station Expansion1 Norhern Ontario
New transmission connection
2024
191
182
Waasigan Transmission Line2
Thunder Bay-Atikokan-Dryden
Norhwestern Ontario
Southwestern Ontario
and station expansion
New transmission line and
station expansion
2024
68
New transmission line and
2025
268
station expansion
Chatham to Lakeshore
Transmission Line3
St. Clair
Transmission Line4
Longwood to Lakeshore
Transmission Line5
Southwestern Ontario
New transmission line and
2025
Southwestern Ontario
New transmission line and
station expansion
station expansion
Second Longwood to Lakeshore
Southwestern Ontario
New transmission line and
Transmission Line5
Lakeshore to Windsor
Transmission Line5
Southwestern Ontario
New transmission line and
station expansion
station expansion
38
TBD
TBD
TBD
TBD
TBD
TBD
38
30
48
TBD
TBD
TBD
23
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Sustainment Projects:
Beck #2 Transmission Station
Niagara area
Station sustainment
Circuit Breaker Replacement
Southwestern Ontario
Cherrywood Transmission Station Pickering
Station sustainment
Circuit Breaker Replacement
Central Ontario
Bruce B Switching Station
Tiveron
Station sustainment
Circuit Breaker Replacement
Southwestern Ontario
Middlepor Transmission Station Middlepor
Station sustainment
Circuit Breaker Replacement
Southwestern Ontario
Lennox Transmission Station
Napanee
Station sustainment
Circuit Breaker Replacement
Southeastern Ontario
Esplanade x Terauley
Toronto
Line sustainment
Underground Cable
Replacement
Southwestern Ontario
2023
2023
2024
2025
2026
2026
135
115
185
184
152
117
113
90
166
117
116
11
1 The East-West Tie Station Expansion project has been placed in-service in phases, with signifcant porions of the project placed in-service over the 2021-22 period, and fnal project
in-service expected in 2024.
2 The estimated cost of the Waasigan Transmission Line relates to the development phase of the project and the anticipated in-service date refects the anticipated completion date of
the development phase only. On May 4, 2022 and November 18, 2022, Hydro One entered into agreements with First Nations communities that provide them the opporunity to acquire
50% ownership in the project. Completion of the line remains subject to stakeholder consultation and regulatory approvals.
3 The Chatham to Lakeshore Transmission Line project includes the line and associated facilities and is furher discussed in the section “Other Developments - Supporing Critical
Infrastructure in Southwestern Ontario”.
4 The estimated cost of the St. Clair Transmission Line relates to the development phase of the project and the anticipated in-service date refects the anticipated completion date of the
development phase only. Completion of the line remains subject to stakeholder consultation and regulatory approvals.
5 The scope and timing of these Southwestern Ontario transmission reinforcements are currently under review.
Future Capital Investments
The Company estimates future capital investments based on
management’s expectations of the amount of capital expenditures that
will be required to provide transmission and distribution services that
are efcient, reliable, and provide value for customers, consistent with
the OEB’s Renewed Regulatory Framework.
The 2023 to 2027 capital estimates difer from prior disclosures as the
Company has updated its plan for timing and pacing of future capital
investments, as well as re-prioritization of work. The overall increase in
the transmission business is primarily related to projects outside of the
OEB-approved JRAP investment plan.
The following tables summarize Hydro One’s annual projected capital investments for 2023 to 2027 by business segment and by category:
By business segment: (millions of dollars)
Transmission1
Distribution
Other
Total capital investments3
By category: (millions of dollars)
Sustainment
Development1
Other2
Total capital investments3
2023
1,565
924
23
2,512
2023
1,534
693
285
2,512
2024
1,547
1,027
18
2,592
2024
1,658
711
223
2,592
2025
1,446
1,043
15
2,504
2025
1,629
669
206
2,504
2026
1,475
1,001
11
2,487
2026
1,548
730
209
2,487
2027
1,539
989
10
2,538
2027
1,480
891
167
2,538
1 Figures include investments in cerain development projects of Hydro One Networks not included in the investment plan approved by the OEB in the JRAP decision.
2 "Other" capital expenditures include investments in feet, real estate, IT, and operations technology and related functions.
3 On March 29, 2021, the IESO requested Hydro One initiate work to develop and construct a new transmission line between Chatham and Lambton (the St Clair Line) to suppor
agricultural growth in Southwestern Ontario. On March 31, 2022, the Minister of Energy directed the OEB to amend Hydro One Networks' transmission licence to require it to develop
and seek approvals for this and three other priority transmission lines to meet growing demand in Southwestern Ontario (see section “Other Developments”). The future capital
investments presented do not include capital expenditures of the three additional lines, as Hydro One is currently evaluating the scope and timing of this work.
24
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Summary of Sources and Uses of Cash
Hydro One’s primary sources of cash fows 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)
Net cash from operating activities
Net cash used in fnancing activities
Net cash used in investing activities
Decrease in cash and cash equivalents
Net cash from operating activities
Cash from operating activities increased by $111 million for the year
ended December 31, 2022 compared to the same period of 2021. The
increase was impacted by various factors, including the following:
● higher pre-tax earnings; and
●
the impacts of the DTA Implementation Decision recognized in the
year; parially ofset by
● decrease in net working capital defciency primarily atributable to
higher receivables including those from the IESO associated with
provincial funding programs, parially ofset by a higher cost of
power payable to the IESO related to the global adjustment rate; and
● changes to regulatory account balances.
Net cash used in fnancing activities
Cash used in fnancing activities decreased by $106 million for the year
ended December 31, 2022, compared to the same period of 2021. This
was impacted by various factors, including the following:
Uses of cash
●
●
the Company repaid $6,000 million of shor-term notes in 2022,
compared to $3,905 million repaid in 2021.
the Company repaid $603 million of long-term debt in 2022,
compared to $804 million repaid in 2021.
● common share dividends paid in 2022 were $662 million, compared
to dividends of $629 million paid in 2021.
Sources of cash
●
●
the Company received proceeds of $6,335 million from the issuance
of shor-term notes in 2022, compared to $4,150 million received
in 2021.
the Company issued $750 million of long-term debt in 2022,
compared to $900 million of long-term debt issued in 2021.
Net cash used in investing activities
Cash used in investing activities for the year ended December 31,
2022 was $10 million higher than the same period of 2021 as a result
of higher capital investments in the current year. See section “Capital
Investments” for comparability of capital investments made by the
Company during the year ended December 31, 2022 compared to the
prior year.
2022
2,260
(197)
(2,073)
(10)
2021
2,149
(303)
(2,063)
(217)
Liquidity and Financing Strategy
Shor-term liquidity is provided through FFO,6 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 $2,300 million in shor-term notes with a term
to maturity of up to 365 days.
At December 31, 2022, Hydro One Inc. had $1,374 million in commercial
paper borrowings outstanding, compared to $1,045 million outstanding
at December 31, 2021. The Company also has revolving bank credit
facilities (Operating Credit Facilities) with a total available balance
of $2,550 million at December 31, 2022. In January 2022, Hydro One
successfully amended its Operating Credit Facilities to incorporate
environmental, social and governance (ESG) targets. The facilities
now include a pricing adjustment which can increase or decrease
Hydro One’s cost of funding based on its perormance on cerain
Sustainability Perormance Measures, which are related to Hydro One's
sustainability goals. On January 12, 2023, Hydro One published a
Sustainable Financing Framework (Framework), which allows the
Company and its subsidiaries to issue sustainable fnancing instruments
and allocate the net proceeds to investments in eligible green and social
project categories. On June 1, 2022, the maturity date for the Operating
Credit Facilities was extended from 2026 to 2027. No amounts were
drawn on the Operating Credit Facilities at December 31, 2022 or 2021.
The Company may use the Operating Credit Facilities for working
capital and general corporate purposes. The shor-term liquidity under
the commercial paper program, the Operating Credit Facilities, available
cash on hand and anticipated levels of FFO6 are expected to be
sufcient to fund the Company’s operating requirements.
At December 31, 2022, the Company had long-term debt outstanding in
the principal amount of $13,801 million, which included $425 million of
long-term debt issued by Hydro One, $13,245 million of long-term debt
issued by Hydro One Inc., and long-term debt in the principal amount of
$131 million issued by HOSSM. The long-term debt issued by Hydro One
was issued under its shor form base shelf prospectus (Universal Base
Shelf Prospectus), as furher described below. The majority of long-
term debt issued by Hydro One Inc. has been issued under its Medium
Term Note (MTN) Program, as furher described below. The Company's
total long-term debt consists of notes and debentures that mature
between 2023 and 2064, and at December 31, 2022, had a weighted-
average term to maturity of approximately 14.0 years (2021 - 14.8 years)
and a weighted-average coupon rate of 3.9% (2021 - 3.8%).
6 FFO is a non-GAAP fnancial measure. See section “Non-GAAP Financial Measures”.
25
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
In June 2022, Hydro One Inc. fled a shor form base shelf prospectus
in connection with its MTN Program, which has a maximum authorized
principal amount of notes issuable of $4,000 million, and expires in
July 2024. At December 31, 2022, $3,250 million remained available for
issuance under the MTN Program prospectus. On January 27, 2023,
Hydro One Inc. issued $1,050 million of long-term debt under its
MTN program, consisting of $300 million (Series 53 notes) maturing
in 2029 with a coupon rate of 3.93%, $450 million (Series 54 notes)
maturing in 2033 with a coupon rate of 4.16% and $300 million
(Series 55 notes) maturing in 2053 with a coupon rate of 4.46%. This
represents Hydro One's frst issuance of medium-term notes pursuant
to the Framework.
On August 15, 2022, Hydro One fled the Universal Base Shelf
Prospectus with securities regulatory authorities in Canada to replace
a previous prospectus that would otherwise have expired in September
2022. The Universal Base Shelf Prospectus allows Hydro One to ofer,
from time to time in one or more public oferings, up to $2,000 million
of debt, equity or other securities, or any combination thereof, during
the 25-month period ending on September 16, 2024. At December 31,
2022, no securities have been issued under the Universal Base
Shelf Prospectus.
On November 22, 2022, Hydro One Holdings Limited (HOHL) fled a
shor form base shelf prospectus (US Debt Shelf Prospectus) with
securities regulatory authorities in Canada and the US to replace a
previous prospectus that would otherwise have expired in January 2023.
The US Debt Shelf Prospectus allows HOHL to ofer, from time to time in
one or more public oferings, up to US$3,000 million of debt securities,
unconditionally guaranteed by Hydro One, expiring in December 2024.
At December 31, 2022, no securities have been issued under the US
Debt Shelf Prospectus.
Compliance
At December 31, 2022, the Company was in compliance with all fnancial
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
afect the Company’s fnancial 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.
At December 31, 2022, Hydro One’s long-term credit ratings were
as follows:
Rating Agency
DBRS
S&P
Long-term Debt Rating
A
BBB+
At December 31, 2022, Hydro One Inc.’s long-term and shor-term debt
ratings were as follows:
Rating Agency
Shor-term Debt Rating
Long-term Debt Rating
DBRS
Moody's
S&P
R-1 (low)
Prime-2
A-1 (low)
A (high)
A3
A-
Efect of Interest Rates
The Company is exposed to fuctuations of interest rates as its
regulated return on equity (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. The Company issues debt from time to time to refnance
maturing debt and for general corporate purposes. The Company is
therefore exposed to fuctuations in interest rates in relation to such
issuances of debt. 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 2022, Hydro One made cash contributions of $89 million to its
pension plan, compared to cash contributions of $62 million in
2021, and incurred $53 million in net periodic pension beneft costs,
compared to $194 million incurred in 2021.
In September 2022, Hydro One fled a triennial actuarial valuation of its
pension plan at December 31, 2021. Based on this valuation, Hydro One
estimates that total Company pension contributions for 2023, 2024,
2025, 2026 and 2027 are approximately $91 million, $101 million,
$103 million, $106 million, and $109 million, respectively. Future
minimum contributions beyond 2024 will be updated following the
actuarial funding valuation as of December 31, 2024, which is expected
to be fled by no later than September 30, 2025. Should Hydro One
elect to fle a valuation earlier than required, contributions for 2023 and
2024 would also be updated, as applicable.
As a result of the transfer of 234 Inergi LP employees to Hydro One that
occurred over a period ending January 1, 2022, the assets and liabilities
of the Inergi Pension Plan will be transferred to the Hydro One Pension
Plan (the Plan). The value of these assets and liabilities will be included in
the Plan as of the date of transfer, which is expected to occur sometime
in 2023.
The Company’s pension benefts obligation is impacted by various
assumptions and estimates, such as the discount rate, rate of return on
plan assets, rate of cost of living increase and morality assumptions.
A full discussion of the signifcant assumptions and estimates can
be found in the section “Critical Accounting Estimates - Employee
Future Benefts”.
26
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022 Other Obligations
Of-Balance Sheet Arrangements
There are no of-balance sheet arrangements that have, or are
reasonably likely to have, a material current or future efect on the
Company’s fnancial condition, changes in fnancial 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:
As at December 31, 2022 (millions of dollars)
Contractual obligations (due by year)
Long-term debt - principal repayments
Long-term debt - interest payments
Shor-term notes payable
Pension contributions1
Environmental and asset retirement obligations
Outsourcing and other agreements
Lease obligations
Long-term software/meter agreement
Total contractual obligations
Other commercial commitments (by year of expiry)
Operating Credit Facilities2
Letters of credit3
Guarantees4
Total other commercial commitments
Total
13,801
8,117
1,374
510
138
222
59
32
Less than
1 year
731
518
1,374
91
28
191
14
12
1-3 years
3-5 years
1,450
1,008
—
204
40
17
21
15
925
952
—
215
4
1
17
2
More than
5 years
10,695
5,639
—
—
66
13
7
3
24,253
2,959
2,755
2,116
16,423
2,550
188
517
3,255
—
186
517
703
—
2
—
2
2,550
—
—
2,550
—
—
—
—
1 Contributions to the Hydro one Pension Plan are based on actuarial repors, including valuations perormed at least every three years, and actual or projected levels of pensionable
earnings, as applicable. The most recent actuarial valuation was perormed efective December 31, 2021 and fled on September 26, 2022. See section "Liquidity and Financing Strategy
- Pension Plan"
2 On June 1, 2022, the maturity dates for the Operating Credit Facilities were extended from June 2026 to June 2027.
3 Leters of credit consist of $163 million leters of credit related to retirement compensation arrangements, a $18 million leter of credit provided to the IESO for prudential suppor,
$4 million in leters of credit to satisfy debt service reserve requirements, and $3 million in leters of credit for various operating purposes.
4 Guarantees consist of $475 million prudential suppor provided to the IESO by Hydro One Inc. on behalf of its subsidiaries, as well as guarantees provided by Hydro One to the Minister
of Natural Resources (Canada) and ONroute of $7 million and $30 million, respectively, relating to OCN LP (OCN Guarantee) and $5 million relating to Aux Energy Inc., the Company's
indirect subsidiary. Ontario Power Generation Inc. (OPG) has provided a $2.5 million guarantee to Hydro One related to the OCN Guarantee.
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 of Directors (Board) and
is established on the basis of Hydro One’s results of operations,
maintenance of its deemed regulatory capital structure, fnancial
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 13, 2023, Hydro One had 598,714,704 issued and outstanding
common shares.
The Company is authorized to issue an unlimited number of preferred
shares, issuable in series. At February 13, 2023, the Company had no
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 were vested
and exercised at February 13, 2023 was 2,225,740.
Regulation
Electricity Rates - Joint Rate Application
In March 2018, the OEB issued a leter (OEB Leter) requesting
Hydro One Networks fle a single application for distribution rates and
transmission revenue requirement for the period from 2023 to 2027.
The OEB Leter had indicated that Hydro One Remotes should be
included in the single application, however, this requirement was later
removed by the OEB.
On August 5, 2021, Hydro One Networks fled a custom JRAP for 2023-
2027. The JRAP included a proposed investment plan supporing the
transmission and distribution revenue requirements. On March 31, 2022,
Hydro One Networks fled updated evidence refecting the impacts
of updated infation assumptions on the proposed investment plan
as well as updated load forecasts. On October 24, 2022, Hydro One
and the other paries involved in the JRAP proceeding entered into a
Setlement Agreement, which was submited to the OEB for approval.
On November 16, 2022, Hydro One updated its revenue requirement
to refect the OEB's cost of capital parameters which were issued
October 20, 2022. On November 29, the OEB issued a Decision and
Order approving the JRAP Setlement Proposal in full. This marks the
end of the JRAP proceeding. The following table lists the rate base and
revenue requirements arising from the approved setlement:
27
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Year
2023
2024
2025
2026
2027
Hydro One Networks - Transmission
Hydro One Networks - Distribution
Rate Base
Revenue Requirement
Rate Base
Revenue Requirement
$14,534 million
$15,342 million
$16,271 million
$17,148 million
$17,940 million
$1,952 million
$2,073 million
$2,168 million
$2,277 million
$2,362 million
$9,460 million
$9,979 million
$10,573 million
$11,153 million
$11,656 million
Other Developments
$1,727 million
$1,813 million
$1,886 million
$1,985 million
$2,071 million
Following the OEB approval of the JRAP Setlement and the pending
completion of the recovery of DTA amounts previously shared with
ratepayers in 2023, Hydro One's efective tax rate over the next fve
years is expected to be between 13% and 16%.
Deferred Tax Asset
On March 7, 2019, the OEB issued its reconsideration decision (DTA
Decision) with respect to Hydro One's rate-seting treatment of the
benefts of the DTA resulting from the transition from the payments in
lieu of tax regime to tax payments under the federal and provincial tax
regimes. On April 5, 2019, the Company fled an appeal with the ODC
with respect to the DTA Decision.
On July 16, 2020, the ODC rendered its decision in which it agreed with
the submissions of Hydro One that the DTA should be allocated to
shareholders in its entirety.
On April 8, 2021, the OEB rendered its DTA Implementation Decision
regarding the recovery of the DTA amounts allocated to ratepayers for
the 2017 to 2022 period. In its DTA Implementation Decision, the OEB
approved recovery of the DTA amounts allocated to ratepayers and
included in customer rates for the 2017 to 2021 period, plus carrying
charges, over a two-year recovery period commencing on July 1, 2021.
The recovery of the previously shared DTA amounts plus carrying
charges resulted in a $135 million increase in FFO7 for the twelve
months ended December 31, 2022 (2021 - $65 million) and is expected
to result in FFO7 of approximately $65 million in 2023. In addition,
the DTA Implementation Decision required that Hydro One adjust the
transmission revenue requirement and the base distribution rates
beginning January 1, 2022 to eliminate any furher tax savings fowing to
customers. This resulted in an incremental $49 million of FFO7 in 2022
and is expected to result in additional FFO7 of approximately $46 million
in 2023, but will decline annually thereafter.
Hydro One Remotes
On November 3, 2021, Hydro One Remotes fled an application with the
OEB seeking approval for a 2.2% increase to 2021 base rates, efective
May 1, 2022. The application was subsequently updated to request a
3.3% increase to 2021 base rates to refect the OEB’s annually updated
infation parameters for electricity distributors for 2022. On March 24,
2022, the OEB approved the application for rates and other charges
which became efective on May 1, 2022.
On August 31, 2022, Hydro One Remotes fled its price cap incentive
rate application for 2023-2027 which includes a proposed 3.72% overall
rate increase. A decision is anticipated in the frst quarer of 2023.
7 FFO is a non-GAAP fnancial measure. See section “Non-GAAP Financial Measures”.
28
Equity Parnership Model with First Nation Communities
On September 22, 2022, Hydro One announced its new equity
parnership model pursuant to which it will ofer First Nations
a 50 per cent equity stake in all new, future large-scale capital
transmission line projects with a value exceeding $100 million.
Exemptive Relief
Disclosure of Ownership by the Province
On July 28, 2022, the Canadian securities regulatory authorities
granted (i) the Minister of Energy, (ii) OPG (on behalf of itself and the
segregated funds established as required by the Nuclear Fuel Waste
Act) and (iii) agencies of the Crown, provincial Crown corporations and
other provincial entities (collectively, the "Non-Aggregated Holders")
exemptive relief, subject to cerain conditions, to enable each Non-
Aggregated Holder to treat securities of Hydro One and debt securities
of Hydro One Inc. and Hydro One Holdings Limited that it owns or
controls separately from securities of Hydro One and debt securities
of Hydro One Inc. and Hydro One Holdings Limited owned or controlled
by the other Non-Aggregated Holders for purposes of cerain take-
over bid, early warning reporing, insider reporing and control person
distribution rules and cerain distribution restrictions under Canadian
securities laws. Hydro One was also granted relief permiting it to
rely solely on insider repors and early warning repors fled by Non-
Aggregated Holders when reporing benefcial ownership or control or
direction over securities of Hydro One and debt securities of Hydro One
Inc. and Hydro One Holdings Limited in any information circular or
annual information form in respect of such securities benefcially
owned or controlled by any Non-Aggregated Holder, subject to cerain
conditions. Substantially similar relief had previously been granted on
June 6, 2017, which terminated in 2022.
US GAAP
On October 13, 2022, Hydro One was granted exemptive relief by
the securities regulators in each province and territory of Canada
that allows Hydro One to continue to repor its fnancial results in
accordance with US GAAP (the "Exemptive Relief"). The Exemptive
Relief will remain in efect until the earliest to occur of the following:
(i) January 1, 2027; (ii) if Hydro One ceases to have rate-regulated
activities, the frst day of Hydro One’s fnancial year that commences
after it ceases to have such rate-regulated activities; and (iii) the frst
day of Hydro One’s fnancial year that commences on or following
the later of: (a) the efective date prescribed by the International
Accounting Standards Board (IASB) for the mandatory application of a
standard within International Financial Reporing Standards specifc to
entities with rate-regulated activities (the "Mandatory Rate-regulated
Standard"); and (b) two years after the IASB publishes the fnal version
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
of a Mandatory Rate-regulated Standard. In January 2021, the IASB
published Exposure Draft – Regulatory Assets and Liabilities (the
“Exposure Draft”). The efective date for mandatory application of the
eventual fnal standard, if any, is not yet determinable and the Company
continues to monitor the developments of the Exposure Draft and
determine the potential impacts to the Company’s fnancial statements.
Hydro One is also permited to repor its fnancial results in accordance
with US GAAP by virue of being, and for so long as it remains, an “SEC
issuer” (within the meaning of National Instrument 52-107 – Acceptable
Accounting Principles and Auditing Standards). There can be no
assurance that Hydro One will remain an SEC issuer indefnitely.
Building Broadband Faster Act, 2021
In March 2021, the Province introduced Bill 257, Supporing Broadband
and Infrastructure Expansion Act, 2021, to create a new act entitled
the Building Broadband Faster Act, 2021 that is aimed at supporing
the timely deployment of broadband infrastructure within unserved
and underserved rural Ontario communities. Bill 257 received Royal
Assent on April 12, 2021. Bill 257 amended the Ontario Energy Board
Act to provide the Province with regulation-making authority regarding
the development of, access to, or use of electricity infrastructure for
non-electricity purposes. The Building Broadband Faster Act Guideline
and three regulations informing the legislative changes were published
in 2021. In March 2022, the Province introduced Bill 93, Geting Ontario
Connected Act, 2022. Bill 93 received Royal Assent on April 14, 2022.
Bill 93 amended the Building Broadband Faster Act to ensure that
organizations that own underground utility infrastructure near a
designated high-speed internet project provide timely access to their
infrastructure data, which would allow internet service providers to
quickly star work on laying down underground high-speed internet
infrastructure. The regulation regarding electricity infrastructure
and designated broadband projects under the Ontario Energy
Board Act came into force in April 2022. This regulation substantially
adopted Hydro One's proposed approach to allocation of the costs of
broadband-related work on utility assets. It also directed the OEB to
establish a deferral account for rate-regulated distributors to record
incremental costs associated with carrying out activities peraining
to designated broadband projects, which the OEB completed in
July 2022. The Company continues to be engaged with the Province
and the OEB on implementing an appropriate regulatory framework
to suppor the published Building Broadband Faster Act Guideline
and regulations, including arrangements to sustain the Company’s
revenues and recovery of reasonable associated costs. In September
2022, the Company launched its choice-based operating model to
provide internet service providers with choices on how to access the
Company’s infrastructure in order to efectively execute designated
broadband projects.
Supporing Critical Transmission Infrastructure in
Southwestern Ontario
On March 31, 2022, the Minister of Energy directed the OEB to amend
Hydro One Networks’ licence to require it to develop and seek approvals
for four priority transmission line projects to meet growing electricity
demand in Southwestern Ontario: the St. Clair Line (a 230kV line from
Lambton TS to Chatham Switching Station (SS)); two 500 kV lines
from Longwood TS to Lakeshore TS; and a 230kV line connecting the
Windsor area to the Lakeshore TS.
On May 9, 2022, Hydro One fled a leave-to-construct application
seeking OEB approval for the Chatham to Lakeshore Transmission Line
project in Southwestern Ontario. In December 2020, the Minister of
Energy issued a directive to the OEB to amend Hydro One Networks’
transmission licence to include a requirement that Hydro One proceed
to develop and seek all necessary approvals for the project. The
cost of this project is estimated at $268 million (see section “Major
Transmission Capital Investment Projects”). On November 24, 2022,
the OEB issued its Decision and Order granting leave to construct as
requested in the application, with standard conditions of approval. On
December 28, 2022, the Haudenosaunee Development Institute fled an
appeal to the Divisional Cour, under s.22 of the Ontario Energy Board
Act, 1998, of this decision. The appeal, amongst other items, asked to
set aside the OEB's decision granting Hydro One approval to construct
the Chatham to Lakeshore Transmission Line project and to deny
the application.
Sustainability Repor
The Hydro One 2021 Sustainability Repor entitled “Energizing life
for people & communities” is available on the Company’s website at
www.hydroone.com/sustainability.
The 2021 Sustainability Repor discloses the Company’s environmental,
social and governance perormance and provides a beter
understanding of how Hydro One manages the opporunities and
challenges associated with its business. The repor also includes
disclosure relating to the Company’s current efors in its priority areas
of People, Planet and Community.
Hydro One Board of Directors and
Executive Ofcers
Board of Directors
On June 8, 2022, Jessica McDonald resigned from the Board of
Hydro One. On the same day, Mark Podlasly was elected to the Board of
Hydro One.
Executive Ofcers
On June 21, 2022, Mark Poweska resigned as a director and President
and Chief Executive Ofcer of Hydro One. On the same day, William
(Bill) Shefeld was appointed as Interim President and Chief Executive
Ofcer of Hydro One. Upon his resignation, Mr. Poweska remained with
Hydro One as an advisor until such time as he assumed the role of
President of Enmax Corporation in September 2022.
On August 26, 2022, Lyla Garzouzi resigned as Chief Safety Ofcer of
Hydro One.
On September 16, 2022, Jason Fitzsimmons resigned as Chief Corporate
Afairs & Customer Care Ofcer of Hydro One.
On January 10, 2023, the Board of Directors of Hydro One announced
the appointment of David Lebeter as President and Chief Executive
Ofcer efective February 1, 2023. On February 1, 2023, Mr. Shefeld
stepped down from his role as Interim President and Chief Executive
Ofcer, however continues in his role as a director of Hydro One, but
will not stand for re-election at the Company's upcoming Annual
General Meeting.
29
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Hydro One Work Force
At December 31, 2022, Hydro One had a skilled and fexible work
force of approximately 6,500 (2021 - 6,300) regular employees and
1,100 (2021 - 2,100) non-regular employees province-wide, comprising
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 contingent workers,
sometimes referred to as “hiring halls”, and also by access to contract
personnel. The hiring halls ofer Hydro One the ability to fexibly use
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 at December 31, 2022:
Power Workers' Union (PWU)1
Society of United Professionals (Society)
Canadian Union of Skilled Workers (CUSW) and construction building trade unions
Total employees represented by unions
Management and non-represented employees
Total employees2
Regular
Employees
Non-Regular
Employees
3,818
1,848
—
5,666
837
6,503
844
44
169
1,057
23
1,080
Total
4,662
1,892
169
6,723
860
7,583
1
Includes 732 non-regular “hiring hall” employees covered by the PWU agreement.
2 The average number of Hydro One employees in 2022 was approximately 9,300, consisting of approximately 6,500 regular employees and approximately 2,800 non-regular employees.
Collective Agreements
In March 2022, Hydro One and the CUSW commenced collective
bargaining with the ofcial exchange of bargaining agendas. The
agreement was ratifed by the CUSW membership in May. The term of
the agreement is for four years, expiring on April 30, 2026.
Hydro One’s collective agreement with the PWU for Customer Service
Operations expired on September 30, 2022. Collective bargaining to
renew this agreement commenced on August 29, 2022 and is ongoing.
Hydro One’s collective agreements with the PWU and Society will expire
on March 31, 2023. Collective bargaining to renew these agreements
commenced on January 11, 2023 and January 16, 2023, respectively, and
are ongoing.
Stock-based Compensation
The Company granted Deferred Stock Units (DSUs) to Directors and Management and Restricted Stock Units (RSUs) related to the new collective
agreement with the Society (Society RSUs). At December 31, 2022 and 2021, the following Long-Term Incentive Plan and other awards were
outstanding:
December 31 (number of units)
Management DSUs
Director DSUs
Society RSUs
2022
118,505
99,939
36,124
2021
90,240
80,813
71,053
30
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Non-GAAP Financial Measures
Hydro One uses a number of fnancial measures to assess its
perormance. Adjusted measures, which include Adjusted EPS (basic
and diluted) and Adjusted net income (collectively, adjusted measures),
remove items from repored results for EPS (basic and diluted) and net
income to calculate the adjusted measures. The Company presents FFO
or “funds from operations” to refect a measure of the Company’s cash
fow; and revenues, net of purchased power to refect revenues net of
the cost of purchased power. Adjusted EPS (basic and diluted), Adjusted
net income, FFO and revenues, net of purchased power are non-
GAAP fnancial measures which do not have a standardized meaning
prescribed by GAAP and might not be comparable to similar measures
presented by other entities. They should not be considered in isolation
nor as a substitute for analysis of the Company’s fnancial information
repored under GAAP.
Hydro One also uses fnancial ratios that are non-GAAP ratios such as
debt to capitalization ratio and earnings coverage ratio. Non-GAAP
ratios do not have a standardized meaning prescribed by GAAP and
might not be comparable to similar measures presented by other
entities. They should not be considered in isolation nor as a substitute
for analysis of the Company’s fnancial information repored under
US GAAP.
FFO
FFO is defned 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 fows as it excludes timing-related
fuctuations in non-cash operating working capital and cash fows not
atributable to common shareholders. As such, management believes
that FFO provides a consistent measure of the cash generating
perormance of the Company’s assets.
The following table provides a reconciliation of GAAP (repored) results to non-GAAP (adjusted) results on a consolidated basis.
Year ended December 31 (millions of dollars)
Net cash from operating activities
Changes in non-cash balances related to operations
Distributions to noncontrolling interest
FFO
2022
2,260
(61)
(10)
2,189
2021
2,149
(100)
(8)
2,041
Adjusted Net Income and Adjusted EPS
The following Adjusted net income, and Adjusted EPS (basic and
diluted) have been calculated by management on a supplementary
basis which adjusts net income under US GAAP for impacts related
to the ODC Decision on Hydro One Networks' distribution and
transmission businesses. Adjusted net income and Adjusted EPS are
used internally by management to assess the Company’s perormance
and are considered useful because they exclude the impacts of the
ODC Decision as noted above. Adjusted net income and Adjusted EPS
provide users with a comparative basis to evaluate the current ongoing
operations of the Company compared to prior year.
The following tables provide a reconciliation of GAAP (repored) results to non-GAAP (adjusted) results on a consolidated basis.
Year ended December 31 (millions of dollars, except number of shares and EPS)
Net income atributable to common shareholders
Impacts related to the ODC Decision
Adjusted net income atributable to common shareholders
Weighted average number of shares
Basic
Efect of dilutive stock-based compensation plans
Diluted
Adjusted EPS
Basic
Diluted
2022
1,050
—
1,050
2021
965
—
965
2020
1,770
(867)
903
598,616,561
598,080,111
597,421,127
1,971,291
2,278,030
2,497,161
600,587,852
600,358,141
599,918,288
$ 1.75
$ 1.75
$ 1.61
$ 1.61
$ 1.51
$ 1.51
31
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Revenues, Net of Purchased Power
Revenues, net of purchased power is defned as revenues less the cost of purchased power; distribution revenues, net of purchased power is
defned as distribution revenues less the cost of purchased power. These measures are used internally by management to assess the impacts of
revenue on net income and are considered useful because they exclude the cost of power that is fully recovered through revenues and therefore
net income neutral.
The following tables provide a reconciliation of GAAP (repored) revenues to non-GAAP (adjusted) revenues, net of purchased power on a
consolidated basis.
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
2022
7,780
3,724
4,056
2022
5,660
3,724
1,936
2021
7,225
3,579
3,646
2021
5,359
3,579
1,780
Quarer ended (millions of dollars)
Dec 31, 2022 Sep 30, 2022
Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021
Jun 30, 2021 Mar 31, 2021
Revenues
Less: Purchased power
Revenues, net of purchased power
1,862
895
967
2,031
963
1,068
1,840
852
988
2,047
1,014
1,033
1,779
1,913
1,722
1,811
914
865
933
980
838
884
894
917
Quarer ended (millions of dollars)
Dec 31, 2022 Sep 30, 2022
Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021
Jun 30, 2021 Mar 31, 2021
Distribution revenues
Less: Purchased power
Distribution revenues,
1,371
895
1,458
963
1,314
852
1,517
1,014
1,347
914
1,395
933
1,263
838
1,354
894
net of purchased power
476
495
462
503
433
462
425
460
Debt to Capitalization Ratio
The Company believes that the debt to capitalization ratio is an imporant non-GAAP ratio in the management of its debt levels. This non-GAAP
ratio does not have a standardized meaning under US GAAP and may not be comparable to similar measures presented by other entities. Debt to
capitalization ratio has been calculated as total debt (including total long-term debt and shor-term borrowings, net of cash and cash equivalents)
divided by total debt plus total shareholders’ equity, but excluding any amounts related to noncontrolling interest. Management believes that the
debt to capitalization ratio is helpful as a measure of the proporion of debt in the Company's capital structure.
Year ended December 31 (millions of dollars)
Shor-term notes payable
Less: cash and cash equivalents
Long-term debt (current porion)
Long-term debt (long-term porion)
Total debt (A)
Shareholders' equity (excluding noncontrolling interest)
Total debt plus shareholders' equity (B)
2022
1,374
(530)
733
13,030
14,607
11,306
25,913
2021
1,045
(540)
603
13,017
14,125
10,888
25,013
Debt-to-capitalization ratio (A/B)
56.4%
56.5%
32
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Earnings Coverage Ratio
Earnings coverage ratio is defned as earnings before income taxes and fnancing charges atributable to shareholders, divided by the sum of
fnancing charges and capitalized interest, and is calculated on a rolling twelve-month basis. The Company believes that the earnings coverage ratio
is an imporant non-GAAP measure in the management of its liquidity. This non-GAAP ratio does not have a standardized meaning under US GAAP
and may not be comparable to similar measures presented by other entities.
Quarer ended (millions of dollars)
Net income to common
shareholders
Income tax expense
Financing charges
Earnings before income taxes and
fnancing charges atributable
to common shareholders
Twelve months ended
(millions of dollars)
Earnings before income taxes
and fnancing charges
atributable to common
shareholders (A)
Dec 31, 2022 Sep 30, 2022
Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021
Jun 30, 2021 Mar 31, 2021
178
178
41
128
307
307
100
122
255
255
68
119
310
310
79
117
159
159
55
123
300
300
71
118
238
238
26
104
268
268
26
116
347
529
442
506
337
489
368
410
Dec 31, 2022 Sep 30, 2022
Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021
Jun 30, 2021 Mar 31, 2021
1,824
1,814
1,774
1,700
1,604
1,574
1,511
1,520
Quarer ended (millions of dollars)
Financing charges
Capitalized interest
Financing charges and capitalized
Dec 31, 2022 Sep 30, 2022
122
16
128
16
Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021
118
15
117
15
123
16
119
16
Jun 30, 2021 Mar 31, 2021
116
13
104
16
interest
144
138
135
132
139
133
120
129
Twelve months ended
(millions of dollars)
Financing charges and
Dec 31, 2022 Sep 30, 2022
Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021
Jun 30, 2021 Mar 31, 2021
capitalized interest (B)
Earnings coverage ratio = A/B
549
3.3
544
3.3
539
3.3
524
3.2
521
3.1
514
3.1
509
3.0
520
2.9
Related Pary Transactions
The Province is a shareholder of Hydro One with approximately 47.2% ownership at December 31, 2022. The IESO, OPG, Ontario Electricity Financial
Corporation (OEFC), and the OEB are related paries to Hydro One because they are controlled or signifcantly infuenced by the Ministry of Energy.
OCN LP is a joint-venture limited parnership between a subsidiary of Hydro One and OPG. The following is a summary of the Company’s related
pary transactions during the years ended December 31, 2022 and 2021:
Year ended December 31 (millions of dollars)
Related Pary
Province
IESO
OPG1
OEFC
OEB
OCN LP2
Transaction
Dividends paid
Power purchased
Revenues for transmission services
Amounts related to electricity rebates
Distribution revenues related to rural rate protection
Distribution revenues related to supply of electricity to remote norhern communities
Funding received related to CDM programs
Power purchased
Revenues related to provision of services and supply of electricity
Capital contribution received from OPG
Costs related to the purchase of services
Power purchased from power contracts administered by the OEFC
OEB fees
Investment in OCN LP
2022
312
2,374
2,062
1,031
247
35
3
20
8
5
2
2
10
4
2021
297
2,238
1,832
1,065
245
35
1
13
8
3
2
1
8
4
1 OPG has provided a $2.5 million guarantee to Hydro One related to the OCN Guarantee. See section "Other Obligations - Summary of Contractual Obligations and Other Commercial
Commitments" for details related to the OCN Guarantee.
2 OCN LP owns and operates electric vehicle fast charging stations across Ontario, under the Ivy Charging Network brand.
33
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Risk Management and Risk Factors
Hydro One is subject to numerous risks and uncerainties. Critical to
Hydro One’s success is the identifcation, management and, to the
extent possible, mitigation of these risks. Hydro One’s Enterprise Risk
Management (ERM) program assists decision-makers throughout the
organization with the management of key business risks, including new
and emerging risks and opporunities.
The material risks relating to Hydro One and its business that the
Company believes would be the most likely to infuence an investor’s
decision to purchase Hydro One’s securities are set out in the risk
factors below. These risks, if they materialize, could have a materially
adverse efect on the Company or its business, fnancial condition, or
results of operations. This list is not a comprehensive list of all the risks
to the Company, and the actual efect of any of the risks cited below
could be materially diferent from what is described below. Additionally,
other risks may arise or risks currently not considered material may
become material in the future.
Risks Relating to Hydro One’s Business
Regulatory Risks and Risks Relating to Hydro One’s Revenues
Risks Relating to Actual Perormance 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-seting process.
Actual costs could exceed the approved forecasts if, for example,
the Company incurs operations, maintenance, administration, capital
and fnancing costs above those included in the Company’s approved
revenue requirement. The inability to recover any signifcant diference
between forecast and actual expenses and to obtain associated
regulatory approvals to recover the diference could materially adversely
afect the Company’s fnancial condition and results of operations.
Furher, 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, net income and cash
fows for either, or both, of these businesses could be materially
adversely afected.
The Company’s current revenue requirements for its transmission and
distribution businesses are based on cost and other assumptions,
including infation, that may not materialize. There is no assurance that
the OEB would allow rate increases sufcient to ofset unfavourable
fnancial 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 conditions, changes in service territory,
and weather conditions that infuence the demand for electricity. The
Company’s overall operating results may fuctuate 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, net income and cash fows as compared to the same period
of the previous year.
34
The Company’s load could also be negatively afected by successful
CDM programs whose results exceed forecasted expectations.
Risks Relating to Non-Rate Applications to the OEB
In addition to the maters described in the “Risks Relating to Obtaining
Rate Orders” subsection below, 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 maters, such as leave to construct
applications, applications for mergers, acquisitions, amalgamations and
divestitures, and environmental approvals. Appeals of OEB decisions
and/or the need to obtain required occupation rights may result
in signifcant delays, which could also lead to increased costs and
project delays.
Decisions to acquire or divest other regulated businesses licensed by
the OEB are subject to OEB approval. Accordingly, there is the risk
that such maters may not be approved, that the Company may not be
selected to build new transmission as par of the competitive process,
or that unfavourable conditions will be imposed by the OEB.
Hydro One may face increased competition with other transmiters
for opporunities to build new, large-scale transmission facilities in
Ontario. The Company is subject to the risk that it will not be selected
to build new transmission in Ontario, which could impair growth, disrupt
operations and/or development, or have other adverse impacts.
Risks Relating to Rate-Seting Models for Transmission and Distribution
The OEB approves and periodically changes the rate-seting models
and methodology for the transmission and distribution businesses.
Changes to the application type, fling requirements, rate-seting model
or 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. Similarly, the OEB is currently
considering other utility remuneration models, and any such change
could afect Hydro One’s revenue and net income.
The OEB’s Custom Incentive Rate-seting 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 efect 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 furher
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
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022 period of a rate decision and no corresponding changes were permited
to the Company’s revenue requirement (including cost of capital
parameters), then the result could be a decrease in the Company’s
fnancial perormance.
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 porion of the Company’s revenues.
Risks Relating to Capital Expenditures
In order to be recoverable in rates, capital expenditures require
the approval of the OEB. There can be no assurance that all capital
expenditures, including any imposed by or resulting from government
or regulatory bodies, incurred by Hydro One will be approved by
the OEB. For example, capital cost overruns including those due to
economic trends and conditions including infation, unexpected
capital expenditures in maintaining or improving the Company’s assets,
unexpected costs as a result of proposed legislation, including that
relating to the expansion of broadband service in Canada, may not be
recoverable in transmission or distribution rates. To the extent possible,
Hydro One aims to mitigate this risk by ensuring expenditures are
reasonable and prudent, and also by seeking from the regulator clear
policy direction on cost responsibility, and by obtaining 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 efect on the Company.
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 paricipation 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, including the costs of debt and income
taxes, or to earn a paricular ROE. A failure to obtain acceptable rate
orders, or approvals of appropriate returns on equity and the ability to
recover in rates costs actually incurred, may materially adversely afect:
Hydro One’s transmission and distribution businesses, the underaking
or timing of capital expenditures, ratings assigned by credit rating
agencies, the cost and issuance of long-term debt, and other maters,
any of which may in turn have a material adverse efect on the Company.
In addition, there is no assurance that the Company will receive
regulatory decisions in a timely manner and, therefore, the Company
may incur costs before having an approved revenue requirement and
cash fows could be impacted. The Company is also subject to the risk
that the OEB could change the regulatory treatment of cerain costs
which may afect the Company’s accounting treatment of and ability to
recover such costs.
Risk of Recoverability of Total Compensation Costs
Hydro One manages all of its total compensation costs, including
pension and other post-employment and post-retirement benefts
(OPEBs), subject to restrictions and requirements imposed by the
collective bargaining process and legislative requirements. Any element
of total compensation costs which is disallowed in whole or par by the
OEB and therefore 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 efect on the Company. The OEB Act
prohibits Hydro One from recovering specifed executive compensation
costs in its rates.
The Company provides OPEBs, including workers' compensation
benefts and long-term disability benefts to qualifying employees.
Hydro One currently maintains the accrual accounting method with
respect to OPEBs. If the OEB directed Hydro One to transition to a
diferent accounting method for OPEBs or otherwise adjusted the basis
of recovery for OPEB costs, this could result in income volatility, due to
an inability of the Company to book the diference between the accrual
and cash as a regulatory asset, and the Company might not be able to
recover some costs. A determination that some of the Company’s post-
employment and post-retirement beneft costs are not recoverable
could have a material adverse efect on the Company.
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 confict from
time to time as a result of being an investor in Hydro One Limited and
also being a government actor seting 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 issue regulations at any time,
including legislation or regulation impacting Hydro One, which could
have potential material adverse efects 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 afect the
governance of Hydro One. Such government actions could adversely
afect the Company’s fnancial 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.
The Province has in the past passed legislation to place limits on
executive compensation at Hydro One and there is no guarantee they
may not do so in the future. Potential involvement by the Province
in the Company’s executive compensation practices may inhibit the
Company’s ability to atract and retain qualifed executive talent,
which may also impact the Company’s perormance, strategy and/or
objectives. The failure to atract and retain qualifed executives could
have a material adverse efect on the Company.
Government action may also impact the Company’s credit ratings
as the Company’s credit ratings refect, in par, the rating 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
afect the Company’s fnancial 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.
35
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Indigenous Claims Risk
Some of the Company’s current and proposed transmission and
distribution assets are or may be located on reserve (as defned in the
Indian Act (Canada)) (Reserve) lands, or lands over which Indigenous
people have Aboriginal, treaty, or other legal rights or claims. Some
Indigenous leaders, communities, and their members have made
asserions related to sovereignty and jurisdiction over Reserve lands and
traditional territories (land traditionally occupied or used by a First Nation,
Métis or Inuit group) and are increasingly willing to asser their claims
through the cours, tribunals, or direct action. These claims, and/or the
setlement or resolution of these claims could have a material adverse
efect 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
having a duty to consult and potentially accommodate Indigenous
communities. Procedural aspects of the Crown's duty to consult may be
delegated to the Company by the Province or the federal government.
A perceived failure by the Crown to sufciently consult an Indigenous
community, including communities with a traditional governance model
not recognized under the Indian Act (Canada), 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 efect
on the Company.
Risk from Transfer of Assets Located on Reserves
The transfer orders by which the Company acquired cerain 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, 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 as required by the Indian Act (Canada). For each
permit, the Company may need to negotiate (an) agreement(s) with
the First Nation, OEFC and any members of the First Nation who have
occupancy rights. Any such agreement(s) include provisions whereby
the First Nation consents to the issuance of a permit. For transmission
assets, the Company must negotiate terms of payment. It is difcult
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, or is unable to obtain the actual federal permits
for any other reason, 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 efect on the
Company if the costs are not recoverable in future rate orders.
36
Compliance with Laws and Regulations
Hydro One must comply with numerous laws and regulations afecting
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 efect on the Company’s business.
See also “Environment Risk” and “Health and Safety 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. In Ontario, the Market Rules issued by the IESO require
the Company to, among other things, comply with applicable reliability
standards established by the Norh American Electric Reliability
Corporation (NERC) and Norheast Power Coordinating Council, Inc.
(NPCC). The 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 costs.
Failure to obtain such approvals could have a material adverse efect on
the Company.
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.
Risk of Natural and Other Unexpected Occurrences
The Company’s facilities are exposed to the efects of severe weather
conditions, natural disasters, man-made events including, but not
limited to, cyber and physical terrorist type atacks, events which
originate from third-pary connected systems, and any other potentially
catastrophic events. 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 fres), claims for damages caused by its failure to
transmit or distribute electricity, costs related to ensuring its continued
ability to transmit or distribute electricity or costs related to information
or cyber security.
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 and cyber security 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.
In the event that the Company is unable to recover such costs, this
could have a material adverse efect on the Company.
Risk Associated with Information Technology (IT), Operational
Technology (OT) Infrastructure, and Data Security
The Company’s ability to operate efectively in the Ontario electricity
market is, in par, dependent upon it developing, modernizing,
maintaining and managing complex IT and OT systems which are
employed to operate and monitor its transmission and distribution
facilities, fnancial and billing systems and other business systems. The
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Company’s increasing reliance on information systems and expanding
data networks, as well as growing volume and complexity of data,
increases its vulnerability, and 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 OT, which only apply to cerain
of the Company’s assets (generally being those whose failure could
impact the functioning of the bulk electricity system). The Company
may maintain diferent or lower levels of 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-atacks or unauthorized access to corporate IT and OT systems
could result in service disruptions and system failures, which could have
a material adverse efect on the Company, including as a result of a
failure to provide electricity to customers. Because it operates critical
infrastructure, Hydro One may be at greater risk of cyber-atacks from
third paries (including state run or controlled paries) 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, counterparies, employees and other third paries.
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 efect on the Company.
Environment Risk
The Company is subject to extensive Canadian federal, provincial and
municipal environmental regulation. Failure to comply could subject
the Company to fnes or other penalties. In addition, the presence or
release of hazardous or other harmful substances could lead to claims
by third paries or governmental orders requiring the Company to take
specifc actions such as investigating, controlling and remediating the
efects of these substances. Although Hydro One is not a large emiter
of greenhouse gases, the Company monitors its emissions to track
and repor on all sources, including sulphur hexafuoride or “SF6”. The
Company could be subject to costs and other risks related to emissions.
Contamination of the Company’s properies 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 provided for in the Company’s fnancial
statements. 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
which may have a material adverse efect on the Company.
The Company’s facilities are exposed to the efects of severe weather
conditions and natural disasters. The Company recognizes the risks
associated with potential climate change and has developed plans
to respond as appropriate. Climate change may have the efect of
shifting weather paterns 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. Notwithstanding
Hydro One’s efors to adapt and increase grid resilience, the Company’s
facilities are exposed to risks which may have an adverse efect on grid
resilience. 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 fres), 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.
In the event that the Company is unable to recover such costs, this
could have a material adverse efect on the Company.
Labour Relations Risk
A substantial majority of the Company’s employees are unionized and
are primarily represented by either the PWU or the Society. Over the
past several years, signifcant efor has been expended to increase
Hydro One’s fexibility to conduct operations in a more cost-efcient
manner. Although the Company has achieved improved fexibility in its
collective agreements, the Company may not be able to achieve furher
improvements, or at least not without increasing the risk of labour
disruption. The Company reached an agreement with the Society for a
collective agreement, covering the period from April 1, 2021 to March 31,
2023. Agreements were also reached with the Society and the PWU to
facilitate the insourcing of Customer Service Operations (CSO) services
efective March 1, 2018, as well as all remaining services provided by
Inergi LP (IT, Supply Chain, Finance and Accounting, and Payroll) on
various dates between March 1, 2021 and January 1, 2022. The Company
also reached a main collective agreement with the PWU, covering
the period from April 1, 2020 to March 31, 2023, and a CSO collective
agreement with the PWU covering the period from October 1, 2019 to
September 30, 2022. The Company also reached a collective agreement
with the CUSW, covering the period from May 1, 2022 to April 30, 2026.
Additionally, Electrical Power Systems Construction Association (EPSCA)
and a number of building trade unions have agreements, to which Hydro
One is bound, covering the period from May 1, 2020 to April 30, 2025.
Future negotiations with unions present the risk of a labour disruption
or dispute, risk to the Company’s ability to sustain the continued supply
37
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
of electricity to customers, as well as potential risks to public safety and
reputation. The Company also faces fnancial risks related to its ability to
negotiate collective agreements consistent with its rate orders. Any of
these could have a material adverse efect on the Company. Negotiations
with the PWU for the renewal of the CSO collective agreement that
expired on September 30, 2022 remain ongoing. Collective agreements
requiring renewal in 2023 include the Society collective agreement and
the main PWU collective agreement, both expiring on March 31, 2023.
Failure to renew these agreements on terms acceptable to Hydro One
could have a material adverse efect on its business and results of
operations and expose Hydro One to the risks noted above.
Risks Relating to Asset Condition, Capital Projects and Innovation
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.
While traditionally a mature and stable industry, the electricity industry
is facing rapid and dramatic technological change and increasing
innovation, the consequences of which could have a material adverse
efect on the Company, including a reduction in revenue.
Execution of the Company’s capital expenditure programs is parially
dependent on external factors, such as OEB approvals; environmental
approvals; municipal permits; equipment outage schedules that
accommodate the IESO, generators and customers; other interrelated
projects being on schedule; supply chain availability and/or cost and
schedule variability for equipment suppliers, contracted services, and
consulting services; and availability of contractor resources including
in relation to workforce and equipment. Many of these external factors
are beyond the Company’s control. 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 propery, 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, or at all, could
materially adversely afect transmission reliability or customers’ service
quality or increase maintenance costs which could have a material
adverse efect on the Company. Failure to receive approvals for projects
when spending has already occurred would result in the inability of
the Company to recover the investment in the project as well as foreit
the anticipated return on investment. The assets involved may be
considered impaired and result in the write of of the value of the asset,
negatively impacting net income. If the Company is unable to carry out
capital expenditure plans in a timely manner, equipment perormance
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 efect on
the Company.
Increased competition for the development of large transmission
projects and legislative changes relating to the selection of transmiters
could impact the Company’s ability to expand its existing transmission
system, which may have an adverse efect on the Company. To the
extent that other paries are selected to construct, own and operate
new transmission assets, the Company’s share of Ontario’s transmission
network would be reduced. Any delays in these new transmiters’
projects may impact the Company’s own projects that it is underaking
to in-service these new transmission assets.
Infectious Disease Risk
An outbreak of infectious disease, in the form of an epidemic, a
pandemic (such as COVID-19 and the emergence of its variants), or
a similar public health threat, could materially adversely impact the
Company. The extent of any such adverse impact on the Company
is uncerain, and may depend on the length and severity of any such
infectious disease outbreak, any resultant government regulations,
guidelines and actions, and any related adverse changes in general
economic and market conditions. Such circumstances could impact, in
paricular: the Company’s operations and workforce, including security
of supply, both with respect to availability and afordability, which
individually or collectively may impact the Company's ability to complete
operating and capital work programs as planned, including within scope
and budget; cerain fnancial obligations of the Company, including
pension contributions and other post-retirement benefts, as a result
of changes in prevailing market conditions; the Company’s expected
revenues; reductions in overall electricity consumption and load, both
shor term and long term; overdue accounts and bad debt increases
as a result of changes in the ability of the Company’s customers to
pay; liquidity and the Company’s ability to raise capital; the Company’s
ability to pay or increase dividends; the timing of increased rates;
the Company’s ability to recover incremental costs and lost revenues
linked to the outbreak; the Company’s ability to fle regulatory flings
on a timely basis; timing of regulatory decisions and the impacts those
decisions may have on the Company or its ability to implement them;
and customer and stakeholder needs and expectations.
The Company also faces risks and costs associated with implementation
of business continuity plans and modifed work conditions, including the
risks and costs associated with maintaining or reducing its workforce,
making the required resources available to its workforce to enable
essential work, including remotely where possible, and to keep its
workforce healthy, as well as risks and costs associated with recovery
of normal operations. Furhermore, the Company is dependent on third
pary providers for cerain activities, and relies on a strong international
supply chain. Any signifcant disruption to those providers or the supply
chain resulting from an outbreak of infectious disease could materially
adversely impact the Company.
Work Force Demographic Risk
By the end of 2022, approximately 10% of the Company’s employees
who are members of the Company’s defned beneft and defned
contribution pension plans were eligible for retirement, and by the
end of 2023, approximately 11% could be eligible. These percentages
are not evenly spread across the Company’s work force, but tend to
be most signifcant in the most senior levels of the Company’s staf
and among management staf. During 2022, approximately 4% of the
Company’s work force (remaining consistent with 2021) elected to retire.
Accordingly, the Company’s continued success will be tied to its ability
to continue to atract and retain sufcient qualifed staf to replace
the capability lost through retirements and meet the demands of the
Company’s work programs.
38
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
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 are sought after as they possess skills and
experience that are also highly coveted by other organizations inside
and outside the electricity sector. The failure to atract, retain and
deploy qualifed personnel for Hydro One’s business could have a
material adverse efect on the Company.
Risk Associated with Arranging Debt Financing
The Company expects to borrow to repay its existing indebtedness and
to fund a porion of capital expenditures. Hydro One Inc. has substantial
debt principal repayments coming due, including $731 million in 2023,
$700 million in 2024 and $750 million in 2025. In addition, from time to
time, the Company may draw on its syndicated bank lines and/or issue
shor-term debt under Hydro One Inc.’s $2,300 million commercial
paper program which would mature within one year of issuance. The
Company also plans to incur continued material capital expenditures
for each of 2023 and 2024. Cash generated from operations, after
the payment of expected dividends, will not be sufcient to fund
the repayment of the Company’s existing indebtedness and capital
expenditures. The Company’s ability to arrange sufcient and cost-
efective debt fnancing could be materially adversely afected by
numerous factors, including the regulatory environment in Ontario,
the Company’s results of operations and fnancial 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 (such as, among other
things, changes in interest rates). 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 par 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 efect on the Company.
Increasing investor interest in ESG perormance and reporing also
has the potential to impact the cost and availability of the Company’s
funding, as these factors may be increasingly connected to the quality
of the Company’s ESG practices and related reporing, including
repors addressing the allocation of funds and impact reporing under
Hydro One’s Sustainable Financing Framework.
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, including potentially
negative interest rates. The Company is exposed to fuctuations in
interest rates as its regulated ROE is derived using a formulaic approach
that takes into account anticipated interest rates. The Company issues
debt from time to time to refnance maturing debt and for general
corporate purposes. The Company is therefore exposed to fuctuations
in interest rates in relation to such issuances of debt. Fluctuations in
interest rates may also impact the funded position of Hydro One’s
Defned Beneft Pension Plan, and associated pension asset or liability
(see also “Pension Plan Risk”). The Company is not currently exposed to
material foreign exchange risk.
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. For the transmission and distribution businesses,
during the Custom Incentive Rate period from 2023 to 2027, the OEB
does not expect to address annual rate applications for updates to
allowed ROE, so fuctuations will have no impact to net income. The
Company has interest rate exposure in 2023 and beyond associated
with the refnancing of maturing shor- and long-term debt, as well
as with debt issued for general corporate purposes and under the
Sustainable Financing Framework which may include debt issued in
relation to growth in rate base. The Company periodically uses interest
rate swap agreements to mitigate elements of interest rate risk.
Financial assets create a risk that a counterpary will fail to discharge
an obligation, causing a fnancial loss. Derivative fnancial instruments
result in exposure to credit risk, since there is a risk of counterpary
default. Hydro One monitors and minimizes credit risk through various
techniques, including dealing with highly rated counterparies, limiting
total exposure levels with individual counterparies, entering into
agreements which enable net setlement, and monitoring the fnancial
condition of counterparies. The Company does not trade in any energy
derivatives. The Company is required to procure electricity on behalf of
competitive electricity retailers and cerain local distribution companies
for resale to their customers. The resulting concentrations of credit
risk are mitigated through the use of various security arrangements,
including leters of credit, which are incorporated into the Company’s
service agreements with these retailers in accordance with the OEB’s
Retail Setlement Code.
The failure to properly manage these risks could have a material adverse
efect on the Company.
Health and Safety Risk
Hydro One’s work environment can be inherently dangerous and there
is a risk to health and safety of both the public and our employees,
as well as possible resultant operational and/or fnancial impacts. The
Company is subject to federal and provincial legislation and regulations
relating to health and safety. Findings of a failure to comply with these
requirements could result in penalties and reputational risk, which could
negatively impact the Company. Failure to comply could subject the
Company to fnes or other penalties. Any regulatory decision to disallow
or limit the recovery of such costs could have a material adverse efect
on the Company.
Pension Plan Risk
Hydro One has the Hydro One Defned Beneft 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
fled with the Financial Services Regulatory Authority of Ontario on
a triennial basis. The most recently fled valuation was prepared as
at December 31, 2021, and was fled in September 2022, covering a
three-year period from 2022 to 2024. The next required valuation will
be prepared as at December 31, 2024 and is expected to be fled by no
later than September 2025. Hydro One’s contributions to its pension
plan satisfy, and are expected to continue to satisfy, minimum funding
requirements. Contributions beyond 2023 will depend on the funded
position of the plan, which is determined by investment returns, interest
rates and changes in benefts 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 efect on the Company, and this risk may be exacerbated if the
amount of required pension contributions increases.
39
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022 Hydro One currently repors and recovers its pension costs on a cash
basis, and maintains the accrual method with respect to OPEBs.
Transitioning from the cash basis to an accrual method for pension
costs 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 also “Regulatory Risks and Risks Relating to Hydro One’s Revenues -
Risk of Recoverability of Total Compensation Costs” for risks relating to
recovery of pension costs.
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 paries in conjunction with
the operation of the Company’s systems, or adjacent land use by third
paries, may increase safety or environmental risks, which could have a
material adverse efect on the Company.
Litigation Risks
In the normal course of the Company’s operations, it becomes
involved in, is named as a pary 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, propery damage, propery
taxes, land rights, the environment, contract disputes, claims by
former employees and claims and proceedings by Indigenous groups.
The outcome of outstanding, pending or future proceedings cannot
be predicted with cerainty and may be determined adversely to the
Company, which could have a material adverse efect on the Company.
Even if the Company prevails in any such legal proceeding, the
proceedings could be costly and time-consuming and would diver
the atention of management and key personnel from the Company’s
business operations, which could adversely afect the Company.
Transmission Assets on Third-Pary Lands Risk
Some of the lands on which the Company’s transmission assets are
located are owned by third paries, 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-pary
owned or controlled lands or has occupancy rights that are subject to
expiry, it may incur material costs to obtain or renew such occupancy
rights, or if such occupancy 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 occupancy rights
and must incur costs as a result, this could have a material adverse
efect on the Company or otherwise materially adversely impact the
Company’s operations.
Reputational, Public Opinion and Political Risk
Reputation risk is the risk of negative publicity or the public’s negative
perceptions towards Hydro One that may result in a detrimental impact
to Hydro One’s business, operations or fnancial condition leading to a
deterioration of Hydro One’s reputation. Hydro One’s reputation could
be negatively impacted by changes in public opinion, atitudes towards
40
the Company’s privatization, failure to deliver on its customer and/
or stakeholder promises, failure to comply with mandatory reliability
regulations established by the NERC and NPCC, failure to adequately
respond to social issues raised by employees, parners and/stakeholders
and other external forces. Adverse reputational events or political
actions could have a material adverse efect 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 and community relationships. Any
of these could have a material adverse impact on Hydro One and its
business, fnancial condition and results of operations.
Risk Associated with Outsourcing Arrangements
Hydro One has entered into an outsourcing arrangement with a third
pary for the provision of cerain back ofce and IT services. If the
services are disrupted, it could have a material adverse efect on the
Company. Additionally, 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 efect on the Company’s business, operating
results, fnancial condition or prospects.
Risks Associated with Acquisitions
Acquisitions include inherent risks that some or all of the expected
benefts may fail to materialize, or may not occur within the time
periods anticipated, and Hydro One may incur material unexpected
costs or liabilities. Realization of the anticipated benefts would
depend, in par, on the Company’s ability to successfully integrate the
acquired business, including the requirement to devote management
atention and resources to integrating business practices and suppor
functions. The failure to realize the anticipated benefts, the diversion
of management’s atention, or any delays or difculties encountered
in connection with the integration could have an adverse efect on
the Company’s business, results of operations, fnancial condition or
cash fows.
Risks Relating to the Common Shares of Hydro One Limited
Hydro One’s common shares trade on the TSX. The trading price of the
common shares has in the past been, and may in the future be, subject
to signifcant fuctuations. These fuctuations may be caused by events
or factors related or unrelated to Hydro One’s operating perormance
and/or beyond its control, including: the risk factors described herein;
general economic conditions within Ontario and Canada, including
changes in interest rates; infation; changes in electricity prices;
changes in electricity demand; weather conditions; actual or anticipated
fuctuations in Hydro One’s quarerly and annual results and the results
of public companies similar to Hydro One; Hydro One’s businesses,
operations, results and prospects; Hydro One’s reputation and its
relationship with the Province; the timing and amount of dividends,
if any, declared on the common shares; future issuances of common
shares or other securities by Hydro One or Hydro One Inc.; Hydro One’s
relationship with its regulator; changes in government regulation, taxes,
legal proceedings or other developments; shorfalls in Hydro One’s
operating results from levels forecasted by securities analysts; investor
sentiment toward energy companies in general or companies adopting
ESG perormance and reporing practices; maintenance of acceptable
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022 credit ratings or credit quality; the impact of COVID-19 on Hydro One
and the Province; and the general state of the securities markets. These
and other factors may impair the development or sustainability of a
liquid market for the common shares and the ability of investors to sell
common shares at an atractive price.
Risks Relating to the Company’s Relationship with
the Province
Ownership and Continued Infuence by the Province and Voting Power;
Share Ownership Restrictions
The Province currently owns approximately 47.2% of the outstanding
common shares of Hydro One. The Electricity Act, 1998 (Ontario)
(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 cerain circumstances also
requires the Province to take steps to maintain that level of ownership.
Accordingly, the Province is expected to continue to maintain a
signifcant ownership interest in voting securities of Hydro One for an
indefnite period.
As a result of its signifcant ownership of the common shares of
Hydro One, the Province has, and is expected indefnitely to have,
the ability to determine or signifcantly infuence the outcome of
shareholder votes, subject to the restrictions in the Governance
Agreement between Hydro One and the Province dated November 5,
2015 (Governance Agreement) (available on SEDAR at www.sedar.com).
Despite the terms of the Governance Agreement in which the Province
has agreed to engage in the business and afairs of the Company as
an investor and not as a manager, there is a risk that the Province’s
engagement in the business and afairs of the Company as an investor
will be informed by its policy objectives and may infuence the conduct
of the business and afairs 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 historically taken by
the Province, 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 signifcant ownership of common
shares of Hydro One together efectively 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.
Nomination of Directors and Confrmation of Chief Executive Ofcer
(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 confrm individuals who satisfy the independence requirements
but who it considers are disposed to suppor and advance its policy
objectives and give disproporionate 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 cerain maters
require a two-thirds vote of the Board, could allow the Province to
unduly infuence cerain Board actions such as confrmation of the Chair
and confrmation 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 paricular
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 afairs 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 efect 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, propery 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 porion
of either system, even where such a transaction may otherwise be
considered to provide substantial benefts 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 furher 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 fle one or more prospectuses and
take other procedural steps to facilitate secondary oferings 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 afect 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 paricular 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
41
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022 to other director nominees. Hydro One’s ability to obtain an efective
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 specifc perormance are not available against the
Province, although a cour may make an order declaratory of the rights
of the paries, which may infuence the Province’s actions. A remedy of
damages would be available to Hydro One, but damages may not be
an efective 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 afect the repored 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 difer
from these estimates and judgments. Hydro One has identifed the
following critical accounting estimates and judgements used in the
preparation of its Consolidated Financial Statements:
Revenues
Distribution revenues atributable 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 afected
by energy consumption, weather, and changes in the composition of
customer classes.
Regulatory Assets and Liabilities
Hydro One’s regulatory assets represent cerain 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 deferred income taxes, pension beneft liability, post-retirement
and post-employment non-service costs, deferred tax asset sharing,
environmental liabilities and share-based compensation costs. The
Company’s regulatory liabilities represent cerain amounts that are
refundable to future electricity customers. They perain primarily to
deferral and variance accounts, and includes amounts related to the
pension asset in the current year. The regulatory assets and liabilities
can be recognized for rate-seting and fnancial reporing 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, at some future date, management judges that it is no
longer probable that the OEB will allow the inclusion of a regulatory
asset or liability in future electricity rates, the appropriate carrying
amount would be refected in results of operations prospectively from
the date the Company’s assessment is made, unless the change meets
the requirements for a subsequent event adjustment.
42
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 uncerainties 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 fow 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 perorm work, infation assumptions and the assumed
patern of annual cash fows may difer signifcantly from the Company’s
current assumptions. Environmental liabilities are reviewed annually or
more frequently if signifcant changes in regulations or other relevant
factors occur. Estimate changes are accounted for prospectively.
Employee Future Benefts
Hydro One’s employee future benefts consist of pension and post-
retirement and post-employment plans, and include pension, group life
insurance, health care, and long-term disability benefts provided to the
Company’s current and retired employees. Employee future benefts
costs are included in Hydro One’s labour costs that are either charged
to results of operations or capitalized as par of the cost of propery,
plant and equipment and intangible assets. Changes in assumptions
afect the beneft obligation of the employee future benefts and the
amounts that will be charged to results of operations or capitalized in
future years. The following signifcant assumptions and estimates are
used to determine employee future beneft costs and obligations:
Weighted Average Discount Rate
The weighted average discount rate used to calculate the employee
future benefts obligation is determined at each year end by referring
to the most recently available market interest rates based on “AA”-
rated corporate bond yields refecting the duration of the applicable
employee future beneft plan. The discount rate at December 31, 2022
increased to 5.06% (from 3.00% at December 31, 2021) for pension
benefts and increased to 5.07% (from 3.00% at December 31, 2021)
for the post-retirement and post-employment plans. The increase
in the discount rate has resulted in a corresponding decrease in
employee future benefts liabilities for the pension, post-retirement
and post-employment plans for accounting purposes. The liabilities
are determined by independent actuaries using the projected beneft
method prorated on service and based on assumptions that refect
management’s best estimates.
Expected Rate of Return on Plan Assets
The expected rate of return on pension plan assets of 6.00% (2021 -
5.40%) is based on expectations of long-term rates of return at the
beginning of the year and refects the current pension plan asset
mix dated November 8, 2022. The expected rate of return for the
December 31, 2022 disclosures and the 2023 registered pension plan
expense is based on the plan’s ultimate target asset mix.
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022 Rates of return on the respective porfolios are determined with
reference to respective published market indices. The expected rate
of return on pension plan assets refects 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 ofset by
the greater stability of fxed-income and shor-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 shor term, the pension
plan can experience fuctuations in actual rates of return.
Rate of Cost of Living Increase
The rate of cost of living increase is determined by considering
diferences between long-term Government of Canada nominal
bonds and real return bonds, which increased from 1.80% per annum
as at December 31, 2021 to approximately 2.12% per annum as at
December 31, 2022. Based on the Bank of Canada’s commitment to
keep long-term infation between 1.00% and 3.00%, in addition to
current and anticipated trends, management believes that a long-term
assumption of 2.00% per annum is reasonable for employee future
benefts liability valuation purposes as at December 31, 2022 (1.75% per
annum was used for the purpose of December 31, 2021 disclosures and
2022 beneft cost).
Salary Increase Assumptions
Salary increases should refect 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 infation and real wage growth in the economy. The
merit and promotion scale was developed based on the salary increase
assumption review perormed 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 refects negotiated salary increases over the contract
period as well as slightly lower expected increases in the shor term.
Morality Assumptions
The Company’s employee future benefts liability is also impacted by
changes in life expectancies used in morality assumptions. Increases in
life expectancies of plan members result in increases in the employee
future benefts liability. For the pension and post-retirement plans,
the morality assumption used at December 31, 2022 is 90% of the
2014 Canadian Pensioners Morality Private Sector table projected
generationally using improvement Scale B. The multiplier applied to the
assumed morality table is based on the result of a morality experience
study that was conducted in 2021. For the post-employment plan,
the morality assumption used at December 31, 2022 is the disability
morality table from the 2009-2015 Canadian Institute of Actuaries
Group Long Term Disability Termination Study, which is the most
recent publicly available table that refects Canadian experience and is
commonly used by Canadian plan sponsors.
Rate of Increase in Health Care Cost Trends
The costs of post-retirement and post-employment benefts are
determined at the beginning of the year and are based on assumptions
for expected claims experience and future health care cost infation.
For the post-retirement beneft plans, a study of Hydro One’s historical
per capita health care cost trend experience was conducted in 2017.
The health and dental trends refect the results of this study as well
as macroeconomic inputs such as the expected long-term rates of
general infation and real GDP growth. The current environment of high
general infation in Canada is resulting in shor-term upward pressure
on the cost of cerain medical services covered by Hydro One's post-
retirement and post-employment beneft plans. However, these efects
are muted somewhat by plan design and government regulation. Based
on this, Hydro One has adopted a modest increase of 25 basis points to
its health care trend assumptions for the purpose of the December 31,
2022 disclosures. This adjustment aligns with the adjustment to the
assumed long-term rate of cost of living increase being adopted at
December 31, 2022.
Disclosure Controls and Procedures and Internal
Control Over Financial Reporing
Disclosure controls and procedures are the processes designed to
ensure that information is recorded, processed, summarized and
repored 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 consolidated fnancial 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 repor. Based on that evaluation, management
concluded that the Company’s disclosure controls and procedures were
efective as at December 31, 2022.
Internal control over fnancial reporing is designed by, or under
the direction of the CEO and CFO to provide reasonable assurance
regarding the reliability of fnancial reporing and the preparation of
consolidated fnancial statements for external purposes in accordance
with US GAAP. The Company’s internal control over fnancial reporing
framework includes those policies and procedures that (i) perain to the
maintenance of records that, in reasonable detail, accurately and fairly
refect the transactions and disposition of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of consolidated fnancial 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 efect on the Company’s consolidated fnancial statements.
The Company’s management, at the direction of the CEO and CFO,
evaluated the efectiveness of the design and operation of internal
control over fnancial reporing based on the criteria established in
the Internal Control - Integrated Framework (2013) issued by the
Commitee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on that evaluation, management concluded that the
Company’s internal control over fnancial reporing was efective as at
December 31, 2022.
Internal controls, no mater 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. Furhermore, the efectiveness of internal control
is afected by change and subject to the risk that internal control
efectiveness may change over time.
43
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022 There were no changes in the design of the Company’s internal control
over fnancial reporing during the three months ended December 31,
2022 that have materially afected, or are reasonably likely to materially
afect, the operation of the Company’s internal control over
fnancial reporing.
Management will continue to monitor its systems of internal control
over reporing and disclosure and may make modifcations from time to
time as considered necessary.
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
Guidance Date issued Description
Efective date
Impact on Hydro One
ASU
2020-06
August
2020
The update addresses the complexity associated with applying US GAAP January 1, 2022
for cerain fnancial instruments with characteristics of liabilities and
equity. The amendments reduce the number of accounting models for
converible debt instruments and converible preferred stock.
No impact upon adoption
ASU
2021-05
July
2021
The amendments are intended to align lease classifcation requirements January 1, 2022
for lessors under Topic 842 with Topic 840's practice.
No impact upon adoption
ASU
2021-10
November The update addresses diversity on the recognition, measurement,
presentation and disclosure of government assistance received by
2021
business entities.
Recently Issued Accounting Guidance Not Yet Adopted
Guidance Date issued Description
ASU
2021-08 2021
October The amendments address how to determine whether a contractual
obligation represents a liability to be recognized by the acquirer in a
business combination.
ASU
2022-02 2022
March
The amendments eliminate the troubled debt restructuring (TDR)
accounting model for entities that have adopted Topic 326 Financial
Instrument – Credit Losses and modifes the guidance on vintage
disclosure requirements to require disclosure of current-period gross
write-ofs by year of origination.
January 1, 2022
No impact upon adoption
Efective date
Anticipated Impact on Hydro One
January 1, 2023
No expected impact upon
adoption
January 1, 2023
Upon adoption, the Company
will disclose the current period
gross write-ofs by year of
origination relating to its
accounts receivable
44
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Summary of Fourh Quarer Results of Operations
Three months ended December 31 (millions of dollars, except EPS)
2022
2021
Change
Revenues
Distribution
Transmission
Other
Costs
Purchased power
OM&A
Distribution
Transmission
Other
Depreciation, amorization and asset removal costs
Income before fnancing charges and income tax expense
Financing charges
Income before income tax expense
Income tax expense
Net income
Net income to common shareholders of Hydro One
Basic EPS
Diluted EPS
Assets Placed In-Service
Distribution
Transmission
Other
Capital Investments
Distribution
Transmission
Other
Net Income
Net income atributable to common shareholders for the quarer ended
December 31, 2022 of $178 million is an increase of $19 million, or 11.9%,
from the prior year. Signifcant infuences on net income included:
●
● higher revenues, net of purchased power,8 primarily resulting from:
—
—
an increase in transmission and distribution OEB-approved 2022
rates; and
positive regulatory adjustments, including the recognition of
CDM revenues following the receipt of the JRAP Decision and a
lower deferred adjustment as a result of the Earnings Sharing
Mechanism in 2022.
● higher OM&A costs primarily resulting from:
—
higher work program expenditures including stations and lines
maintenance, environmental management, IT initiatives and
storm restoration; and
—
higher corporate suppor costs.
1,371
480
11
1,862
895
222
143
23
388
231
1,347
421
11
1,779
914
161
103
15
279
247
1,514
1,440
348
128
220
41
179
178
339
123
216
55
161
159
$ 0.30
$ 0.30
$ 0.27
$ 0.26
326
761
3
1,090
253
310
7
570
257
526
3
786
221
303
8
532
1.8%
14.0%
0.0%
4.7%
(2.1%)
37.9%
38.8%
53.3%
39.1%
(6.5%)
5.1%
2.7%
4.1%
1.9%
(25.5%)
11.2%
11.9%
11.1%
15.4%
26.8%
44.7%
0.0%
38.7%
14.5%
2.3%
(12.5%)
7.1%
lower depreciation, amorization and asset removal costs primarily
resulting from a gain realized on the sale of surplus propery, parially
ofset by higher depreciation resulting from the growth in capital
assets as the Company continues to place new assets in-service,
consistent with its ongoing capital investment program, and higher
asset removal costs.
●
lower income tax expense primarily resulting from:
—
higher deductible timing diferences compared to the prior year;
parially ofset by
—
higher pre-tax earnings.
8 Revenues, net of purchased power, is a non-GAAP fnancial measure. See section
"Non-GAAP Financial Measures."
45
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
EPS
Basic EPS was $0.30 in the fourh quarer of 2022, compared to basic
EPS of $0.27 in the fourh quarer of 2021.
Revenues
The year-over-year increase of $59 million or 14.0% in transmission
revenues during the quarer was primarily due to the following:
● positive regulatory adjustments, including the recognition of CDM
revenues following receipt of the JRAP Decision, parially ofset by
a deferred adjustment associated with the OEB-approved Earnings
Sharing Mechanism; and
● higher revenues resulting from OEB-approved 2022 rates; parially
ofset by
● a regulatory adjustment associated with the Capitalized Overhead
Tax Variance and an adjustment to transmission revenue requirement
efective January 1, 2022 to cease sharing of DTA amounts pursuant
to the DTA Implementation Decision, the net impact of which is
ofset by a decrease in income tax and therefore net income neutral.
The year-over-year increase of $24 million or 1.8% in distribution
revenues during the quarer was primarily due to the following:
● higher revenues resulting from OEB-approved 2022 rates; and
● positive regulatory adjustments including a lower adjustment to the
Earnings Sharing Mechanism in 2022; parially ofset by
●
lower purchased power costs, which are fully recovered from
ratepayers and are thus net income neutral; and
● a regulatory adjustment associated with the Capitalized Overhead
Tax Variance and an adjustment to base distribution rates efective
January 1, 2022 to cease sharing of DTA amounts pursuant to the
DTA Implementation Decision, the net impact of which is ofset by a
decrease in income tax and therefore net income neutral.
Distribution revenues, net of purchased power,9 increased by 9.9%
during the fourh quarer of 2022 compared to the prior year, primarily
due to the reasons noted above, adjusted for the recovery of purchased
power costs.
OM&A Costs
The year-over-year increase of $40 million or 38.8% in transmission
OM&A costs during the quarer was primarily due to the following:
● higher work program expenditures, including higher volume of
maintenance work on stations, as well as higher spend on lines and
facilities;
● higher corporate suppor costs; and
● higher propery taxes; parially ofset by
●
lower project write-ofs.
The year-over-year increase of $61 million or 37.9% in distribution OM&A
costs during the quarer was primarily due to the following:
● higher work program expenditures, including higher volume of
emergency restoration and environmental management as well as
higher spend associated with IT initiatives and customer programs;
● higher corporate suppor costs;
● higher project write-ofs; and
● costs related to storm restoration efors that have been recovered
from third paries and are ofset in revenue, therefore net
income neutral.
Depreciation, Amorization and Asset Removal Costs
The decrease of $16 million or 6.5%, in depreciation, amorization and
asset removal costs in the fourh quarer of 2022 was primarily due to
a gain realized on the sale of surplus propery, parially ofset by higher
depreciation resulting from the growth in capital assets as the Company
continues to place new assets in-service, consistent with its ongoing
capital investment program, and higher asset removal costs.
Financing Charges
The $5 million or 4.1% increase in fnancing charges for the quarer
ended December 31, 2022, was primarily due to higher weighted-
average interest rates on shor-term notes, parially ofset by gains on
interest rate swap agreements.
Income Taxes
Income tax expense for the fourh quarer of 2022 decreased by
$14 million compared to the same period in 2021. This resulted in a
realized efective tax rate of approximately 18.6% in the fourh quarer
of 2022, compared to approximately 25.5% in the fourh quarer of the
prior year.
The decrease in income tax expense for the three months ended
December 31, 2022 was primarily atributable to:
● higher deductible timing diferences compared to the prior year; and
● net income neutral items, including incremental tax recovery relating
to the Capitalized Overhead Tax Variance which was parially ofset
by the tax expense relating to the DTA Implementation Decision. This
decrease in tax expense is ofset by a corresponding decrease in
revenue and therefore net income neutral; parially ofset by
● higher earnings adjusted for the DTA Implementation Decision and
impacts of the JRAP Decision.
9 Revenues, net of purchased power, is a non-GAAP fnancial measure. See section
"Non-GAAP Financial Measures."
46
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Assets Placed In-Service
The increase in transmission assets placed in-service during the fourh
quarer was primarily due to the following:
●
timing of investments placed in-service for information technology
initiatives; and
● higher volume of assets placed in-service associated with customer
●
substantial completion of the end-of-life air blast circuit breakers
replacement at Bruce B Switching Station;
● higher investments associated with customer connections placed
in-service;
●
timing of investments placed in-service for information technology
initiatives; and
● higher volume of transmission line refurbishments and
replacements; parially ofset by
●
timing of investments placed in-service for major development
projects.
The increase in distribution assets placed in-service during the fourh
quarer was primarily due to the following:
● parial in-service of South Middle Road feeder development project;
● higher volume of storm-related asset replacements;
connections; parially ofset by
●
lower volume of line refurbishments and replacements.
Capital Investments
The increase in transmission capital investments during the fourh
quarer was primarily due to the following:
● higher volume of refurbishment and replacement work on
transmission stations and lines; and
● higher volume of work on wood poles; parially ofset by
●
lower volume of work on customer connections.
The increase in distribution capital investments during the fourh quarer
was primarily due to the following:
● higher spend on storm-related asset replacements; and
● higher volume of work on customer connections.
Hydro One Holdings Limited – Consolidating
Summary Financial Information
Hydro One Limited fully and unconditionally guarantees the payment
obligations of its wholly-owned subsidiary, HOHL, issuable under
the shor form base shelf prospectus dated November 22, 2022.
Accordingly, the following consolidating summary fnancial 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 cerain credit suppor issuers. The
tables below contain consolidating summary fnancial information at
December 31, 2022 and December 31, 2021 and for the years ended
December 31, 2022 and December 31, 2021 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 fnancial information is
intended to provide investors with meaningful and comparable fnancial
information about Hydro One Limited and its subsidiaries. This summary
fnancial information should be read in conjunction with Hydro One
Limited's most recently issued annual and interim fnancial statements.
This summary fnancial information has been prepared in accordance
with US GAAP, as issued by the FASB.
Year ended December 31
(millions of dollars)
Revenue
Net Income (Loss) Atributable
to Common Shareholders
Hydro One
Limited
2022
662
2021
629
661
630
—
—
HOHL
Subsidiaries of
Hydro One Limited,
other than HOHL
Consolidating
Adjustments
Total Consolidated
Amounts of Hydro
One Limited
2022
2021
2022
2021
2022
2021
2022
2021
—
8,567
7,983
(1,449)
(1,387)
7,780
7,225
—
1,767
1,665
(1,378)
(1,330)
1,050
965
Subsidiaries of
Hydro One Limited,
other than HOHL
Consolidating
Adjustments
Total Consolidated
Amounts of Hydro
One Limited
2021
2022
2021
2022
2021
2022
2021
2022
2021
As at December 31
(millions of dollars)
Hydro One
Limited
HOHL
Current Assets
Non-Current Assets
Current Liabilities
Non-Current Liabilities
2022
117
97
3,469
3,450
509
425
475
425
—
—
—
—
—
—
—
—
3,067
2,742
(1,324)
(1,013)
1,860
1,826
45,973
45,019
(19,845)
(19,912) 29,597
28,557
4,455
3,507
(1,312)
(1,004)
3,652
2,978
28,801
28,892
(12,813)
(12,888) 16,413
16,429
47
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
Forward-looking Statements and Information
The Company’s oral and writen 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, the industry, regulatory and economic
environments in which it operates, and includes beliefs and assumptions
made by the management of the Company. Such statements include,
but are not limited to, statements regarding: the Company’s and
Hydro One Remotes' transmission and distribution rate applications
including the JRAP and its proposed investment plan, resulting and
related decisions including the DTA Implementation Decision, as well as
resulting rates, recovery and expected impacts and timing; expected
timing of the Company's update to its transmission and distribution
revenue requirements; expected timing for a decision in respect of
Hydro One Remotes’ price cap incentive rate application; expectations
about the Company’s liquidity and capital resources and operational
requirements; the Operating Credit Facilities; expectations regarding
the Company’s fnancing activities; the Company’s maturing debt; the
Company’s ongoing and planned projects, initiatives and expected
capital investments, including expected results, costs and in-service
and completion dates; contractual obligations and other commercial
commitments; the number of Hydro One common shares issuable
in connection with outstanding awards under the share grant plans;
collective bargaining and agreements and expectations regarding
the ability to negotiate renewal collective agreements; the US GAAP
exemptive relief and the potential impacts of the Exposure Draft;
the Company's status as an SEC issuer; Bill 257 and Bill 93, related
regulations and the expected impacts; future pension contributions;
dividends; non-GAAP fnancial measures; internal controls over
fnancial reporing and disclosure; recent accounting-related guidance
and anticipated impacts; the MTN Program; the Universal Base
Shelf Prospectus; and the US Debt Shelf Prospectus. Words such as
“expect”, “anticipate”, “intend”, “atempt”, “may”, “plan”, “will”, “would”,
“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
perormance and involve assumptions and risks and uncerainties
that are difcult to predict. Therefore, actual outcomes and results
may difer 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.
These forward-looking statements are based on a variety of factors
and assumptions including, but not limited to, the following: the
scope of the COVID-19 pandemic and duration thereof as well as the
efect and severity of corporate and other mitigation measures on
the Company’s operations, supply chain or employees; no unforeseen
changes in the legislative and operating framework for Ontario’s
electricity market or for Hydro One specifcally; favourable decisions
from the OEB and other regulatory bodies concerning outstanding and
future rate and other applications; no unexpected delays in obtaining
required regulatory approvals; no unforeseen changes in rate orders
or rate seting methodologies for the Company’s distribution and
transmission businesses; no unfavourable changes in environmental
regulation; continued use of US GAAP; a stable regulatory environment;
no signifcant changes to the Company's current credit ratings; no
unforeseen impacts of new accounting pronouncements; no changes
to expectations regarding electricity consumption; no unforeseen
changes to economic and market conditions; recoverability of costs
and expenses related to the COVID-19 pandemic, including the
costs of customer defaults resulting from the pandemic; completion
of operating and capital projects that have been deferred; and no
signifcant event occurring outside the ordinary course of business.
These assumptions are based on information currently available to the
Company, including information obtained from third-pary sources.
Actual results may difer materially from those predicted by such
forward-looking statements. While Hydro One does not know what
impact any of these diferences may have, the Company’s business,
results of operations, fnancial condition and credit stability may be
materially adversely afected if any such diferences occur. Factors that
could cause actual results or outcomes to difer materially from the
results expressed or implied by forward-looking statements include,
among other things:
●
●
●
●
●
●
●
regulatory risks and risks relating to Hydro One’s revenues, including
risks relating to actual perormance against forecasts, competition
with other transmiters and other applications to the OEB, the rate-
seting models for transmission and distribution, the recoverability
of capital expenditures, obtaining rate orders or recoverability of
total compensation costs;
risks associated with the Province’s share ownership of Hydro One
and other relationships with the Province, including potential
conficts of interest that may arise between Hydro One, the Province
and related paries, risks associated with the Province’s exercise of
furher legislative and regulatory powers, risks relating to the ability
of the Company to atract and retain qualifed executive talent or the
risk of a credit rating downgrade for the Company and its impact on
the Company’s funding and liquidity;
risks relating to the location of the Company’s assets on Reserve
lands, that the company’s operations and activities may give rise
to the Crown’s duty to consult and potentially accommodate
Indigenous communities, and the risk that Hydro One may incur
signifcant costs associated with transferring assets located
on Reserves;
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 efects of
severe weather conditions, natural disasters, man-made events or
other unexpected occurrences for which the Company is uninsured
or for which the Company could be subject to claims for damage;
the risk of non-compliance with environmental regulations and
inability to recover environmental expenditures in rate applications
and the risk that assumptions that form the basis of the Company’s
recorded environmental liabilities and related regulatory assets
may change;
risks associated with information system security and maintaining
complex information technology and operational technology system
infrastructure, including system failures or risks of cyber-atacks
or unauthorized access to corporate information technology and
operational technology systems;
48
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
●
●
●
●
●
●
●
●
●
●
the risk that the Company may not be able to execute plans for
capital projects necessary to maintain the perormance of the
Company’s assets or to carry out projects in a timely manner or
the risk of increased competition for the development of large
transmission projects or legislative changes afecting the selection
of transmiters;
risks relating to an outbreak of infectious disease, including the
COVID-19 pandemic (including a signifcant expansion in length
or severity of the COVID-19 pandemic, including the spread of its
variants, restricting or prohibiting the Company’s operations or
signifcantly impacting the Company’s supply chain or workforce;
severity of mitigation measures relating to the COVID-19 pandemic
and delays in completion of and increases in costs of operating and
capital projects; and the regulatory and accounting treatment of
incremental costs and lost revenues of the Company related to the
COVID-19 pandemic);
the risk of labour disputes and inability to negotiate or renew
appropriate collective agreements on acceptable terms consistent
with the Company’s rate decisions;
risks related to the Company’s work force demographic and its
potential inability to atract and retain qualifed personnel;
the risk that the Company is not able to arrange sufcient cost-
efective fnancing to repay maturing debt and to fund capital
expenditures or the risk of a downgrade in the Company’s
credit ratings;
risks associated with fuctuations in interest rates and failure to
manage exposure to credit and fnancial instrument risk;
risks associated with economic uncerainty and fnancial
market volatility;
risks associated with asset condition, capital projects and
innovation, including public opposition to or delays or denials of
the requisite approvals and accommodations for the Company’s
planned projects;
the risk of failure to mitigate signifcant health and safety risks;
the risk of not being able to recover the Company’s pension
expenditures in future rates and uncerainty regarding the future
regulatory treatment of pension, other post-employment benefts
and post-retirement benefts costs;
●
●
●
●
●
●
●
●
the impact of the ownership by the Province of lands underlying the
Company’s transmission system;
the risk associated with legal proceedings that could be costly,
time-consuming or diver the atention of management and key
personnel from the Company’s business operations;
the impact if the Company does not have valid occupational rights
on third-pary owned or controlled lands and the risks associated
with occupational rights of the Company that may be subject
to expiry;
risks relating to adverse reputational events or political actions;
the potential that Hydro One may incur signifcant expenses
to replace functions currently outsourced if agreements are
terminated or expire before a new service provider is selected;
risks relating to acquisitions, including the failure to realize the
anticipated benefts of such transactions at all, or within the
time periods anticipated, and unexpected costs incurred in
relation thereto;
the inability to continue to prepare fnancial statements using
U.S. GAAP; and
the risk related to the impact of any 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 entitled “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 cerain maters,
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,
the US Securities and Exchange Commission’s EDGAR website
at www.sec.gov/edgar.shtml, and the Company’s website at
www.HydroOne.com/Investors.
49
Management’s Discussion and AnalysisHydro One Limited Annual Report 2022
The 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 conformity with United States Generally
Accepted Accounting Principles. The Repor of Independent Registered
Public Accounting Firm outlines the scope of their examination and
their opinion.
The Hydro One Board of Directors, through its Audit Commitee, is
responsible for ensuring that management fulflls its responsibilities
for fnancial reporing and internal control over fnancial reporing
and disclosure. The Audit Commitee 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 with respect to the Consolidated Financial Statements
before recommending approval by the Board of Directors. The external
auditors had direct and full access to the Audit Commitee, with and
without the presence of management, to discuss their audit fndings.
On behalf of Hydro One’s management:
David Lebeter
Christopher Lopez
President and Chief Executive Ofcer
Chief Financial Ofcer
Management’s Repor
The Consolidated Financial Statements, Management’s Discussion
and Analysis (MD&A) and related fnancial 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 Consolidated Financial
Statements for the year ended December 31, 2022 and accompanying
notes thereto (together, the 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.
The preparation of the Consolidated Financial Statements and
information in the MD&A involves the use of estimates and assumptions
based on management’s judgment, paricularly when transactions
afecting the current accounting period cannot be fnalized with
cerainty 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 signifcant accounting policies followed by the Company as
described in Note 2 to the Consolidated Financial Statements. The
preparation of the 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
uncerainties. Actual results in the future may difer 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 fnancial
reporing as described in the annual MD&A. Management evaluated
the efectiveness of the design and operation of disclosure controls
and procedures, and internal control over fnancial reporing based
on the framework and criteria established in the Internal Control -
Integrated Framework (2013) issued by the Commitee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on that
evaluation, management concluded that the Company’s internal control
over fnancial reporing was efective at a reasonable level of assurance
as at December 31, 2022. As required, the results of that evaluation
were repored to the Audit Commitee of the Hydro One Board of
Directors and the external auditors.
50
Hydro One Limited Annual Report 2022 Repor of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Hydro One Limited
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
Hydro One Limited (the Company) as of December 31, 2022 and 2021,
the related consolidated statements of operations and comprehensive
income, changes in equity, and cash fows for each of the years in the
two-year period ended December 31, 2022, and the related notes
(collectively, the consolidated fnancial statements). In our opinion, the
consolidated fnancial statements present fairly, in all material respects,
the fnancial position of the Company as of December 31, 2022 and
2021, and the results of its operations and its cash fows for each of the
years in the two-year period ended December 31, 2022, in conformity
with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated fnancial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these consolidated fnancial statements based on our audits. We are a
public accounting frm 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 U.S.
federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perorm the audits to
obtain reasonable assurance about whether the consolidated fnancial
statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to
perorm, an audit of its internal control over fnancial reporing. As par of
our audits, we are required to obtain an understanding of internal control
over fnancial reporing but not for the purpose of expressing an opinion
on the efectiveness of the Company’s internal control over fnancial
reporing. Accordingly, we express no such opinion.
Our audits included perorming procedures to assess the risks of material
misstatement of the consolidated fnancial statements, whether due to
error or fraud, and perorming procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated fnancial statements.
Our audits also included evaluating the accounting principles used and
signifcant estimates made by management, as well as evaluating the
overall presentation of the consolidated fnancial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Mater
The critical audit mater communicated below is a mater arising from
the current period audit of the consolidated fnancial statements
that was communicated or required to be communicated to the audit
commitee and that: (1) relates to accounts or disclosures that are
material to the consolidated fnancial statements and (2) involved
our especially challenging, subjective, or complex judgments. The
communication of a critical audit mater does not alter in any way our
opinion on the consolidated fnancial statements, taken as a whole, and
we are not, by communicating the critical audit mater below, providing
a separate opinion on the critical audit mater or on the accounts or
disclosures to which it relates.
Evaluation of regulatory assets and liabilities and the impact of
rate regulation on the consolidated fnancial statements
As discussed in Note 2 to the consolidated fnancial statements, the
Company accounts for its regulated operations in accordance with
Financial Accounting Standards Board Accounting Standard Codifcation
Topic 980, Regulated Operations (ASC 980). Under ASC 980, the actions
of the Company’s regulator may result in the recognition of revenue
and costs in time periods that are diferent than non-rate-regulated
enterprises. When this occurs, the Company records incurred and
allowed costs that it has assessed are probable of recovery in future
electricity rates as regulatory assets or propery, plant and equipment.
Obligations imposed or probable to be imposed by the regulator to
refund previously collected revenue or expenditure of revenue collected
from customers on future costs are recorded as regulatory liabilities.
As disclosed in Note 12 to the consolidated fnancial statements, as of
December 31, 2022, the Company’s regulatory assets were $3,153 million
and regulatory liabilities were $1,262 million.
We identifed the evaluation of regulatory assets and liabilities and
the impact of rate regulation as a critical audit mater. Accounting
for regulated operations under ASC 980 afects multiple fnancial
statement accounts and disclosures in the Company’s consolidated
fnancial statements. Assessing the accounting for regulated operations
requires industry knowledge and signifcant auditor judgment due
to interpretations of regulatory decisions and judgments involved in
evaluating the Company’s assessment of the probability associated with
recovery of regulatory assets and propery, plant and equipment, and
imposition of regulatory liabilities.
The following are the primary procedures we perormed to address this
critical audit mater. We evaluated the design and tested the operating
efectiveness of cerain internal controls over the Company’s regulatory
accounting process. This included controls over the evaluation of
the probability of (1) the recovery in future rates of costs deferred as
regulatory assets, and (2) a refund of previously collected revenue
or expenditure of revenue collected from customers on future costs
that should be repored as regulatory liabilities, and controls over
the monitoring and evaluation of regulatory developments that may
afect the probability of recovering costs in future rates or imposing of
regulatory liabilities. We evaluated the Company’s assessment of the
probability of recovery of the carrying amount of regulatory assets and
propery, plant and equipment and the imposition of regulatory liabilities,
through consideration of selected on-going regulatory proceedings and
decisions. For a selection of regulatory proceedings and decisions, we
read the Company’s assessment and interpretations. For a selection of
regulatory assets and liabilities, we recalculated the amounts recorded
based on methodologies approved by the regulator and agreed the data
used in the calculations to the Company’s underlying books and records.
We compared the amounts calculated by the Company to the amounts
recorded in the consolidated fnancial statements.
Charered Professional Accountants, Licensed Public Accountants
We have served as the Company’s auditor since 2008.
Toronto, Canada
February 13, 2023
51
Hydro One Limited Annual Report 2022
Consolidated Statements of Operations
and Comprehensive Income
For the years ended December 31, 2022 and 2021
Year ended December 31 (millions of Canadian dollars, except per share amounts)
2022
2021
Revenues
Distribution (includes $287 related party revenues; 2021 - $286) (Note 28)
Transmission (includes $2,064 related party revenues; 2021 - $1,833) (Note 28)
Other (Note 28)
Costs
Purchased power (includes $2,396 related party costs; 2021 - $2,252) (Note 28)
Operation, maintenance and administration (Note 28)
Depreciation, amortization and asset removal costs (Note 4)
Income before financing charges and income tax expense
Financing charges (Note 5)
Income before income tax expense
Income tax expense (Note 6)
Net income
Other comprehensive income (Note 7)
Comprehensive income
Net income attributable to:
Noncontrolling interest (Note 27)
Common shareholders
Comprehensive income attributable to:
Noncontrolling interest (Note 27)
Common shareholders
Earnings per common share (Note 25)
Basic
Diluted
Dividends per common share declared (Note 24)
See accompanying notes to Consolidated Financial Statements.
5,660
2,077
43
7,780
3,724
1,258
966
5,948
1,832
486
1,346
288
1,058
23
1,081
8
1,050
1,058
8
1,073
1,081
5,359
1,824
42
7,225
3,579
1,112
922
5,613
1,612
461
1,151
178
973
17
990
8
965
973
8
982
990
$ 1.75
$ 1.75
$ 1.11
$ 1.61
$ 1.61
$ 1.05
52
Hydro One Limited Annual Report 2022
Consolidated Balance Sheets
At December 31, 2022 and 2021
As at December 31 (millions of Canadian dollars)
2022
2021
Assets
Current assets:
Cash and cash equivalents
Accounts receivable (Note 8)
Due from related paries (Note 28)
Other current assets (Note 9)
Propery, plant and equipment (Note 10)
Other long-term assets:
Regulatory assets (Note 12)
Deferred income tax assets (Note 6)
Intangible assets (Note 11)
Goodwill
Other assets (Note 13)
Total assets
Liabilities
Current liabilities:
Shor-term notes payable (Notes 16, 18)
Long-term debt payable within one year (Notes 16, 17, 18)
Accounts payable and other current liabilities (Note 14)
Due to related paries (Note 28)
Long-term liabilities:
Long-term debt (Notes 16, 17)
Regulatory liabilities (Note 12)
Deferred income tax liabilities (Note 6)
Other long-term liabilities (Note 15)
Total liabilities
Contingencies and Commitments (Notes 30, 31)
Subsequent Events (Note 33)
Noncontrolling interest subject to redemption (Note 27)
Equity
Common shares (Note 23)
Additional paid-in capital (Note 26)
Retained earnings
Accumulated other comprehensive income (loss)
Hydro One shareholders’ equity
Noncontrolling interest (Note 27)
Total equity
See accompanying notes to Consolidated Financial Statements.
On behalf of the Board of Directors:
Timothy Hodgson
Chair
Stacey Mowbray
Chair, Audit Commitee
530
767
282
281
1,860
25,077
540
699
284
303
1,826
23,842
2,964
3,561
114
608
373
461
4,520
31,457
1,374
733
1,274
271
3,652
13,030
1,123
715
1,545
16,413
20,065
118
570
373
93
4,715
30,383
1,045
603
1,064
266
2,978
13,017
362
367
2,683
16,429
19,407
20
20
5,699
34
5,562
11
11,306
66
11,372
31,457
5,688
38
5,174
(12)
10,888
68
10,956
30,383
53
Hydro One Limited Annual Report 2022
Consolidated Statements of Changes in Equity
For the years ended December 31, 2022 and 2021
Year ended December 31, 2022
(millions of Canadian dollars)
January 1, 2022
Net income
Other comprehensive income (Note 7)
Distributions to noncontrolling interest (Note 27)
Dividends on common shares (Note 24)
Common shares issued
Stock-based compensation
December 31, 2022
Year ended December 31, 2021
(millions of Canadian dollars)
January 1, 2021
Net income
Other comprehensive income (Note 7)
Distributions to noncontrolling interest (Note 27)
Dividends on common shares (Note 24)
Common shares issued
Stock-based compensation
December 31, 2021
See accompanying notes to Consolidated Financial Statements.
Additional
Paid-in
Capital
38
—
—
—
—
(8)
4
34
Accumulated
Other
Comprehensive
Income
Hydro One
Shareholders’
Equity
Non-
controlling
Interest
(Note 27)
Total
Equity
(12)
10,888
68
10,956
—
23
—
—
—
—
1,050
23
—
(662)
3
4
6
—
(8)
—
—
—
1,056
23
(8)
(662)
3
4
Retained
Earnings
5,174
1,050
—
—
(662)
—
—
5,562
11
11,306
66
11,372
Additional
Paid-in
Capital
47
—
—
—
—
(10)
1
38
Retained
Earnings
4,838
965
—
—
(629)
—
—
5,174
Accumulated
Other
Comprehensive
Loss
(29)
—
17
—
—
—
—
Hydro One
Shareholders’
Equity
10,534
965
17
—
(629)
—
1
Non-
controlling
Interest
(Note 27)
72
6
—
(10)
—
—
—
Total
Equity
10,606
971
17
(10)
(629)
—
1
(12)
10,888
68
10,956
Common
Shares
5,688
—
—
—
—
11
—
5,699
Common
Shares
5,678
—
—
—
—
10
—
5,688
54
Hydro One Limited Annual Report 2022
Consolidated Statements of Cash Flows
For the years ended December 31, 2022 and 2021
Year ended December 31 (millions of Canadian dollars)
2022
2021
Operating activities
Net income
Environmental expenditures
Adjustments for:
Depreciation and amorization (Note 4)
Regulatory assets and liabilities
Deferred income tax expense
Other
Changes in non-cash balances related to operations (Note 29)
Net cash from operating activities
Financing activities
Long-term debt issued
Long-term debt repaid
Shor-term notes issued
Shor-term notes repaid
Dividends paid (Note 24)
Distributions paid to noncontrolling interest
Common shares issued
Costs to obtain fnancing
Net cash used in fnancing activities
Investing activities
Capital expenditures (Note 29)
Propery, plant and equipment
Intangible assets
Capital contributions received (Note 29)
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 Consolidated Financial Statements.
1,058
(33)
831
44
260
39
61
973
(30)
815
70
154
67
100
2,260
2,149
750
(603)
6,335
(6,000)
(662)
(10)
3
(10)
(197)
(1,966)
(120)
12
1
900
(804)
4,150
(3,905)
(629)
(8)
—
(7)
(303)
(1,928)
(143)
14
(6)
(2,073)
(2,063)
(10)
540
530
(217)
757
540
55
Hydro One Limited Annual Report 2022
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
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).
At December 31, 2022, the Province held approximately 47.2%
(2021 - 47.2%) of the common shares of Hydro One. The principal
businesses of Hydro One are the transmission and distribution of
electricity to customers within Ontario.
Rate Seting
The Company's transmission business consists of the transmission
system operated by Hydro One Inc.’s subsidiaries, which include
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 Parnership (B2M LP), and an approximately 55% interest in
Niagara Reinforcement Limited Parnership (NRLP).
Hydro One’s distribution business consists of the distribution systems
operated by Hydro One Inc.'s subsidiaries, Hydro One Networks, and
Hydro One Remote Communities Inc. (Hydro One Remotes).
Transmission
On March 7, 2019, the Ontario Energy Board (OEB) issued its
reconsideration decision (DTA Decision) with respect to Hydro One's
rate-seting treatment of the benefts of the deferred tax asset (DTA)
resulting from the transition from the payments in lieu of tax regime to
tax payments under the federal and provincial tax regimes. On July 16,
2020, the Ontario Divisional Cour rendered its decision (ODC Decision)
on the Company's appeal of the OEB's DTA Decision. On April 8, 2021,
the OEB rendered its decision and order (DTA Implementation Decision)
regarding the recovery of the DTA amounts allocated to ratepayers for
the 2017 to 2022 period. See Note 12 - Regulatory Assets and Liabilities
for additional details.
On April 23, 2020, the OEB rendered its decision on Hydro One
Networks' 2020-2022 transmission rate application (2020-2022
Transmission Decision). On July 16, 2020, the OEB issued its fnal rate
order for the 2020-2022 transmission rates approving a revenue
requirement of $1,630 million, $1,701 million and $1,772 million for
2020, 2021 and 2022, respectively. On July 30, 2020, the OEB issued
its decision for Uniform Transmission Rates (UTRs). The 2020 UTRs
that were put in place on an interim basis on January 1, 2020 continued
for the remainder of 2020 in light of the COVID-19 pandemic. On
December 17, 2020, the OEB issued its decision and order seting the
fnal 2021 UTRs efective January 1, 2021, which included the approval of
a two-year disposition period for Hydro One Network's 2020 foregone
revenue including interest, beginning on January 1, 2021.
On July 31, 2019, B2M LP fled a transmission rate application for 2020-
2024. On January 16, 2020, the OEB approved the 2020 base revenue
requirement of $33 million, and a revenue cap escalator index for 2021
to 2024.
On October 25, 2019, NRLP fled its revenue cap incentive rate
application for 2020-2024. On December 19, 2019, the OEB approved
NRLP’s proposed 2020 revenue requirement of $9 million on an interim
basis efective January 1, 2020. On April 9, 2020, fnal OEB approval
was received.
56
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.
On August 5, 2021 Hydro One Networks fled a custom joint rate
application (JRAP) for 2023-2027 transmission and distribution rates.
On November 29, 2022 the OEB approved the application and issued
its rate order for 2023-2027 transmission rates approving revenue
requirement for Hydro One Networks' Transmission Business of
$1,952 million for 2023, $2,073 million for 2024, $2,168 million for 2025,
$2,277 million for 2026 and $2,362 million for 2027.
Distribution
In March 2017, Hydro One Networks fled an application with the OEB
for 2018-2022 distribution rates. On March 7, 2019, the OEB rendered
its decision on the distribution rates application. In accordance with the
OEB decision, the Company fled its draft rate order refecting updated
revenue requirements of $1,459 million for 2018, $1,498 million for 2019,
$1,532 million for 2020, $1,578 million for 2021, and $1,624 million for
2022. On June 11, 2019, the OEB approved the rate order confrming these
updated revenue requirements.
On August 28, 2017, Hydro One Remotes fled a distribution rate
application for 2018-2022. On April 12, 2018 the OEB approved Hydro One
Remotes’ 2018 revenue requirement of $54 million efective May 1, 2018,
with a price cap escalator index for 2019-2022.
On November 3, 2020, Hydro One Remote Communities fled an
application with the OEB seeking approval for a 2% increase to 2020 base
rates, efective May 1, 2021, which was subsequently updated to 2.2%
in accordance with the OEB’s 2021 infation parameters for electricity
distributors issued on November 9, 2020. On March 25, 2021, the OEB
approved Hydro One Remote Communities’ application for rates and
other charges to be efective May 1, 2021.
On November 3, 2021, Hydro One Remotes fled an application with the
OEB seeking approval for a 2.2% increase to 2021 base rates, efective
May 1, 2022. The application was subsequently updated to request a 3.3%
increase to 2021 base rates to refect the OEB’s annually updated infation
parameters for electricity distributors for 2022. On March 24, 2022, the
OEB approved the application for rates and other charges which became
efective on May 1, 2022.
On August 5, 2021 Hydro One Networks fled a JRAP for 2023-2027
transmission and distribution rates. On November 29, 2022, as par
of the approval of the JRAP application, the OEB issued its rate order
for 2023-2027 distribution rates approving revenue requirement for
Hydro One Networks' Distribution Business of $1,727 million for 2023,
$1,813 million for 2024, $1,886 million for 2025, $1,985 million for 2026
and $2,071 million for 2027.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Presentation
These consolidated fnancial statements (Consolidated Financial
Statements) include the accounts of the Company and its subsidiaries.
Inter-company transactions and balances have been eliminated.
Basis of Accounting
These Consolidated Financial Statements are prepared and presented
in accordance with United States (US) Generally Accepted Accounting
Principles (GAAP) and in Canadian dollars.
Hydro One Limited Annual Report 2022
Use of Management Estimates
The preparation of fnancial statements requires management to make
estimates and assumptions that afect the repored amounts of assets
and liabilities at the date of the fnancial statements and the repored
amounts of revenues, expenses, gains and losses during the reporing
periods. 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. Signifcant estimates relate to unbilled revenues, regulatory
assets and regulatory liabilities, environmental liabilities, pension
benefts, and post-retirement and post-employment benefts. Actual
results may difer signifcantly 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 specifc 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 in accordance with Financial
Accounting Standards Board Accounting Standard Codifcation Topic
980, Regulated Operations. within the Company's regulated business,
giving rise to the recognition of regulatory assets and liabilities. The
Company’s regulatory assets represent cerain 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. In addition, the Company has recorded regulatory
liabilities that generally represent amounts that are refundable
to electricity customers in future rates. 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 seting 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 seting future rates, the
appropriate carrying amount would be refected in results of operations
prospectively from the date the Company’s assessment is made, unless
the change meets the requirements for a subsequent event adjustment.
Cash and Cash Equivalents
Cash and cash equivalents include cash and shor-term investments
with an original maturity of three months or less.
Revenue Recognition
Transmission revenues predominantly consist of transmission
tarifs, which are collected through OEB-approved UTRs which are
applied against the monthly peak demand for electricity across
Hydro One's high-voltage network. OEB-approved UTRs are based on
an approved revenue requirement that includes a rate of return. The
transmission tarifs are designed to recover revenues necessary to
suppor the Company's transmission system with sufcient capacity
to accommodate the maximum expected demand which is infuenced
by weather and economic conditions. Transmission revenues are
recognized as electricity is transmited and delivered to customers.
Distribution revenues atributable 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 afected
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, net of allowance for doubtful
accounts. Overdue amounts related to regulated billings bear interest
at OEB-approved rates. The allowance for doubtful accounts refects
the Company’s current lifetime expected credit losses (CECL) for all
accounts receivable balances. The Company estimates the CECL by
applying internally developed loss rates to all outstanding receivable
balances by aging category on an undiscounted basis. Loss rates
applied to the accounts receivable balances are based on historical
overdue balances, customer payments and write-ofs, which may be
furher supplemented from time to time to refect management's
best estimate of the loss. Accounts receivable are writen-of against
the allowance when they are deemed uncollectible. The allowance
for doubtful accounts is afected by changes in volume, prices and
economic conditions.
Noncontrolling interest
Noncontrolling interest represents the porion of equity ownership in
subsidiaries that is not atributable to shareholders of Hydro One.
Noncontrolling interest is initially recorded at fair value and subsequently
the amount is adjusted for the proporionate share of net income and
other comprehensive income (OCI) or other comprehensive loss (OCL)
atributable to the noncontrolling interest and any dividends or
distributions paid to the noncontrolling interest.
If a transaction results in the acquisition of all, or par, 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
Income taxes are accounted for using the asset and liability method.
Current tax assets and liabilities are recognized based on the taxes
payable or refundable on the current and prior year’s taxable income.
Current and deferred income taxes are computed based on the tax
rates and tax laws enacted as at the balance sheet date. Tax benefts
associated with income tax positions are recorded only when the
more-likely-than-not recognition threshold is satisfed and are
measured at the largest amount of beneft that has a greater than 50%
likelihood of being realized upon setlement. 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.
Signifcant management judgment is required to determine recognition
thresholds and the related amount of tax benefts 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.
57
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
Deferred Income Taxes
Deferred income tax assets and liabilities are recognized on all temporary
diferences 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 setled 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 associated with its regulated operations which
are considered to be more-likely-than-not to be recoverable or refunded
in the future regulated rates charged to customers are recognized as
deferred income tax regulatory assets and liabilities with an ofset to
deferred income tax expense.
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.
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 beneft will be realized.
Materials and Supplies
Materials and supplies represent consumables, small spare pars and
construction materials held for internal construction and maintenance
of propery, plant and equipment. These assets are carried at average
cost less any impairments recorded.
Propery, Plant and Equipment
Propery, plant and equipment is recorded at original cost, net of
customer contributions, and any accumulated impairment losses.
The cost of additions, including beterments and replacement asset
components, is included on the consolidated balance sheets as
propery, plant and equipment.
The original cost of propery, plant and equipment includes direct
materials, direct labour (including employee benefts), contracted
services, atributable capitalized fnancing costs, asset retirement
costs, and direct and indirect overheads that are related to the capital
project or program. Indirect overheads include a porion of corporate
costs such as fnance, treasury, human resources, and information
technology. Overhead costs, including corporate functions and feld
services costs, are capitalized on a fully allocated basis, consistent with
an OEB-approved methodology.
Propery, plant and equipment in service consists of transmission,
distribution, communication, administration and service assets and
land easements. Propery, plant and equipment also includes future use
assets, such as land, major components and spare pars, 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, suppor structures,
foundations, insulators, connecting hardware and grounding systems,
and assets used to step up the voltage of electricity from generating
58
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 fbre 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, transpor and work equipment, tools and other
minor assets.
Easements
Easements include a statutory easement for the use of transmission
corridor and related abuting lands pursuant to Par IX.1 of the
Electricity Act, 1998 (Ontario) (Electricity Act), as well as other land
rights for occupation.
Intangible Assets
Intangible assets separately acquired or internally developed are
measured on initial recognition at cost, which comprises purchased
software, direct labour (including employee benefts), consulting,
engineering, overheads and atributable capitalized fnancing charges.
Following initial recognition, intangible assets are carried at cost,
net of any accumulated amorization and accumulated impairment
losses. The Company’s intangible assets primarily represent major
computer applications.
Capitalized Financing Costs
Capitalized fnancing costs represent interest costs atributable to
the construction of propery, plant and equipment or development of
intangible assets. The fnancing cost of atributable borrowed funds is
capitalized as par of the acquisition cost of such assets. The capitalized
fnancing costs are a reduction of fnancing charges recognized in the
consolidated statements of operations and comprehensive income.
Capitalized fnancing costs are calculated using the Company’s
weighted average efective 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.
Depreciation and Amorization
The cost of propery, plant and equipment and intangible assets
is depreciated or amorized on a straight-line basis based on the
estimated remaining service life of each asset category, except for
transpor and work equipment, which is depreciated on a declining
balance basis.
The Company periodically initiates an external independent review of
its propery, plant and equipment and intangible asset depreciation and
amorization rates, as required by the OEB. Any changes arising from
OEB approval of such a review are implemented on a remaining service
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
life basis, consistent with their inclusion in electricity rates. The most
recent reviews resulted in changes to rates efective January 1, 2015 and
January 1, 2020 for Hydro One Networks’ distribution and transmission
businesses, respectively. A summary of average service lives and
depreciation and amorization rates for the various classes of assets is
included below:
Propery, plant and equipment:
Transmission
Distribution
Communication
Administration and service
Intangible assets
In accordance with group depreciation practices, the original cost
of propery, 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 refected in results of
operations. Where a disposition of propery, 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 identifable
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 perorms a qualitative
assessment to determine whether it is more likely than not that the fair
value of the applicable reporing 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
reporing unit is less than its carrying value, no furher 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 reporing unit is less than its carrying amount, a quantitative
goodwill impairment assessment is perormed. The quantitative
assessment compares the fair value of the applicable reporing unit
to its carrying amount, including goodwill. If the 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 the assessment perormed as at September 30, 2022 and
with no signifcant events since, the Company has concluded that
goodwill was not impaired at December 31, 2022.
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 fows expected
to result from the use and eventual disposition of the asset. When
Average Service Life
Range
Average
Rate
55 years
46 years
16 years
25 years
10 years
1% - 3%
1% - 7%
1% - 15%
1% - 20%
10%
2%
2%
5%
3%
7%
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 fows. If
the carrying value of the long-lived asset is not recoverable based on
the estimated future undiscounted cash fows, 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 par, or if such a disallowance is judged to be probable.
Hydro One regularly monitors the assets of its unregulated subsidiary
Acronym Solutions Inc. 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-pary comparable sales
for reference and internally developed discounted cash fow analysis.
Signifcant 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 fows related to these long-lived assets. As at December 31, 2022
and 2021, no asset impairment had been recorded for assets within
either the Company’s regulated or unregulated businesses.
Costs of Arranging Debt Financing
For fnancial liabilities classifed as other than held-for-trading, the
Company defers the external transaction costs related to obtaining
fnancing and presents such amounts net of related debt on the
consolidated balance sheets. Deferred issuance costs are amorized
over the contractual life of the related debt on an efective-interest
basis and the amorization is included within fnancing charges in
the consolidated statements of operations and comprehensive
income. Transaction costs for items classifed as held-for-trading are
expensed immediately.
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.
59
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
Financial Assets and Liabilities
All fnancial assets and liabilities are classifed into one of the following
fve categories: held-to-maturity; loans and receivables; held-for-
trading; other liabilities; or available-for-sale. Financial assets and
liabilities classifed as held-for-trading are measured at fair value. All
other fnancial assets and liabilities are measured at amorized cost.
Accounts receivable and amounts due from related paries are classifed
as loans and receivables. The Company considers the carrying amounts
of accounts receivable and amounts due from related paries to be
reasonable estimates of fair value because of the shor time to maturity
of these instruments. The Company estimates the CECL for all accounts
receivable balances, which are recognized as adjustments to the
allowance for doubtful accounts. Accounts receivable are writen-of
against the allowance when they are deemed uncollectible. All fnancial
instrument transactions are recorded at trade date.
The Company determines the classifcation of its fnancial assets and
liabilities at the date of initial recognition. The Company designates
cerain of its fnancial 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.
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 defnition 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, 2022 or 2021.
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 specifc risk exposure being hedged, and the method for
assessing the efectiveness of the hedging relationship. The Company
also assesses, both at the inception of the hedge and on a quarerly
basis, whether the hedging instruments are efective in ofseting
changes in fair values or cash fows of the hedged items.
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. Cerain 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 par of economic hedging relationships.
The accounting guidance for derivative instruments requires the
recognition of all derivative instruments not identifed 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 fow hedges or
fair value hedges. The Company ofsets fair value amounts recognized
on its consolidated balance sheets related to derivative instruments
executed with the same counterpary under the same master
neting agreement.
For derivative instruments that qualify for hedge accounting and which
are designated as cash fow hedges, any unrealized gain or loss, net of
tax, is recorded as a component of accumulated OCI (AOCI). Amounts
in AOCI are reclassifed to results of operations in the same period
or periods during which the hedged transaction afects results of
operations and presented in the same line item as the earnings efect
of the hedged item. Any gains or losses on the derivative instrument
that represent hedge components excluded from the assessment of
efectiveness are recognized in the same line item of the consolidated
statements of operations as the hedged item. 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 ofseting 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
refected in results of operations.
Employee Future Benefts
Employee future benefts provided by Hydro One include pension, post-
retirement and post-employment benefts. The costs of the Company’s
pension, post-retirement and post-employment beneft plans are
recorded over the periods during which employees render service.
The Company recognizes the funded status of its defned beneft
pension plan (Pension Plan) and its post-retirement and post-
employment plans on its consolidated balance sheets and subsequently
recognizes the changes in funded status at the end of each reporing
year. Defned beneft pension, post-retirement and post-employment
plans are considered to be underunded when the projected beneft
obligation (PBO) exceeds the fair value of the plan assets. Liabilities
are recognized on the consolidated balance sheets for any net
underunded PBO. The net underunded PBO may be disclosed as a
current liability, long-term liability, or both. The current porion is the
amount by which the actuarial present value of benefts included in the
beneft 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 overunded PBO. The post-
retirement and post-employment beneft plans are unfunded because
there are no related plan assets.
Hydro One recognizes its contributions to the defned contribution
pension plan (DC Plan) as pension expense, with a porion being
capitalized as par 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.
Defned Beneft Pension
Defned beneft pension costs are recorded on an accrual basis for
fnancial reporing purposes. Pension costs are actuarially determined
using the projected beneft method prorated on service and are based
on assumptions that refect management’s best estimate of the efect
of future events, including future compensation increases. Past service
costs from plan amendments and all actuarial gains and losses are
amorized on a straight-line basis over the expected average remaining
60
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022 service period of active employees in the plan, or over the estimated
remaining life expectancy of inactive employees in the plan. Pension
plan assets, consisting primarily of listed and unlisted equity securities,
marketable and private debt, corporate and government debt securities
as well as unlisted real estate and unlisted infrastructure investments,
are recorded at fair value at the end of each year. Hydro One records a
regulatory asset or liability equal to the net underunded or overunded
PBO for its pension plan. Defned beneft pension costs are atributed to
labour costs on a cash basis and a porion directly related to acquisition
and development of capital assets is capitalized as par of the cost of
propery, plant and equipment and intangible assets. The remaining
defned beneft pension costs are charged to results of operations
(OM&A costs).
Post-retirement and Post-employment Benefts
Post-retirement and post-employment benefts are recorded and
included in rates on an accrual basis. Costs are determined by
independent actuaries using the projected beneft method prorated
on service and based on assumptions that refect management’s best
estimates. For post-retirement benefts, past service costs from plan
amendments are amorized to results of operations based on the
expected average remaining service period.
For post-retirement benefts, all actuarial gains or losses are deferred
using the “corridor” approach. The amount calculated above the
“corridor” is amorized to results of operations on a straight-line basis
over the expected average remaining service life of active employees
in the plan or over the remaining life expectancy of inactive employees
in the plan. The post-retirement beneft obligation is remeasured to
its fair value at each year end based on an annual actuarial repor, with
an ofset to the associated regulatory account, to the extent of the
remeasurement adjustment.
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 beneft obligation is remeasured to
its fair value at each year end based on an annual actuarial repor, with
an ofset to the associated regulatory account, to the extent of the
remeasurement adjustment.
All post-retirement and post-employment beneft costs are atributed
to labour costs and are either charged to results of operations (OM&A
costs) or capitalized as par of the cost of propery, plant and equipment
and intangible assets (applies to the service cost component of beneft
cost) and to regulatory assets for all other components of the beneft
cost, 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 fnancial statements using the graded-
vesting atribution method for share grant plans that have both a
perormance 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. Foreitures are recognized as they occur.
Deferred Share Unit (DSU) Plans
The Company records the liabilities associated with its Directors’
and Management DSU Plans at fair value at each reporing date until
setlement, 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
reporing period.
Society Restricted Share Unit (RSU) Plan
The Company measures its Society RSU plan based on fair value of
share grants as estimated based on the grant date common share price.
The costs are recognized over the vesting period using the straight-line
atribution method. The Company records a regulatory asset equal to
the accrued costs of the Society RSU plan 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.
Foreitures are recognized as they occur.
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. Foreitures are recognized as they occur.
Loss Contingencies
Hydro One is involved in cerain legal and environmental maters
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 beter 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 paries, such as federal,
provincial and local cours or regulators. Contingent liabilities are
often resolved over long periods of time. Amounts recorded in the
Consolidated Financial Statements may difer from the actual outcome
once the contingency is resolved. Such diferences could have a
material impact on future results of operations, fnancial position and
cash fows of the Company.
Provisions are based upon current estimates and are subject to greater
uncerainty where the projection period is lengthy. A signifcant upward
or downward trend in the number of claims fled, 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 setlement could also change the estimated liability. Legal
fees are expensed as incurred.
61
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022 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
setled in an arm’s length transaction with a third pary. As the Company
anticipates that the future expenditures will continue to be recoverable
in future rates, an ofseting regulatory asset has been recorded to
refect 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. Estimate changes are accounted
for prospectively.
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
perorm a future asset retirement activity but where the timing and/or
method of setlement 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 perorm the asset retirement activity is unconditional even though
uncerainty exists about the timing and/or method of setlement.
This uncerainty 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.
Leases
At the commencement date of a lease, the minimum lease payments
are discounted and recognized as a lease obligation. Discount rates
used correspond to the Company's incremental borrowing rates.
Renewal options are assessed for their likelihood of being exercised
and are included in the measurement of the lease obligation when it
is reasonably cerain they will be exercised. The Company does not
recognize leases with a term of less than 12 months. A corresponding
Right-of-Use (ROU) asset is recognized at the commencement date of
a lease. The ROU asset is measured as the lease obligation adjusted for
any lease payments made and/or any lease incentives and initial direct
costs incurred. ROU assets are included in other long-term assets, and
corresponding lease obligations are included in other current liabilities
and other long-term liabilities on the consolidated balance sheets.
Subsequent to the commencement date, the lease expense recognized
at each reporing period is the total remaining lease payments over the
remaining lease term. Lease obligations are measured as the present
value of the remaining unpaid lease payments using the discount rate
established at commencement date. The amorization of the ROU
assets is calculated as the diference between the lease expense and
the accretion of interest, which is calculated using the efective interest
method. Lease modifcations and impairments are assessed at each
reporing period to assess the need for a remeasurement of the lease
obligations or ROU assets.
3. NEW ACCOUNTING PRONOUNCEMENTS
The following tables present Accounting Standard Updates (ASUs) issued by the Financial Accounting Standards Board that are applicable to
Hydro One:
Recently Adopted Accounting Guidance
Guidance
Date issued Description
ASU
2020-06 2020
August
The update addresses the complexity associated with applying US GAAP
for cerain fnancial instruments with characteristics of liabilities and equity.
The amendments reduce the number of accounting models for converible
debt instruments and converible preferred stock.
Efective date
Impact on Hydro One
January 1, 2022 No impact upon adoption
ASU
2021-05 2021
July
The amendments are intended to align lease classifcation requirements
for lessors under Topic 842 with Topic 840's practice.
January 1, 2022 No impact upon adoption
ASU
2021-10 2021
November The update addresses diversity on the recognition, measurement,
presentation and disclosure of government assistance received by
business entities.
January 1, 2022 No impact upon adoption
62
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
Recently Issued Accounting Guidance Not Yet Adopted
Guidance
Date issued Description
ASU
2021-08
October
2021
The amendments address how to determine whether a contractual
obligation represents a liability to be recognized by the acquirer in a
business combination.
ASU
2022-02
March
2022
The amendments eliminate the troubled debt restructuring (TDR)
accounting model for entities that have adopted Topic 326 Financial
Instrument – Credit Losses and modifes the guidance on vintage
disclosure requirements to require disclosure of current-period gross
write-ofs by year of origination.
Efective date
Anticipated Impact on Hydro One
January 1, 2023 No expected impact upon
adoption
January 1, 2023 Upon adoption, the Company
will disclose the current
period gross write-ofs by
year of origination relating to
its accounts receivable
4. DEPRECIATION, AMORTIZATION AND ASSET REMOVAL COSTS
Year ended December 31 (millions of dollars)
Depreciation of propery, plant and equipment1
Amorization of intangible assets
Amorization of regulatory assets
Depreciation and amorization
Asset removal costs
1
Includes gain on sale of assets of $39 million (2021 - $8 million).
5. FINANCING CHARGES
Year ended December 31 (millions of dollars)
Interest on long-term debt
Interest on shor-term notes
Interest on regulatory accounts
Realized (gain) loss on cash fow hedges (interest-rate swap agreements) (Notes 7, 17)
Other
Less:
Interest capitalized on construction and development in progress
DTA carrying charges
Interest earned on cash and cash equivalents
2022
717
81
33
831
135
966
2022
505
27
8
(3)
17
(63)
2
(7)
486
2021
709
76
30
815
107
922
2021
505
1
5
12
13
(60)
(12)
(3)
461
6. INCOME TAXES
As a rate regulated utility company, the Company recovers income taxes from its ratepayers based on estimated current income tax expense in
respect of its regulated business. The amounts of deferred income taxes related to regulated operations which are considered to be more likely-
than-not to be recoverable from, or refundable to, ratepayers in future periods are recognized as deferred income tax regulatory assets or liabilities,
with an ofset to deferred income tax recovery or expense, respectively. The Company’s consolidated tax expense or recovery for the period
includes all current and deferred income tax expenses for the period net of the regulated accounting ofset to deferred income tax expense arising
from temporary diferences to be recovered from, or refunded to, customers in future rates. Thus, the Company’s income tax expense or recovery
difers from the amount that would have been recorded using the combined Canadian federal and Ontario statutory income tax rate.
63
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
The reconciliation between the statutory and the efective tax rates is provided as follows:
Year ended December 31 (millions of dollars)
Income before income tax expense
Income tax expense at statutory rate of 26.5% (2021 - 26.5%)
Increase (decrease) resulting from:
Net temporary diferences recoverable in future rates charged to customers:
Impact of DTA Implementation Decision1
Capital cost allowance in excess of depreciation and amorization
Overheads capitalized for accounting but deducted for tax purposes
Interest capitalized for accounting but deducted for tax purposes
Pension and post-retirement beneft contributions in excess of pension expense
Environmental expenditures
Net temporary diferences atributable to regulated business
Net permanent diferences
Total income tax expense
Efective income tax rate
2022
1,346
357
96
(90)
(35)
(17)
(11)
(9)
(66)
(3)
288
21.4%
2021
1,151
305
9
(81)
(22)
(16)
(9)
(8)
(127)
—
178
15.5%
1
Pursuant to the DTA Implementation Decision, the impact represents the amounts recovered from ratepayers in respect of tax deductions previously shared with the ratepayers. See
Note 12 - Regulatory Assets and Liabilities.
The major components of income tax expense are as follows:
Year ended December 31 (millions of dollars)
Current income tax expense
Deferred income tax expense
Total income tax expense
2022
36
252
288
2021
30
148
178
Deferred Income Tax Assets and Liabilities
Deferred income tax assets and liabilities refect the future tax consequences atributable to temporary diferences between the tax bases and
the fnancial statement carrying amounts of the assets and liabilities including the carry forward amounts of tax losses and tax credits. Deferred
income tax assets and liabilities atributable to the Company’s regulated business are recognized with a corresponding ofset in deferred income
tax regulatory assets and liabilities to refect the anticipated recovery or repayment of these balances in the future electricity rates. At December 31,
2022 and 2021, deferred income tax assets and liabilities consisted of the following:
As at December 31 (millions of dollars)
Deferred income tax assets
Post-retirement and post-employment benefts expense in excess of cash payments
Pension obligations
Regulatory assets and liabilities
Non-capital losses
Non-depreciable capital propery
Tax credit carryforwards
Investment in subsidiaries
Environmental expenditures
Less: valuation allowance
Total deferred income tax assets
Deferred income tax liabilities
Capital cost allowance in excess of depreciation and amorization
Pension assets
Regulatory assets and liabilities
Other
Total deferred income tax liabilities
Net deferred income tax liabilities
64
2022
2021
506
—
301
245
273
182
102
34
1,643
(381)
1,262
1,728
129
—
6
1,863
(601)
659
257
—
265
273
148
99
44
1,745
(378)
1,367
1,304
—
308
4
1,616
(249)
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
The net deferred income tax liabilities are presented on the consolidated balance sheets as follows:
As at December 31 (millions of dollars)
Long-term:
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax liabilities
2022
2021
114
(715)
(601)
118
(367)
(249)
The valuation allowance for deferred tax assets as at December 31, 2022 was $381 million (2021 - $378 million). The valuation allowance primarily
relates to temporary diferences for non-depreciable assets and investments in subsidiaries. As of December 31, 2022 and 2021, 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)
2035
2036
2037
2038
2039
2040
2041
2042
Total losses
7. OTHER COMPREHENSIVE INCOME
Year ended December 31 (millions of dollars)
Gain on cash fow hedges (interest-rate swap agreements) (Notes 5, 17)1
Gain on transfer of other post-employment benefts (OPEB) (Note 19)
Other
1
Includes $2 million after-tax realized gain (2021 - $8 million loss) and $3 million before-tax (2021 - $12 million loss) on cash fow hedges reclassifed to fnancing charges.
8. ACCOUNTS RECEIVABLE
As at December 31 (millions of dollars)
Accounts receivable - billed
Accounts receivable - unbilled
Accounts receivable, gross
Allowance for doubtful accounts
Accounts receivable, net
2022
357
473
830
(63)
767
The following table shows the movements in the allowance for doubtful accounts for the years ended December 31, 2022 and 2021:
Year ended December 31 (millions of dollars)
Allowance for doubtful accounts – beginning
Write-ofs
Additions to allowance for doubtful accounts
Allowance for doubtful accounts – ending
2022
(56)
25
(32)
(63)
2022
1
138
227
230
228
18
26
37
905
2021
1
483
172
95
199
18
29
—
997
2022
2021
10
2
11
23
12
—
5
17
2021
346
409
755
(56)
699
2021
(46)
15
(25)
(56)
65
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
9. OTHER CURRENT ASSETS
As at December 31 (millions of dollars)
Regulatory assets (Note 12)
Prepaid expenses and other assets
Materials and supplies
Derivative assets (Note 17)
2022
189
62
25
5
281
10. PROPERTY, PLANT AND EQUIPMENT
As at December 31, 2022 (millions of dollars)
Propery, Plant
and Equipment
Accumulated
Depreciation
Construction
in Progress
Transmission
Distribution
Communication
Administration and service
Easements
20,162
12,707
1,528
2,120
701
37,218
6,641
4,380
1,197
1,065
88
938
107
100
85
—
2021
226
55
22
—
303
Total
14,459
8,434
431
1,140
613
As at December 31, 2021 (millions of dollars)
Propery, Plant
and Equipment
Accumulated
Depreciation
Transmission
Distribution
Communication
Administration and service
Easements
18,970
12,045
1,466
1,963
679
35,123
13,371
1,230
25,077
Construction
in Progress
1,183
95
61
78
—
Total
13,846
7,977
405
1,019
595
6,307
4,163
1,122
1,022
84
12,698
1,417
23,842
Financing charges capitalized on propery, plant and equipment under construction were $57 million in 2022 (2021 - $57 million).
11. INTANGIBLE ASSETS
As at December 31, 2022 (millions of dollars)
Computer applications software
Other
As at December 31, 2021 (millions of dollars)
Computer applications software
Other
Intangible
Assets
1,178
6
1,184
Intangible
Assets
1,097
5
1,102
Accumulated
Amorization
Development
in Progress
738
5
743
167
—
167
Accumulated
Amorization
Development
in Progress
657
5
662
130
—
130
Total
607
1
608
Total
570
—
570
Financing charges capitalized to intangible assets under development were $6 million in 2022 (2021 - $3 million). The estimated annual amorization
expense for intangible assets is as follows: 2023 - $74 million; 2024 - $64 million; 2025 - $62 million; 2026 - $59 million; and 2027 - $53 million.
66
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
12. REGULATORY ASSETS AND LIABILITIES
Regulatory assets and liabilities arise as a result of the rate-seting process. Hydro One has recorded the following regulatory assets and liabilities:
As at December 31 (millions of dollars)
Regulatory assets:
Deferred income tax regulatory asset
Post-retirement and post-employment benefts - non-service cost
Environmental
Deferred tax asset sharing
Stock-based compensation
Conservation and Demand Management (CDM) variance
Rural and Remote Rate Protection (RRRP) variance
Pension beneft regulatory asset
Foregone revenue deferral
Other
Total regulatory assets
Less: current porion
Regulatory liabilities:
Post-retirement and post-employment benefts
Pension beneft regulatory liability
Tax rule changes variance
Earnings sharing mechanism deferral
Retail setlement variance account (RSVA)
External revenue variance
Asset removal costs cumulative variance
Pension cost diferential
Capitalized overhead tax variance
Green energy expenditure variance
Deferred income tax regulatory liability
Other
Total regulatory liabilities
Less: current porion
Deferred Income Tax Regulatory Asset and Liability
Deferred income taxes are recognized on temporary diferences
between the carrying amount of assets and liabilities in the fnancial
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 fow through
the rate-seting 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 2022 income tax expense would have been higher by approximately
$66 million (2021 - $127 million). The $66 million (2021 - $127 million)
impact is ofset against deferred income tax regulatory asset and
liability, deferred tax asset sharing, and post-retirement and post-
employment benefts - non-service cost.
2022
2021
2,724
141
93
73
34
25
25
—
—
38
3,153
(189)
2,964
506
358
100
75
53
50
41
26
16
5
4
28
1,262
(139)
1,123
2,509
125
122
204
38
8
10
713
25
33
3,787
(226)
3,561
33
—
86
42
58
52
36
30
—
13
4
18
372
(10)
362
Post-Retirement and Post-Employment Benefts -
Non-Service Cost
Hydro One has recorded a regulatory asset relating to the future
recovery of its post-retirement and post-employment benefts other
than service costs. The regulatory asset includes the applicable tax
impact to refect taxes payable. Prior to adoption of ASU 2017-07 in
2018, these amounts were capitalized to propery, plant and equipment
and intangible assets. As par of Hydro One Networks' 2020-2022
Transmission Decision, the OEB concluded that the non-service cost
component of Hydro One's OPEB costs shall be recognized as OM&A
for both its transmission and distribution businesses. Furhermore,
Hydro One Networks distribution continued to record the non-service
cost component of OPEBs in this account until the end of 2022.
As par of the JRAP Decision received in November 2022, the OEB
approved the disposition of Hydro One Networks' transmission and
distribution account balances as at December 31, 2020, including
accrued interest, which will be recovered from ratepayers over a one-
year period ending December 31, 2023 and a three-year period ending
December 31, 2025, respectively.
67
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
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-seting process. The Company has recorded an equivalent amount
as a regulatory asset. In 2022, the revaluation adjustment increased
the environmental regulatory asset by $3 million (2021 - $18 million)
to refect changes in the recoverable porion of the Company’s PCB
and LAR environmental liabilities. The environmental regulatory asset
is amorized to results of operations based on the patern of actual
expenditures incurred and charged to environmental liabilities. The OEB
has the discretion to examine and assess the prudence and the timing
of recovery of all of Hydro One’s actual environmental expenditures.
In the absence of rate-regulated accounting, with respect to the
revaluation adjustment, 2022 OM&A expenses would have been higher
by $3 million (2021 - higher by $18 million). In addition, 2022 amorization
expense would have been lower by $33 million (2021 - lower by
$30 million), and 2022 fnancing charges would have been higher by
$1 million (2021 - higher by $1 million).
Deferred Tax Asset Sharing
On October 2, 2020, the OEB issued a procedural order to implement
the direction of the Ontario Divisional Cour which required Hydro One
to submit its proposal for the recovery of the DTA amounts allocated
to ratepayers for the 2017 to 2022 period. On April 8, 2021, the OEB
rendered the DTA Implementation Decision, in which the OEB approved
recovery of the DTA amounts allocated to ratepayers for the 2017 to
2021 period, plus carrying charges over a two-year period, commencing
on July 1, 2021. In addition, Hydro One was approved to adjust the
transmission revenue requirement and the base distribution rates
beginning January 1, 2022 to eliminate any furher amounts of future tax
savings fowing to customers. As at December 31, 2022, Hydro One has
a regulatory asset of $73 million for the cumulative DTA amounts shared
with ratepayers since 2017 to date, net of the amount recovered from
ratepayers pursuant to the DTA Implementation Decision. The regulatory
asset of $73 million (2021 - $204 million) consists of $24 million
(2021 - $72 million) and $49 million (2021 - $132 million) for Hydro One
Networks’ distribution and transmission segments, respectively. As a
result of the OEB’s procedural order, the $73 million regulatory asset
relating to the cumulative DTA amounts allocated to ratepayers since
2017 has been separately presented from the deferred income tax
regulatory asset. The balance of this regulatory account will continue to
decrease as amounts are recovered over the next 6 months.
Stock-based Compensation
The Company recognizes costs associated with share grant plans and
Society RSUs in a regulatory asset as management considers it probable
that share grant plans' and Society RSU costs will be recovered in
the future through the rate-seting process. In the absence of rate-
regulated accounting, OM&A expenses would be lower by $2 million
(2021 - $1 million). Share grant and Society RSU costs are transferred to
labour costs at the time they vest and are issued, and are recovered in
rates in accordance with recovery of these labour costs.
CDM Variance
The CDM variance account tracks the impact of actual CDM and
demand response programs on the actual load forecast compared to
the estimated load forecast included in revenue requirement. As per
the OEB's decision on Hydro One Networks' transmission rates for 2017
to 2019, this account was maintained to record any variances for 2017,
2018, and 2019. In April 2020, the 2017 balance, plus accrued interest
through December 31, 2018 was approved for disposition over a three-
year period that ended on December 31, 2022. CDM variance amounts
for 2018 and 2019 were calculated and proposed for disposition in the
Hydro One Networks JRAP application. In November 2022, the amount
as at December 31, 2020, including accrued interest, was approved
for disposition by the OEB. The amount was approved to be recovered
from ratepayers over a one-year period ending December 31, 2023.
Since CDM revenues qualify as a Type A program under the Alternative
Revenue Program, $23 million was recognized in transmission revenues.
RRRP Variance
Hydro One Remotes receives RRRP amounts from the Independent
Electricity System Operator (IESO). At December 31, 2022, the Company
recognized a regulatory asset representing the amounts required to
achieve breakeven net income, as regulated under the cost recovery
model, in excess of cumulative RRRP amounts received. In 2022, RRRP
amounts received were lower (2021 - lower) than amounts required
to achieve breakeven net income, and as such, the regulatory asset
was increased by $15 million (2021 - $4 million). In the absence of
rate-regulated accounting, 2022 revenue would have been lower by
$15 million (2021 - lower by $4 million).
Foregone Revenue Deferral
As at December 31, 2021, the foregone revenue deferral account was
made up of the remaining balance refecting Hydro One Networks
transmission business' foregone revenue, based on the diference
between approved 2020 UTRs and interim 2020 UTRs, which was
approved by the OEB to be collected from ratepayers over a two-year
period that ended on December 31, 2022.
Post-Retirement and Post-Employment Benefts
In accordance with OEB rate orders, post-retirement and post-
employment benefts costs are recovered on an accrual basis. The
Company recognizes the net unfunded or overunded status of post-
retirement and post-employment obligations on the consolidated
balance sheets with an incremental ofset to the associated regulatory
asset or regulatory liability, as the case may be. A regulatory asset or
liability is recognized because management considers it to be probable
that post-retirement and post-employment beneft costs will be
recovered or returned in the future through the rate-seting process.
The post-retirement and post-employment beneft obligation is
remeasured to the present value of the actuarially determined beneft
obligation at each year end based on an annual actuarial repor, with an
ofset to the associated regulatory asset or liability as the case may be,
to the extent of the remeasurement adjustment. In the absence of rate-
regulated accounting, 2022 OCI would have been higher by $473 million
(2021 - OCI higher by $94 million).
68
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022 Pension Beneft Regulatory Asset / Liability
In accordance with OEB rate orders, pension costs recovered on a
cash basis as employer contributions are paid to the pension fund in
accordance with the Pension Benefts Act (Ontario). The Company
recognizes the net unfunded or overunded status of pension
obligations on the consolidated balance sheets with an ofset to the
associated regulatory asset or liability. The pension beneft obligation is
remeasured to the present value of the actuarially determined beneft
obligation at each year end based on an annual actuarial repor, with
an ofset to the associated regulatory asset or liability, to the extent
of the remeasurement adjustment. In the absence of rate-regulated
accounting, OCI would have been higher by $1,035 million (2021 - OCI
higher by $1,017 million) and OM&A expenses would have been lower by
$36 million (2021 - higher by $132 million).
Tax Rule Changes Variance
The 2019 federal and Ontario budgets (Budgets) provided cerain
time-limited investment incentives permiting Hydro One to deduct
accelerated capital cost allowance of up to three times the frst-year
rate for capital investments acquired after November 20, 2018 and
placed in-service before January 1, 2028 (Accelerated Depreciation).
Following the enactment of the Budget measures in the second quarer
of 2019, the OEB directed all Ontario regulated utilities including
Hydro One to track the full revenue impact of the tax benefts related to
the Accelerated Depreciation rules to ratepayers. The tax beneft to be
returned to ratepayers in the future gave rise to a regulatory liability and
resulted in a decrease in revenues as current rates do not include the
beneft of the Accelerated Depreciation; therefore, the revenue subject
to refund cannot be recognized. As par of the JRAP Decision received
in November 2022, the OEB approved the disposition of Hydro One
Networks' transmission and distribution account balances as at
December 31, 2020, including accrued interest, which will be returned
to ratepayers over a one-year period ending December 31, 2023 and a
three-year period ending December 31, 2025, respectively.
Earnings Sharing Mechanism Deferral
In March 2019, the OEB approved the establishment of an earnings
sharing mechanism deferral account for Hydro One Networks'
distribution segment to record over-earnings including tax impacts,
if any, realized for any year from 2018 to 2022. Under this mechanism,
Hydro One shares 50% of regulated earnings that exceed the OEB-
approved regulatory return-on-equity by more than 100 basis points
with distribution ratepayers. A similar account was also approved for
B2M LP in January 2020, and Hydro One Networks transmission and
NRLP in April 2020. HOSSM's account was approved as par of the
acquisition decision in October 2016 and became efective in 2022.
The balance in the account as at December 31, 2022 mostly relates
to Hydro One Networks distribution and transmission. As par of the
JRAP Decision received in November 2022, the OEB approved the
disposition of Hydro One networks' distribution business' balance as at
December 31, 2020, including accrued interest, over a three-year period
ending December 31, 2025.
RSVA
Hydro One has deferred cerain retail setlement variance amounts
under the provisions of Aricle 490 of the OEB’s Accounting Procedures
Handbook. The RSVA account tracks the diference between the cost of
power purchased from the IESO and the cost of power recovered from
ratepayers. As par of the JRAP Decision received in November 2022,
the OEB approved the disposition of Hydro One networks' distribution
business' balance as at December 31, 2020, including accrued interest,
over a three-year period ending December 31, 2025.
External Revenue Variance
The external revenue variance account balance refects the diference
between Hydro One Networks' transmission business' actual expor
service revenue and external revenues from secondary land use, and
the OEB-approved amounts. The account also records the diference
between actual net external station maintenance, engineering and
construction services revenue, and other external revenue, and the
OEB-approved amounts. As par of the JRAP Decision received in
November 2022, the OEB approved the disposition of Hydro One
networks' transmission business' balance as at December 31,
2020, including accrued interest, over a one-year period ending
December 31, 2023.
Asset Removal Costs Cumulative Variance
In April 2020, the OEB approved the establishment of an asset
removal costs cumulative variance account for Hydro One Networks'
transmission business to record the diference between the revenue
requirement associated with forecast asset removal costs included in
depreciation expense and actual asset removal costs incurred from
2020 to 2022. This account is asymmetrical to the beneft of ratepayers
on a cumulative basis over the 2020-2022 rate period. As par of the
JRAP Decision received in November 2022, the OEB approved the
disposition of Hydro One networks' transmission business' balance as at
December 31, 2020, including accrued interest, over a one-year period
ending December 31, 2023.
Pension Cost Diferential
Variances between the pension cost recognized and the cost
embedded in rates as par of the rate-seting process for Hydro One
Networks' transmission and distribution businesses are recognized as
a regulatory asset or regulatory liability, as the case may be. As par
of the JRAP Decision received in November 2022, the OEB approved
the disposition of Hydro One Networks' transmission and distribution
account balances as at December 31, 2020, including accrued interest,
which will be returned to ratepayers over a one-year period ending
December 31, 2023 and a three-year period ending December 31, 2025,
respectively. In the absence of rate-regulated accounting, 2022 revenue
would have been lower by $4 million (2021 - higher by $1 million).
Capitalized Overhead Tax Variance
In November 2022, the OEB approved the establishment of a capitalized
overhead tax variance account to capture the diference between
the capitalized overheads deducted in calculating the regulatory
tax expense included in rates and the actual capitalized overhead
costs deducted in Hydro One's tax returns for Hydro One Networks'
transmission and distribution businesses for the 2016 to 2027 period.
Variance amounts are recognized at the earlier of (i) when the tax
year has been audited by the Canada Revenue Agency or (ii) when the
taxation year is statute barred.
Green Energy Expenditure Variance
In April 2010, the OEB requested the establishment of deferral accounts
which capture the diference between the revenue recorded on the
basis of Green Energy Plan expenditures incurred and the actual
recoveries received.
69
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022 13. OTHER LONG-TERM ASSETS
As at December 31 (millions of dollars)
Deferred pension assets (Note 19)
Right-of-Use assets (Note 22)
Investments
Other long-term assets
14. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
As at December 31 (millions of dollars)
Accrued liabilities
Accounts payable
Regulatory liabilities (Note 12)
Accrued interest
Environmental liabilities (Note 20)
Lease obligations (Note 22)
Derivative liabilities (Note 17)
15. OTHER LONG-TERM LIABILITIES
As at December 31 (millions of dollars)
Post-retirement and post-employment beneft liability (Note 19)
Environmental liabilities (Note 20)
Lease obligations (Note 22)
Asset retirement obligations (Note 21)
Pension beneft liability (Note 19)
Long-term accounts payable
Other long-term liabilities
2022
358
56
35
12
461
2022
683
295
139
120
25
12
—
2021
—
57
22
14
93
2021
619
255
10
124
34
14
8
1,274
1,064
2022
1,376
68
43
28
—
—
30
2021
1,800
88
46
14
713
3
19
1,545
2,683
16. DEBT AND CREDIT AGREEMENTS
Shor-Term Notes and Credit Facilities
Hydro One meets its shor-term liquidity requirements in par
through the issuance of commercial paper under Hydro One Inc.’s
Commercial Paper Program which has a maximum authorized amount
of $2,300 million. These shor-term notes are denominated in Canadian
dollars with varying maturities up to 365 days. The Commercial Paper
Program is suppored by Hydro One Inc.’s revolving standby credit
facilities totaling $2,300 million.
At December 31, 2022, Hydro One’s consolidated commited and
unsecured credit facilities (Operating Credit Facilities) consisted of
the following:
(millions of dollars)
Hydro One Inc.
Revolving standby credit facilities
Hydro One
Five-year senior, revolving term credit facility
Total
Maturity
June 20271
June 20271
Total
Amount
2,300
250
2,550
Amount
Drawn
—
—
—
1
On June 1, 2022, the maturity dates for the Operating Credit Facilities were extended from June 2026 to June 2027.
The Company may use the Operating Credit Facilities for working
capital and general corporate purposes. If used, interest on the
Operating 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 ofer and sell debt securities. Any debt
securities issued by HOHL are fully and unconditionally guaranteed by
the Company. At December 31, 2022 and 2021, no debt securities have
been issued by HOHL.
70
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
Long-Term Debt
The following table presents long-term debt outstanding at December 31, 2022 and 2021:
As at December 31 (millions of dollars)
3.20% Series 25 notes due 2022
0.71% Series 48 notes due 2023
2.54% Series 42 notes due 2024
1.76% Series 45 notes due 2025
2.97% Series 40 notes due 2025
2.77% Series 35 notes due 2026
4.91% Series 52 notes due 2028
3.02% Series 43 notes due 2029
2.16% Series 46 notes due 2030
7.35% Debentures due 2030
1.69% Series 49 notes due 2031
2.23% Series 50 notes due 2031
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
2.71% Series 47 notes due 2050
3.64% Series 44 notes due 2050
3.10% Series 51 notes due 2051
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)
1.41% Series 2020-1 notes due 2027
Hydro One long-term debt (b)
6.6% Senior Secured Bonds due 2023 (Principal amount - $95 million)
4.6% Note Payable due 2023 (Principal amount - $36 million)
HOSSM long-term debt (c)
Add: Net unamorized debt premiums
Less: Unamorized deferred debt issuance costs
Total long-term debt
2022
2021
—
600
700
400
350
500
750
550
400
400
400
450
500
385
600
400
300
500
300
315
435
350
325
350
450
750
500
250
450
225
310
50
600
600
700
400
350
500
—
550
400
400
400
450
500
385
600
400
300
500
300
315
435
350
325
350
450
750
500
250
450
225
310
50
13,245
13,095
425
425
97
36
133
425
425
105
37
142
13,803
13,662
8
(48)
9
(51)
13,763
13,620
71
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
(a) Hydro One Inc. long-term debt
(b) Hydro One long-term debt
At December 31, 2022, long-term debt of $13,245 million (2021 -
$13,095 million) was outstanding, the majority of which was issued
under Hydro One Inc.’s Medium Term Note (MTN) Program. In June
2022, Hydro One Inc. fled a shor form base shelf prospectus in
connection with its MTN Program, which has a maximum authorized
principal amount of notes issuable of $4,000 million, expiring in July
2024. At December 31, 2022, $3,250 million remained available for
issuance under the MTN Program prospectus.
In 2022, Hydro One Inc. issued long-term debt totaling $750 million
(2021 - $900 million) and repaid long-term debt of $600 million
(2021 - $800 million) under the MTN Program.
At December 31, 2022, long-term debt of $425 million (2021 -
$425 million) was outstanding under Hydro One's shor form base
shelf prospectus (Universal Base Shelf Prospectus). On August 15,
2022, Hydro One fled the Universal Base Shelf Prospectus with
securities regulatory authorities in Canada to replace a previous
prospectus that would otherwise have expired in September 2022.
The Universal Base Shelf Prospectus allows Hydro One to ofer,
from time to time in one or more public oferings, up to $2,000
million of debt, equity or other securities, or any combination
thereof, during the 25-month period ending on September 16,
2024. At December 31, 2022, no securities have been issued under
the Universal Base Shelf Prospectus. During the years ended
December 31, 2022 and 2021, no long-term debt was issued
or repaid.
(c) HOSSM long-term debt
At December 31, 2022, HOSSM long-term debt of $133 million
(2021 - $142 million), with a principal amount of $131 million (2021
- $134 million) was outstanding. In 2022, no long-term debt was
issued (2021 - $nil), and $3 million (2021 - $4 million) of long-term
debt was repaid.
The total long-term debt is presented on the consolidated balance sheets as follows:
As at December 31 (millions of dollars)
Current liabilities:
Long-term debt payable within one year
Long-term liabilities:
Long-term debt
Total long-term debt
2022
733
13,030
13,763
2021
603
13,017
13,620
Principal and Interest Payments
At December 31, 2022, future principal repayments, interest payments, and related weighted-average interest rates were as follows:
Long-Term Debt
Principal Repayments
Interest
Payments
Weighted-Average
Interest Rate
(millions of dollars)
(millions of dollars)
731
700
750
500
425
3,106
3,450
7,245
13,801
518
513
495
479
473
2,478
1,976
3,663
8,117
(%)
1.7
2.5
2.3
2.8
1.4
2.2
4.1
4.5
3.9
Year 1
Year 2
Year 3
Year 4
Year 5
Years 6-10
Thereafter
72
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
AND RISK MANAGEMENT
Fair value is considered to be the exchange price in an orderly
transaction between market paricipants to sell an asset or transfer a
liability at the measurement date. The fair value defnition 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.
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 insignifcant porion of the valuation based
on unobservable inputs.
Hydro One classifes 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 3 inputs are any fair value measurements that include
unobservable inputs for the asset or liability for more than an
insignifcant porion of the valuation. A Level 3 measurement may be
based primarily on Level 2 inputs.
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 sufcient frequency and volume to
provide ongoing pricing information.
Level 2 inputs are those other than quoted market prices that are
observable, either directly or indirectly, for an asset or liability. Level 2
Non-Derivative Financial Assets and Liabilities
At December 31, 2022 and 2021, the Company’s carrying amounts
of cash and cash equivalents, accounts receivable, due from related
paries, shor-term notes payable, accounts payable, and due to related
paries are representative of fair value due to the shor-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, 2022 and 2021 are as follows:
As at December 31 (millions of dollars)
Long-term debt, including current porion
Fair Value Measurements of Derivative Instruments
Fair Value Hedges
At December 31, 2022 and 2021, Hydro One Inc. had no fair
value hedges.
Cash Flow Hedges
At December 31, 2022 and 2021, Hydro One Inc. had a total of
$800 million in pay-fxed, receive-foating interest-rate swap
2022
Carrying Value
13,763
2022
Fair Value
13,026
2021
Carrying Value
13,620
2021
Fair Value
15,573
agreements designated as cash fow hedges. These cash fow hedges
are intended to ofset the variability of interest rates on the issuances
of shor-term commercial paper between January 9, 2020 and
March 9, 2023.
At December 31, 2022 and 2021, the Company had no derivative
instruments classifed as undesignated contracts.
Fair Value Hierarchy
The fair value hierarchy of fnancial assets and liabilities at December 31, 2022 and 2021 is as follows:
As at December 31, 2022 (millions of dollars)
Carrying Value
Fair Value
Level 1
Level 2
Level 3
Assets:
Derivative instruments (Note 9)
Cash fow hedges, including current porion
5
5
Liabilities:
Long-term debt, including current porion
13,763
13,026
—
—
5
13,026
—
—
As at December 31, 2021 (millions of dollars)
Carrying Value
Fair Value
Level 1
Level 2
Level 3
Liabilities:
Long-term debt, including current porion
13,620
15,573
Derivative instruments (Note 14)
Cash fow hedges, including current porion
8
13,628
8
15,581
—
—
—
15,573
8
15,581
—
—
—
The fair value of the interest rate swaps designated as cash fow hedges is determined using a discounted cash fow method based on period-end
swap yield curves.
73
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
The fair value of the long-term debt is based on unadjusted period-end market prices for the same or similar debt of the same
remaining maturities.
There were no transfers between any of the fair value levels during the years ended December 31, 2022 or 2021.
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 values, foreign exchange rates and interest rates. The Company is
exposed to fuctuations 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 or material foreign exchange risk.
The Company uses a combination of fxed and variable-rate debt to
manage the mix of its debt porfolio. The Company also uses derivative
fnancial instruments to manage interest-rate risk. The Company may
utilize interest-rate swaps 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, such as
cash fow hedges, to manage its exposure to shor-term interest rates or
to lock in interest-rate levels on forecasted fnancing.
A hypothetical 100 basis point increase in interest rates associated with
variable-rate debt would not have resulted in a signifcant decrease to
Hydro One’s net income for the years ended December 31, 2022 and
2021, respectively.
For derivative instruments that are designated and qualify as cash fow
hedges, the unrealized gain or loss, after tax, on the derivative instrument
is recorded as OCI or OCL and is reclassifed to results of operations in
the same period during which the hedged transaction afects results
of operations. During the year ended December 31, 2022, a $12 million
after-tax unrealized gain (2021 - $4 million loss), $17 million before-tax
(2021 - $5 million loss), was recorded in OCI, and a $2 million after-tax
realized gain (2021 - $8 million loss), $3 million before-tax (2021 -
$12 million loss), was reclassifed to fnancing charges. This resulted in an
accumulated other comprehensive income (AOCI) of $4 million related
to cash fow hedges at December 31, 2022 (2021 - accumulated other
comprehensive loss (AOCL) - $6 million). The Company estimates that the
amount of AOCI, after tax, related to cash fow hedges to be reclassifed
to results of operations in the next 12 months is $4 million. Actual
amounts reclassifed to results of operations depend on the interest
rate risk in efect until the derivative contracts mature. For all forecasted
transactions, at December 31, 2022, the maximum term over which the
Company is hedging exposures to the variability of cash fows is less than
three months.
The Pension Plan manages market risk by diversifying investments in
accordance with the Pension Plan’s Statement of Investment Policies
and Procedures. Interest rate risk arises from the possibility that changes
in interest rates will afect the fair value of the Pension Plan’s fnancial
instruments. In addition, changes in interest rates can also impact
discount rates which impact the valuation of the pension and post-
retirement and post-employment liabilities. Currency risk is the risk that
the value of the Pension Plan’s fnancial instruments will fuctuate due to
changes in foreign currencies relative to the Canadian dollar. Other price
risk is the risk that the value of the Pension Plan’s investments in equity
securities will fuctuate as a result of changes in market prices, other than
those arising from interest rate risk or currency risk. All three factors may
contribute to changes in values of the Pension Plan investments. See
Note 19 - Pension and Post-Retirement and Post-Employment Benefts
for furher details.
Credit Risk
Financial assets create a risk that a counterpary will fail to discharge
an obligation, causing a fnancial loss. At December 31, 2022 and 2021,
there were no signifcant concentrations of credit risk with respect to
any class of fnancial 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, 2022
and 2021, there was no material accounts receivable balance due from
any single customer.
At December 31, 2022, the Company’s allowance for doubtful accounts
was $63 million (2021 - $56 million). The allowance for doubtful
accounts refects the Company's CECL for all accounts receivable
balances, which are based on historical overdue balances, customer
payments and write-ofs. At December 31, 2022, approximately 4%
(2021 - 5%) of the Company’s net accounts receivable were outstanding
for more than 60 days.
Hydro One manages its counterpary credit risk through various
techniques including (i) entering into transactions with highly rated
counterparies, (ii) limiting total exposure levels with individual
counterparies, (iii) entering into master agreements which enable
net setlement and the contractual right of ofset, and (iv) monitoring
the fnancial condition of counterparies. The Company monitors
current credit exposure to counterparies on both 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 fnancial instruments result in exposure to credit risk since
there is a risk of counterpary default. The maximum credit exposure of
derivative contracts, before collateral, is represented by the fair value
of contracts in an asset position at the reporing date. At December 31,
2022 and 2021, the counterpary credit risk exposure on the fair value
of these interest-rate swap contracts was not material. At December 31,
2022, Hydro One’s credit exposure for all derivative instruments, and
applicable payables and receivables, was with two fnancial institutions
with investment grade credit ratings as counterparies.
The Pension Plan manages its counterpary credit risk with respect to
bonds by investing in investment-grade corporate and government
bonds and with respect to derivative instruments by transacting only
with highly rated fnancial institutions and by ensuring that exposure is
diversifed across counterparies.
74
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
Liquidity Risk
Liquidity risk refers to the Company’s ability to meet its fnancial
obligations as they come due. Hydro One meets its shor-term
operating liquidity requirements using cash and cash equivalents
on hand, funds from operations, the issuance of commercial paper,
and the Operating Credit Facilities. The shor-term liquidity under
the commercial paper program, the Operating Credit Facilities, and
anticipated levels of funds from operations are expected to be sufcient
to fund the Company’s operating requirements. The Company's
currently available liquidity is also expected to be sufcient to address
any reasonably foreseeable impacts that the COVID-19 pandemic may
have on the Company’s cash requirements.
In June 2022, Hydro One Inc. fled a shor form base shelf prospectus
in connection with its MTN Program, which has a maximum authorized
principal amount of notes issuable of $4,000 million, and expires in
July 2024. At December 31, 2022, $3,250 million remained available
for issuance under the MTN Program prospectus. See Note 33 -
Subsequent Events for long-term debt issued under Hydro One Inc.'s
MTN Program subsequent to December 31, 2022.
On August 15, 2022, Hydro One fled the Universal Base Shelf
Prospectus with securities regulatory authorities in Canada to replace
a previous prospectus that would otherwise have expired in September
2022. The Universal Base Shelf Prospectus allows Hydro One to ofer,
from time to time in one or more public oferings, up to $2,000 million
of debt, equity or other securities, or any combination thereof, during
the 25-month period ending on September 16, 2024. At December 31,
2022, no securities have been issued under the Universal Base Shelf
Prospectus.
On November 22, 2022, HOHL fled a shor form base shelf prospectus
(US Debt Shelf Prospectus) with securities regulatory authorities
in Canada and the US to replace a previous prospectus that would
otherwise have expired in January 2023. The US Debt Shelf Prospectus
allows HOHL to ofer, from time to time in one or more public oferings,
up to US$3,000 million of debt securities, unconditionally guaranteed
by Hydro One, expiring in December 2024. At December 31, 2022, no
securities have been issued under the US Debt Shelf Prospectus.
The Pension Plan’s shor-term liquidity is provided through cash and
cash equivalents, contributions, investment income and proceeds from
investment transactions. In the event that investments must be sold
quickly to meet current obligations, the majority of the Pension Plan’s
assets are invested in securities that are traded in an active market and
can be readily disposed of as liquidity needs arise.
18. CAPITAL MANAGEMENT
The Company’s objectives with respect to its capital structure are to maintain efective access to capital on a long-term basis at reasonable rates,
and to deliver appropriate fnancial returns. In order to ensure ongoing access to capital, the Company targets to maintain strong credit quality. At
December 31, 2022 and 2021, the Company’s capital structure was as follows:
As at December 31 (millions of dollars)
Shor-term notes payable
Long-term debt payable within one year
Less: cash and cash equivalents
Long-term debt
Common shares
Retained earnings
Total capital
2022
1,374
733
(530)
1,577
13,030
5,699
5,562
25,868
2021
1,045
603
(540)
1,108
13,017
5,688
5,174
24,987
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, 2022, the Company was in compliance with all fnancial covenants and limitations associated with the outstanding
borrowings and credit facilities.
75
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
19. PENSION AND POST-RETIREMENT AND
POST-EMPLOYMENT BENEFITS
Hydro One has a Pension Plan, a DC Plan, a supplementary pension
plan (Supplementary Plan), and post-retirement and post-employment
beneft plans.
DC Plan
Hydro One established a DC Plan efective 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 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 Supplementary 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’s contributions to the
DC Plan for the year ended December 31, 2022 were $3 million (2021 -
$2 million).
Pension Plan, Supplementary Plan, and Post-Retirement and
Post-Employment Plans
The Pension Plan is a defned beneft contributory plan which covers
eligible regular employees of Hydro One and its subsidiaries. The
Pension Plan provides benefts 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 staf hired after November 17, 2005,
benefts are based on highest fve-year average pensionable earnings.
After retirement, pensions are indexed to infation. Membership in
the Pension Plan was closed to management employees who were
not eligible 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 repors, including valuations perormed at least every
three years, and actual or projected levels of pensionable earnings,
as applicable. The most recent actuarial valuation was perormed
efective December 31, 2021 and fled on September 26, 2022. Total
annual cash Pension Plan employer contributions for 2022 were
$89 million (2021 - $62 million). Estimated annual Pension Plan employer
contributions for the years 2023, 2024, 2025, 2026 and 2027 are
approximately $91 million, $101 million, $103 million, $106 million, and
$109 million, respectively.
The Supplementary Plan provides members of the Pension Plan
with benefts that would have been earned and payable under the
Pension Plan beyond the limitations imposed by the Income Tax Act
(Canada). The Supplementary Plan obligation is included with other
post-retirement and post-employment beneft obligations on the
consolidated balance sheets.
Hydro One recognizes the overunded or underunded status of the
Pension Plan, and post-retirement and post-employment beneft
plans (Plans) as an asset or liability on its consolidated balance sheets,
with ofseting regulatory assets and liabilities as appropriate. The
overunded beneft asset and underunded beneft 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
and post-retirement beneft obligations is generally recognized over
the expected average remaining service period of the employees and
using the corridor approach for the post-retirement beneft plan. For
post-employment beneft plan, the impact of changes in assumptions
are recognized immediately in the net periodic beneft cost. The
measurement date for the Plans is December 31.
76
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
The following tables provide the components of the unfunded status of the Company's Plans at December 31, 2022 and 2021:
Year ended December 31 (millions of dollars)
Change in projected beneft obligation
Projected beneft obligation, beginning of year
Current service cost
Employee contributions
Interest cost
Benefts paid
Net actuarial loss
Transfers from other plans1
Projected beneft obligation, end of year
Change in plan assets
Fair value of plan assets, beginning of year
Actual return on plan assets
Benefts paid
Employer contributions
Employee contributions
Administrative expenses
Fair value of plan assets, end of year
Unfunded (funded) status
Pension Benefts
Post-Retirement and
Post-Employment Benefts
2022
2021
2022
2021
9,358
214
63
283
(402)
(1,970)
—
7,546
8,645
(470)
(402)
89
63
(21)
7,904
(358)
9,763
1,863
1,857
240
61
257
(392)
(571)
—
9,358
8,103
834
(392)
62
61
(23)
8,645
713
63
—
58
(51)
(499)
8
1,442
—
—
(51)
51
—
—
—
66
—
51
(47)
(98)
34
1,863
—
—
(47)
47
—
—
—
1,442
1,863
1 See below for information related to the transfer from other plans in 2021 as well as future transfers from other plans for employees transferred in 2021 and 2022.
Future Transfers from Other Plans
Hydro One and Inergi LP agreed to transfer the employment of cerain
Inergi LP employees (Transferred Employees) to Hydro One Networks.
Employees related to the Information Technology Operations, Finance
and Accounting, Payroll, Source to Pay, Setlements and cerain Shared
Services functions were transferred over a period ending January 1,
2022. The Transferred Employees who were paricipants in the Inergi LP
Pension Plan (Inergi Plan) became paricipants in the Hydro One Pension
Plan upon transfer to Hydro One Networks. In December 2022, approval
was granted by the Financial Services Regulatory Authority of Ontario
to transfer the assets and liabilities of the Inergi Plan, however, the
assets and liabilities have not yet been transferred to the Hydro One
Pension Plan. The values of assets and liabilities of the Inergi Plan to be
transferred to the Plan will be determined at the date of transfer, which
is expected to occur in Q1 or Q2 2023. Inergi and Hydro One Networks
also agreed to transfer OPEB liabilities related to the Transferred
Employees to Hydro One’s post-retirement and post-employment
beneft plans.
On March 1, 2021, Transferred Employees associated with information
technology operations (ITO Employees) transferred to Hydro One
Networks, and the transfer of the OPEB liability of $28 million related
to the ITO Employees was completed. The liability was recorded as a
post-retirement and post-employment beneft liability with an ofset to
OCL, and cash totaling $27 million was transferred to Hydro One and
recorded as an asset with an ofset to OCI. Both, the OCI resulting from
the transfer of the cash asset and the OCL resulting from the transfer
of the other post-retirement beneft liability are being recognized in net
income over the expected average remaining service lifetime (EARSL) of
the ITO Employees.
On November 1, 2021, Transferred Employees associated with source
to pay operations (S2P Employees) transferred to Hydro One Networks,
and the transfer of the OPEB liability of $6 million related to the S2P
Employees was completed. The liability was recorded as a post-
retirement and post-employment beneft liability with an ofset to OCL,
and cash totaling $6 million was transferred to Hydro One and recorded
as an asset with an ofset to OCI. Both, the OCI resulting from the
transfer of the cash asset and the OCL resulting from the transfer of
the other post-retirement beneft liability are being recognized in net
income over the EARSL of the S2P Employees.
The transfer of Finance and Accounting, Payroll and cerain Shared
Services functions occurred on January 1, 2022 and the transfer of the
OPEB liability of $9 million related to these Employees was completed
in the frst quarer. The liability was recorded as a post-retirement and
post-employment beneft liability with an ofset to OCL, and cash
totaling $10 million was transferred to Hydro One and recorded as an
asset with an ofset to OCI. Both the OCI resulting from the transfer
of the cash asset and the OCL resulting from the transfer of the other
post-retirement beneft liability are being recognized in net income over
the EARSL of the Finance and Accounting, Payroll and cerain Shared
Services employees.
77
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
Hydro One presents its beneft obligations and plan assets net on its consolidated balance sheets as follows:
As at December 31 (millions of dollars)
Other assets1
Deferred pension assets
Accrued liabilities
Pension beneft liability
Post-retirement and post-employment beneft liability
Net unfunded (funded) status
1
Represents the funded status of HOSSM defned beneft pension plan.
2022
9
358
—
—
—
(367)
Pension Benefts
2021
10
—
—
713
—
703
Post-Retirement and
Post-Employment Benefts
2022
2021
—
—
66
—
1,376
1,442
—
—
63
—
1,800
1,863
The funded or unfunded status of the Plans refers to the diference 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 beneft obligation (ABO) and fair value of plan assets for the Pension Plan:
As at December 31 (millions of dollars)
PBO
ABO
Fair value of plan assets
2022
7,546
7,002
7,904
2021
9,358
8,451
8,645
On an ABO basis, the Pension Plan was funded at 113% as at December 31, 2022 (2021 - 102%). On a PBO basis, the Pension Plan was funded at 105%
at December 31, 2022 (2021 - 92%). The ABO difers from the PBO in that the ABO includes no assumption about future compensation levels.
Components of Net Periodic Beneft Costs
The following table provides the components of the net periodic beneft costs for the years ended December 31, 2022 and 2021 for the
Pension Plan:
Year ended December 31 (millions of dollars)
Current service cost
Interest cost
Expected return on plan assets, net of expenses
Prior service cost amorization
Amorization of actuarial losses
Net periodic beneft costs
Charged to results of operations1
2022
214
283
(507)
2
61
53
35
1
The Company accounts for pension costs consistent with their inclusion in OEB-approved rates. During the year ended December 31, 2022, pension costs of $89 million (2021 -
$74 million) were atributed to labour, of which $35 million (2021 - $27 million) was charged to operations, and $54 million (2021 - $47 million) was capitalized as par of the cost of
propery, plant and equipment and intangible assets.
The following table provides the components of the net periodic beneft costs for the years ended December 31, 2022 and 2021 for the post-
retirement and post-employment beneft plans:
Year ended December 31 (millions of dollars)
Current service cost
Interest cost
Prior service cost amorization
Amorization of actuarial losses
Net periodic beneft costs
Charged to results of operations1,2
2022
63
58
11
(8)
124
71
2021
240
257
(430)
2
125
194
27
2021
66
51
7
(2)
122
64
1 The Company accounts for post-retirement and post-employment costs consistent with their inclusion in OEB-approved rates. During the year ended December 31, 2022, post-
retirement and post-employment costs of $124 million (2021 - $122 million) were atributed to labour, of which $71 million (2021 - $64 million) was charged to operations, $15 million
(2021 - $14 million) was recorded in the Hydro One Networks distribution post-retirement and post-employment benefts non-service cost regulatory asset, and $38 million (2021 -
$44 million) was capitalized as par of the cost of propery, plant and equipment and intangible assets.
2
In the 2020-2022 Transmission Decision, the OEB approved the recovery of the non-service cost component of post-retirement and post-employment benefts as par of operation,
maintenance and administration costs for the Company's transmission business. These costs were previously capitalized and recovered through rate base. As a result, during the year
ended December 31, 2022, additional other post-retirement and post-employment costs of $14 million (2021 - $14 million) atributed to labour were charged to operations.
78
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
Assumptions
The measurement of the obligations of the Plans and the costs of
providing benefts 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 beneft obligations and costs is impacted by several assumptions
including the discount rate applied to beneft obligations, the long-term
expected rate of return on plan assets, Hydro One’s expected level of
contributions to the Plans, the incidence of morality, the expected
remaining service period of plan paricipants, 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 paricipants. 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 perormance,
weighted by target asset class allocations. In general, equity securities,
real estate and private equity investments are forecasted to have higher
returns than fxed-income securities.
The following weighted average assumptions were used to determine the beneft obligations at December 31, 2022 and 2021:
Year ended December 31
Signifcant 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 Benefts
Post-Retirement and
Post-Employment Benefts
2022
2021
2022
2021
5.06%
2.50%
2.00%
—
3.00%
2.25%
1.75%
—
5.07%
2.50%
2.00%
4.19%
3.04%
2.25%
1.75%
3.97%
1 5.02% per annum in 2023, grading down to 4.19% per annum in and after 2031 (2021 - 4.88% per annum in 2022, grading down to 3.97% per annum in and after 2031)
The following weighted average assumptions were used to determine the net periodic beneft costs for the years ended December 31, 2022
and 2021. Assumptions used to determine current year-end beneft obligations are the assumptions used to estimate the subsequent year’s net
periodic beneft costs.
Year ended December 31
Pension Benefts:
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 Benefts:
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
2022
2021
6.00%
3.00%
2.25%
1.75%
14
3.04%
2.25%
1.75%
14.9
3.97%
5.40%
2.60%
2.25%
1.75%
14
2.60%
2.25%
1.75%
15.3
3.70%
1 4.88% per annum in 2022, grading down to 3.97% per annum in and after 2031 (2021 - 4.74% per annum in 2021, grading down to 3.70% per annum in and after 2031)
The discount rate used to determine the current year pension obligation and the subsequent year’s net periodic beneft costs is based on a yield
curve approach. Under the yield curve approach, expected future beneft payments for each plan are discounted by a rate on a third-pary 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 fows.
79
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
The following approximate life expectancies were used in the morality assumptions to determine the PBO for the pension and post-retirement and
post-employment plans at December 31, 2022 and 2021:
As at December 31
Life expectancy at age 65 for a member currently at:
Age 65 - male
Age 65 - female
Age 45 - male
Age 45 - female
Estimated Future Beneft Payments
At December 31, 2022, estimated future beneft payments to the paricipants of the Plans were:
(millions of dollars)
2023
2024
2025
2026
2027
2028 through to 2032
Total estimated future beneft payments through to 2032
2022
(years)
23
25
24
26
2021
(years)
23
25
24
26
Pension Benefts
Post-Retirement and
Post-Employment Benefts
395
405
414
420
424
2,187
4,245
67
68
70
71
72
370
718
Components of Regulatory Accounts
A porion of actuarial gains and losses and prior service costs is recorded within regulatory accounts on Hydro One’s consolidated balance sheets to
refect the expected regulatory inclusion of these amounts in future rates, which would otherwise be recorded in OCI. These amounts are refected
in the following table:
Year ended December 31 (millions of dollars)
Pension Benefts:
Net actuarial gain for the year
Amorization of actuarial losses
Amorization of prior service cost
Post-Retirement and Post-Employment Benefts:
Actuarial gain for the year
Amorization of actuarial losses
2022
2021
(972)
(61)
(2)
(1,035)
(471)
(2)
(473)
(891)
(124)
(2)
(1,017)
(91)
(3)
(94)
The following table provides the components of regulatory accounts that have not been recognized as components of net periodic beneft costs
for the years ended December 31, 2022 and 2021:
Year ended December 31 (millions of dollars)
Pension Benefts:
Actuarial (gain) loss
Post-Retirement and Post-Employment Benefts:
Actuarial gain
2022
2021
(358)
(506)
713
(33)
80
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
Pension Plan Assets
Investment Strategy
On a regular basis, Hydro One evaluates its investment strategy to ensure
that Pension Plan assets will be sufcient to pay Pension Plan benefts
when it comes due. As par 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 cerain level of net assets in order to
meet the pension obligations of the Company. The Pension Plan fulfls
its primary objective by adhering to specifc investment policies outlined
in its Statement of Investment Policies and Procedures (SIPP), which is
reviewed and approved annually by the Human Resource Commitee
of Hydro One’s Board of Directors. The Company manages net assets
by engaging external investment managers who are charged with the
fduciary responsibility of investing existing funds and new funds (current
year’s employee and employer contributions) in accordance with the
approved SIPP. The perormance of the underlying investment 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 beneft
payments to eligible Pension Plan members.
Pension Plan Asset Mix
At December 31, 2022, the Pension Plan actual weighted average, target, and range asset allocations were as follows:
Equity securities
Debt securities
Real Estate and Infrastructure
Actual (%)
Target Allocation (%)
Range Allocation (%)
48
33
19
100
40
35
25
100
25 - 55
30 – 40
0 - 35
At December 31, 2022, the Pension Plan held $21 million (2021 - $22 million) Hydro One corporate bonds and $425 million (2021 - $603 million) of
debt securities of the Province.
Concentrations of Credit Risk
Hydro One evaluated its Pension Plan’s asset porfolio for the existence
of signifcant concentrations of credit risk as at December 31, 2022 and
2021. 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, 2022
and 2021, there were no signifcant concentrations (defned as greater
than 10% of plan assets) of risk in the Pension Plan’s assets.
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 counterpary 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 fnancial
institutions, and also by ensuring that exposure is diversifed across
counterparies. The risk of default on transactions in listed securities is
considered minimal, as the trade will fail if either pary to the transaction
does not meet its obligation.
81
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
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, 2022 and 2021:
As at December 31, 2022 (millions of dollars)
Pooled funds
Cash and cash equivalents
Shor-term securities
Derivative instruments
Corporate shares - Canadian
Corporate shares - Foreign
Bonds and debentures - Canadian
Bonds and debentures - Foreign
Total fair value of plan assets1
Derivative instruments
Total fair value of plan liabilities1
Level 1
—
233
—
—
139
2,702
—
—
3,074
—
—
Level 2
26
—
116
—
—
204
2,044
84
2,474
1
1
Level 3
2,315
—
—
—
—
—
—
—
2,315
—
—
Total
2,341
233
116
—
139
2,906
2,044
84
7,863
1
1
1
At December 31, 2022, the total fair value of Pension Plan assets and liabilities excludes $44 million of interest and dividends receivable, $5 million of pension administration expenses
payable, $2 million of taxes payable, $3 million receivable from paricipants, $4 million of sold investments receivable, and $2 million of purchased investments payable.
As at December 31, 2021 (millions of dollars)
Level 1
Level 2
Pooled funds
Cash and cash equivalents
Shor-term securities
Derivative instruments
Corporate shares - Canadian
Corporate shares - Foreign
Bonds and debentures - Canadian
Bonds and debentures - Foreign
Total fair value of plan assets1
Derivative instruments
Total fair value of plan liabilities1
—
144
—
—
167
3,412
—
—
3,723
—
—
21
—
86
2
—
258
2,491
97
2,955
1
1
Level 3
1,937
—
—
—
—
—
—
—
1,937
—
—
Total
1,958
144
86
2
167
3,670
2,491
97
8,615
1
1
1
At December 31, 2021, the total fair value of Pension Plan assets and liabilities excludes $39 million of interest and dividends receivable, $5 million of pension administration expenses
payable, $2 million of taxes payable, $4 million payable to paricipants, $6 million of sold investments receivable, and $3 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.
82
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
Changes in the Fair Value of Financial Instruments Classifed in Level 3
The following table summarizes the changes in fair value of fnancial instruments classifed in Level 3 for the years ended December 31, 2022 and
2021. The Pension Plan classifes fnancial instruments as Level 3 when the fair value is measured based on at least one signifcant input that is not
observable in the markets or due to lack of liquidity in cerain 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 fnancial 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
Purchases
Sales and disbursements
Fair value, end of year
There were no signifcant transfers between any of the fair value levels
during the years ended December 31, 2022 and 2021.
Valuation Techniques Used to Determine Fair Value
Pooled funds mainly consist of private equity, real estate infrastructure
and private debt 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 parnerships in businesses that are
characterized by high internal growth and operational efciencies,
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
parnerships that seek to generate a total return through income and
capital growth by investing primarily in global and Canadian limited
parnerships. Investment strategies in infrastructure include limited
parnerships in core infrastructure assets focusing on assets that
are expected to generate stable, long-term cash fows and deliver
incremental returns relative to conventional fxed-income investments.
Private equity, real estate and infrastructure valuations are repored
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 fows and market-based comparable data.
Private debt valuations are repored by the fund manager. Private debt
is credit that is extended to companies on a bilaterally negotiated basis.
It is not readily marketable and takes a wide range of forms, such as
senior secured and unsecured loans, infrastructure project fnancing,
investments secured by real estate assets, and securitized lease/loan
obligations suppored by a pool of assets. Since these valuation inputs
are not highly observable, private equity, real estate infrastructure
and private debt investments have been categorized as Level 3 within
pooled funds.
2022
1,937
128
336
(86)
2,315
2021
1,429
307
308
(107)
1,937
Cash equivalents consist of demand cash deposits held with banks
and cash held by the investment managers. Cash equivalents are
categorized as Level 1.
Shor-term securities are valued at cost plus accrued interest, which
approximates fair value due to their shor-term nature. Shor-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, 2022 was
$355 million (2021 - $414 million), the most signifcant currencies being
hedged against the Canadian dollar are the United States dollar, euro,
British pound sterling, Swedish krona and Japanese yen. The net realized
loss on contracts for the year ended December 31, 2022 was $4 million
(2021 $2 million net realized gain). The terms to maturity of the forward
exchange contracts at December 31, 2022 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.
83
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
20. ENVIRONMENTAL LIABILITIES
The following tables show the movements in environmental liabilities for the years ended December 31, 2022 and 2021:
Year ended December 31, 2022 (millions of dollars)
Environmental liabilities - beginning
Interest accretion
Expenditures
Revaluation adjustment
Environmental liabilities - ending
Less: current porion
Year ended December 31, 2021 (millions of dollars)
Environmental liabilities - beginning
Interest accretion
Expenditures
Revaluation adjustment
Environmental liabilities - ending
Less: current porion
PCB
68
1
(40)
20
49
(20)
29
PCB
76
1
(24)
15
68
(27)
41
LAR
54
—
(6)
(4)
44
(5)
39
LAR
57
—
(6)
3
54
(7)
47
Total
122
1
(46)
16
93
(25)
68
Total
133
1
(30)
18
122
(34)
88
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:
As at December 31, 2022 (millions of dollars)
Undiscounted environmental liabilities
Less: discounting environmental liabilities to present value
Discounted environmental liabilities
As at December 31, 2021 (millions of dollars)
Undiscounted environmental liabilities
Less: discounting environmental liabilities to present value
Discounted environmental liabilities
At December 31, 2022, the estimated future environmental expenditures were as follows:
PCB
50
(1)
49
PCB
70
(2)
68
LAR
44
—
44
LAR
54
—
54
(millions of dollars)
2023
2024
2025
2026
2027
Thereafter
Total
94
(1)
93
Total
124
(2)
122
25
25
14
2
2
26
94
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 uncerainties 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 fow information. A long-
term infation 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% (2021 - 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,
84
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
cost estimates to perorm work, infation assumptions and the assumed
patern of annual cash fows may difer signifcantly 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 infuence the timing of expenditures.
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 setled. Depreciation expense is adjusted prospectively for any
increases or decreases to the carrying amount of the associated asset.
PCBs
The Environment Canada regulations, enacted under the Canadian
Environmental Protection Act, 1999, govern the management, storage
and disposal of PCBs based on cerain 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 specifcally exempted equipment.
Contaminated equipment will generally be replaced, or will be
decontaminated by removing PCB-contaminated insulating oil and retro
flling with replacement oil that contains PCBs in concentrations of less
than 2 ppm.
At December 31, 2022, the Company’s best estimate of the total
estimated future expenditures to comply with current PCB regulations
was $50 million (2021 - $70 million). These expenditures are expected to
be incurred over the period from 2023 to 2025. As a result of its annual
review of environmental liabilities, the Company recorded a revaluation
adjustment in 2022 to increase the PCB environmental liability by
$20 million (2021 - $15 million).
LAR
At December 31, 2022, the Company’s best estimate of the total
estimated future expenditures to complete its LAR program was
$44 million (2021 - $54 million). These expenditures are expected to be
incurred over the period from 2023 to 2049. As a result of its annual
review of environmental liabilities, the Company recorded a revaluation
adjustment in 2022 to decrease the LAR environmental liability by
$4 million (2021 - increase of $3 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, as well as for the estimated expenditure for the
future decommissioning and removal of some diesel generating stations
and related assets operated by its subsidiary, Hydro One Remotes.
Asset retirement obligations, which represent legal obligations
associated with the retirement of cerain tangible long-lived assets, are
computed as the present value of the projected expenditures for the
future retirement of specifc 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 fows associated with the asset retirement
Some of the Company’s transmission and distribution assets,
paricularly 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 fnite 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 paricular 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.
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 fow information. A long-term infation 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% (2021 - 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 perorm work, infation assumptions and the assumed patern of
annual cash fows may difer signifcantly from the Company’s current
assumptions. Asset retirement obligations are reviewed annually or
more frequently if signifcant changes in regulations or other relevant
factors occur. Estimate changes are accounted for prospectively.
During the year, the Company recorded an asset retirement obligation
associated with the decommissioning and removal of diesel generating
stations within the Hydro One Remotes operating territory. As a result
of its annual review of asset retirement obligations, the Company
also recorded a revaluation adjustment in 2022 to increase the asset
retirement obligations related to the removal and disposal of asbestos-
containing materials installed in some of its facilities by $3 million
(2021 - no revaluation adjustment to the asset retirement obligations
was recorded).
At December 31, 2022, Hydro One had recorded a total asset retirement
obligation of $28 million (2021 - $14 million), primarily consisting of the
estimated future expenditures associated with the removal and disposal
of asbestos-containing materials installed in some of its facilities of
$17 million (2021 - $14 million), and the decommissioning and removal of
diesel generating stations of $11 million.
85
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
22. LEASES
Hydro One has operating lease contracts for buildings used in administrative and service-related functions and storing telecommunications
equipment. These leases have terms between three and eight years with renewal options of additional three- to fve-year terms at prevailing market
rates at the time of extension. 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. Renewal
options are included in the lease term when their exercise is reasonably cerain. Other information related to the Company's operating leases was
as follows:
Year ended December 31 (millions of dollars)
Lease expense
Lease payments made
As at December 31
Weighted-average remaining lease term1 (years)
Weighted-average discount rate
1
Includes renewal options that are reasonably cerain to be exercised.
At December 31, 2022, future minimum operating lease payments were as follows:
2022
13
16
2022
5
2.4%
(millions of dollars)
2023
2024
2025
2026
2027
Thereafter
Total undiscounted minimum lease payments
Less: discounting minimum lease payments to present value
Total discounted minimum lease payments
At December 31, 2021, future minimum operating lease payments were as follows:
(millions of dollars)
2022
2023
2024
2025
2026
Thereafter
Total undiscounted minimum lease payments
Less: discounting minimum lease payments to present value
Total discounted minimum lease payments
Hydro One presents its ROU assets and lease obligations on the consolidated balance sheets as follows:
2021
17
16
2021
6
2.3%
14
12
9
9
8
7
59
(4)
55
16
11
10
7
7
13
64
(4)
60
As at December 31 (millions of dollars)
Other long-term assets (Note 13)
Accounts payable and other current liabilities (Note 14)
Other long-term liabilities (Note 15)
2022
56
12
43
2021
57
14
46
86
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
23. SHARE CAPITAL
Common Shares
The Company is authorized to issue an unlimited number of common
shares. At December 31, 2022, the Company had 598,714,704 (2021 -
598,217,549) common shares issued and outstanding.
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, fnancial 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 presents the changes to common shares during the years ended December 31, 2022 and 2021:
Year ended December 31, 2022 (number of shares)
Common shares - beginning
Common shares issued - LTIP1
Common shares issued - share grants2
Common shares - ending
Ownership by
Public
Province
Total
315,804,901
282,412,648
598,217,549
108,710
388,445
—
—
108,710
388,445
316,302,056
282,412,648
598,714,704
52.8%
47.2%
100%
1
In 2022, Hydro One issued from treasury 108,710 common shares in accordance with provisions of the LTIP.
2
In 2022, Hydro One issued from treasury 388,445 common shares in accordance with provisions of the Power Workers’ Union (PWU) and the Society Share Grant Plans.
Year ended December 31, 2021 (number of shares)
Common shares - beginning
Common shares issued - LTIP1
Common shares issued - share grants2
Common shares - ending3
Ownership by
Public
Province
Total
315,199,139
282,412,648
597,611,787
188,388
417,374
—
—
188,388
417,374
315,804,901
282,412,648
598,217,549
52.8%
47.2%
100%
1
In 2021, Hydro One issued from treasury 188,388 common shares in accordance with provisions of the LTIP.
2
In 2021, Hydro One issued from treasury 417,374 common shares in accordance with provisions of the PWU and the Society Share Grant Plans.
3 On December 30th, 2021, stock options of 108,710 under the Company's LTIP were exercised with a setlement date of January 4th, 2022.
Preferred Shares
The Company is authorized to issue an unlimited number of preferred
shares, issuable in series. At December 31, 2022 and 2021, two series of
preferred shares were authorized for issuance: the Series 1 preferred
shares and the Series 2 preferred shares. At December 31, 2022, and
2021, the Company had no 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 fx the number of shares in the series and
determine the designation, rights, privileges, restrictions and conditions
ataching to that series of preferred shares. Holders of Hydro One’s
preferred shares are not entitled to receive notice of, to atend 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.
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 concer) may benefcially 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.
24. DIVIDENDS
In 2022, common share dividends in the amount of $662 million (2021 -
$629 million) were declared and paid.
See Note 33 - Subsequent Events for dividends declared subsequent to
December 31, 2022.
87
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
25. EARNINGS PER COMMON SHARE
Basic earnings per common share (EPS) is calculated by dividing net
income atributable to common shareholders of Hydro One by the
weighted-average number of common shares outstanding.
Diluted EPS is calculated by dividing net income atributable to common
shareholders of Hydro One by the weighted-average number of
common shares outstanding adjusted for the efects 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 atributable to common shareholders (millions of dollars)
Weighted-average number of shares
Basic
Efect of dilutive stock-based compensation plans
Diluted
EPS
Basic
Diluted
2022
1,050
2021
965
598,616,561
598,080,111
1,971,291
2,278,030
600,587,852
600,358,141
$ 1.75
$ 1.75
$ 1.61
$ 1.61
26. STOCK-BASED COMPENSATION
Share Grant Plans
Hydro One has two share grant plans (Share Grant Plans), one for the
beneft of cerain members of the PWU (PWU Share Grant Plan) and
one for the beneft of cerain members of the Society (Society Share
Grant Plan).
The PWU Share Grant Plan provides for the issuance of common
shares of Hydro One from treasury to cerain 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 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 ratifed 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 Ofering
(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.
The Society Share Grant Plan provides for the issuance of common
shares of Hydro One from treasury to cerain 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
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 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 atribution method as the share
grant plans have both a perormance condition and a service condition.
In 2022, 388,445 common shares (2021 - 417,374) were issued under
the Share Grant Plans. Total share-based compensation recognized
during 2022 was $4 million (2021 - $5 million) and was recorded as a
regulatory asset.
A summary of share grant activity under the Share Grant Plans during the years ended December 31, 2022 and 2021 is presented below:
Year ended December 31, 2022
Share grants outstanding - beginning
Vested and issued1
Foreited
Share grants outstanding - ending
(number of common shares)
Share Grants Weighted-Average
Price
2,662,000
$ 20.50
(388,445)
(83,939)
2,189,616
—
$ 20.50
$ 20.50
1
In 2022, Hydro One issued 388,445 common shares from treasury to eligible employees in accordance with provisions of the Share Grant Plans.
Year ended December 31, 2021
Share grants outstanding - beginning
Vested and issued1
Foreited
Share grants outstanding - ending
(number of common shares)
Share Grants Weighted-Average
Price
3,154,805
$ 20.50
(417,374)
(75,431)
2,662,000
—
$ 20.50
$ 20.50
1
In 2021, Hydro One issued 417,374 common shares from treasury to eligible employees in accordance with provisions of the Share Grant Plans.
88
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
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 Directors' DSU Plan during the years ended December 31, 2022 and 2021 is presented below:
Year ended December 31 (number of DSUs)
DSUs outstanding - beginning
Granted
Setled
DSUs outstanding - ending
For the year ended December 31, 2022, an expense of $1 million (2021 -
$1 million) was recognized in earnings with respect to the Directors' DSU
Plan. At December 31, 2022, a liability of $4 million (2021 - $3 million)
related to Directors' DSUs has been recorded at the closing price of the
Company's common shares of $36.27. This liability is included in other
long-term liabilities on the consolidated balance sheets.
2022
80,813
19,126
—
99,939
2021
65,240
20,888
(5,315)
80,813
Management DSU Plan
Under the Management DSU Plan, eligible executive employees can
elect to receive a specifed proporion of their annual shor-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, 2022 and 2021 is presented below:
Year ended December 31 (number of DSUs)
DSUs outstanding - beginning
Granted
Paid
DSUs outstanding - ending
2022
90,240
37,524
(9,259)
118,505
2021
61,880
28,360
—
90,240
For the year ended December 31, 2022, an expense of $1 million
(2021 - $1 million) was recognized in earnings with respect to the
Management DSU Plan. At December 31, 2022, a liability of $4 million
(2021 - $3 million) related to Management DSUs has been recorded
at the closing price of the Company's common shares of $36.27. This
liability is included in other long-term liabilities on the consolidated
balance sheets.
Employee Share Ownership Plan
In 2015, Hydro One established Employee Share Ownership Plans (ESOP)
for cerain eligible management and non-represented employees
(Management ESOP) and for cerain eligible Society-represented staf
(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 staf 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 2022, Company
contributions made under the ESOP were $2 million (2021 - $2 million).
LTIP
Efective August 31, 2015, the Board of Directors of Hydro One
adopted an LTIP. Under the LTIP, long-term incentives were granted
to cerain executive and management employees of Hydro One
and its subsidiaries, and all equity-based awards would be setled
in newly issued shares of Hydro One from treasury, consistent with
the provisions of the plan which also permit the paricipants to
surrender a porion 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 fexibility to award a range of vehicles, including
Perormance Share Units (PSUs), 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 perormance.
89
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
PSUs and RSUs
A summary of PSU and RSU awards activity under the LTIP during the years ended December 31, 2022 and 2021 is presented below:
Year ended December 31 (number of units)
Units outstanding - beginning
Vested and issued
Setled
Units outstanding - ending
PSUs
2022
—
—
—
—
2021
111,920
(111,920)
—
—
RSUs
2022
—
—
—
—
2021
139,730
(104,970)
(34,760)
—
No awards were granted in 2022 or 2021. The compensation expense related to the PSU and RSU awards recognized by the Company during 2022
was $nil (2021 - less than $1 million).
Society RSU Plan
As a result of the renewal of the Company's prior collective agreement
with members of the Society, the Company provided equity
compensation in the form of RSUs to cerain eligible members. The
equity compensation provides for the purchase of common shares of
Hydro One from the open market, efective March 1, 2021 in one equity
grant vesting in equal porions over a two-year period. To be eligible, an
employee must be an employee of the Company as of July 30, 2021, the
date the plan was ratifed by the Society; the grant date. The number of
common shares issued to each eligible employee will be equal to 1.0%
of such eligible employee’s salary as at April 1, 2021, divided by $30.80,
being the price of the common shares of Hydro One at the grant date.
Each RSU is entitled to accrue common share dividend equivalents in
the form of additional RSUs at the time dividends are paid, subsequent
to declaration by Hydro One’s Board of Directors.
A summary of RSU awards activity under the Society RSU Plan during the years ended December 31, 2022 and 2021 is presented below:
Year ended December 31 (number of RSUs)
RSUs outstanding - beginning
Granted
Vested and issued
Setled
Foreited
RSUs outstanding - ending
2022
71,053
1,667
(34,346)
(1,106)
(1,144)
36,124
2021
—
71,053
—
—
—
71,053
Stock Options
The Company is authorized to grant stock options under its LTIP to
cerain eligible employees. No stock options were granted in 2022
or 2021.
The fair value-based method is used to measure compensation expense
related to stock options and the expense was 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.
A summary of stock options activity during the years ended December 31, 2022 and 2021 is presented below:
Stock options outstanding - January 1, 2021
Exercised1
Stock options outstanding - December 31, 2021
Stock options outstanding - December 31, 2022
1
The stock options exercised in 2021 had an aggregate intrinsic value of $1 million.
No compensation expense related to stock options was recognized by the Company during 2022 or 2021.
Number of Stock Weighted-average
exercise price
Options
108,710
(108,710)
—
—
$ 20.66
$ 20.66
$
$
—
—
90
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
27. NONCONTROLLING INTEREST
Total noncontrolling interest consists of noncontrolling interest atributable to B2M LP and NRLP. The following tables show the movements in total
noncontrolling interest during the years ended December 31, 2022 and 2021:
Year ended December 31, 2022 (millions of dollars)
Temporary Equity
Equity
Noncontrolling interest - beginning
Distributions to noncontrolling interest
Net income atributable to noncontrolling interest
Noncontrolling interest - ending
20
(2)
2
20
68
(8)
6
66
Year ended December 31, 2021 (millions of dollars)
Temporary Equity
Equity
Noncontrolling interest - beginning
Distributions to noncontrolling interest
Net income atributable to noncontrolling interest
Noncontrolling interest - ending
22
(4)
2
20
72
(10)
6
68
Total
88
(10)
8
86
Total
94
(14)
8
88
B2M LP
On December 16, 2014, transmission assets totaling $526 million were
transferred from Hydro One Networks to B2M LP. This was fnanced 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 classifed
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 classifed within equity.
The following tables show the movements in B2M LP noncontrolling interest during the years ended December 31, 2022 and 2021:
Year ended December 31, 2022 (millions of dollars)
Temporary Equity
Equity
Noncontrolling interest - beginning
Distributions to noncontrolling interest
Net income atributable to noncontrolling interest
Noncontrolling interest - ending
20
(2)
2
20
46
(5)
4
45
Year ended December 31, 2021 (millions of dollars)
Temporary Equity
Equity
Noncontrolling interest - beginning
Distributions to noncontrolling interest
Net income atributable to noncontrolling interest
Noncontrolling interest - ending
22
(4)
2
20
49
(7)
4
46
Total
66
(7)
6
65
Total
71
(11)
6
66
NRLP
On September 18, 2019, Hydro One Networks sold to the Six Nations of
the Grand River Development Corporation and, through a trust, to the
Mississaugas of the Credit First Nation a 25.0% and 0.1%, respectively,
equity interest in NRLP parnership units for total consideration of
$12 million, representing the fair value of the equity interest acquired.
On January 31, 2020, the Mississaugas of the Credit First Nation
purchased an additional 19.9% equity interest in NRLP parnership units
from Hydro One Networks for total cash consideration of $9 million.
Following this transaction, Hydro One's interest in the equity porion
of NRLP parnership units was reduced to 55%, with the Six Nations
of the Grand River Development Corporation and the Mississaugas
of the Credit First Nation owning 25% and 20%, respectively, of the
equity interest in NRLP parnership units. The First Nations Parners'
noncontrolling interest in NRLP is classifed within equity.
The following table shows the movements in NRLP noncontrolling interest during the years ended December 31, 2022 and 2021:
Year ended December 31 (millions of dollars)
Noncontrolling interest - beginning
Distributions to noncontrolling interest
Net income atributable to noncontrolling interest
Noncontrolling interest - ending
2022
2021
22
(3)
2
21
23
(3)
2
22
91
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
28. RELATED PARTY TRANSACTIONS
The Province is a shareholder of Hydro One with approximately 47.2% ownership at December 31, 2022. The IESO, Ontario Power Generation Inc.
(OPG), Ontario Electricity Financial Corporation (OEFC), and the OEB are related paries to Hydro One because they are controlled or signifcantly
infuenced by the Ministry of Energy. Ontario Charging Network (OCN LP) is a joint-venture limited parnership between OPG and a subsidiary of
Hydro One. The following is a summary of the Company’s related pary transactions during the years ended December 31, 2022 and 2021:
Year ended December 31 (millions of dollars)
Related Pary
Transaction
Province
Dividends paid
IESO
Power purchased
Revenues for transmission services
Amounts related to electricity rebates
Distribution revenues related to rural rate protection
Distribution revenues related to supply of electricity to remote norhern communities
Funding received related to CDM programs
OPG1
Power purchased
Revenues related to provision of services and supply of electricity
Capital contribution received from OPG
Costs related to the purchase of services
OEFC
OEB
Power purchased from power contracts administered by the OEFC
OEB fees
OCN LP2
Investment in OCN LP
2022
312
2,374
2,062
1,031
247
35
3
20
8
5
2
2
10
4
2021
297
2,238
1,832
1,065
245
35
1
13
8
3
2
1
8
4
1 OPG has provided a $2.5 million guarantee to Hydro One related to the OCN Guarantee. See Note 31 - Commitments for details related to the OCN Guarantee.
2 OCN LP owns and operates electric vehicle fast charging stations across Ontario, under the Ivy Charging Network brand.
Sales to and purchases from related paries are based on the requirements of the OEB’s Afliate Relationships Code. Outstanding balances at
period end are interest-free and setled in cash. Invoices are issued monthly, and amounts are due and paid on a monthly basis.
92
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
29. 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 paries
Materials and supplies (Note 9)
Prepaid expenses and other assets (Note 9)
Other long-term assets (Note 13)
Accounts payable
Accrued liabilities (Note 14)
Due to related paries
Accrued interest (Note 14)
Long-term accounts payable and other long-term liabilities (Note 15)
Post-retirement and post-employment beneft liability
2022
(72)
2
(3)
(7)
1
27
64
5
(4)
8
40
61
2021
18
42
1
(2)
(4)
(3)
53
(63)
6
2
50
100
Capital Expenditures
The following tables reconcile investments in propery, plant and equipment and intangible assets and the amounts presented in the consolidated
statements of cash fows for the years ended December 31, 2022 and 2021. The reconciling items include net change in accruals and
capitalized depreciation.
Year ended December 31, 2022 (millions of dollars)
Capital investments
Reconciling items
Cash outfow for capital expenditures
Year ended December 31, 2021 (millions of dollars)
Capital investments
Reconciling items
Cash outfow for capital expenditures
Propery, Plant and
Equipment
Intangible Assets
(2,010)
44
(1,966)
(122)
2
(120)
Propery, Plant and
Equipment
Intangible Assets
(1,983)
55
(1,928)
(142)
(1)
(143)
Total
(2,132)
46
(2,086)
Total
(2,125)
54
(2,071)
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 shorfall 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 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 propery,
plant and equipment in service. In 2022, there were $12 million capital
contributions from these assessments (2021 - $14 million).
Supplementary Information
Year ended December 31 (millions of dollars)
Net interest paid
Income taxes paid
2022
523
33
2021
506
20
93
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
30. 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 maters will not have a material adverse efect on the Company’s
consolidated fnancial position, results of operations or cash fows.
Transfer of Assets
The transfer orders by which the Company acquired cerain of Ontario
Hydro’s businesses as of April 1, 1999 did not transfer title to some
assets located on Reserves (as defned 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. 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 2022, the Company paid
approximately $5 million (2021 - $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 indefnite period of
time. If the Company cannot reach a satisfactory setlement, 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 efect on the Company’s results
of operations if the Company is not able to recover them in future
rate orders.
31. COMMITMENTS
The following table presents a summary of Hydro One’s commitments under outsourcing and other agreements due in the next fve years
and thereafter:
As at December 31, 2022 (millions of dollars)
Outsourcing and other agreements
Long-term software/meter agreement
Year 1
191
12
Year 2
Year 3
Year 4
Year 5
Thereafter
17
11
—
4
—
1
1
1
13
3
Outsourcing and Other Agreements
In February 2021, Hydro One entered into a three-year agreement for
information technology services with Capgemini Canada Inc., which
expires on February 29, 2024, and includes an option to extend for two
additional one-year terms at Hydro One’s discretion. This agreement
resulted in commitments of $143 million over the initial three-year term
of the agreement.
Brookfeld Global Integrated Solutions (BGIS) provides services to
Hydro One, including facilities management and execution of cerain
capital projects as deemed required by the Company. The agreement
with BGIS for these services expires in December 2024, with an option
for the Company to renew the agreement for an additional term of
three years.
Anixter Power Solutions Canada Inc. (Wesco) provides services to
Hydro One to suppor its Broadband Development Project. Under
the agreement with Wesco, as at December 31, 2022, Hydro One has
commited to purchases in the amount of $61 million.
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
suppor services for smar meters and related hardware and software,
including additional software licences, as well as cerain professional
services. The agreement with Trilliant for these services expires in
December 2030.
Other Commitments
The following table presents a summary of Hydro One’s other commercial commitments by year of expiry in the next fve years and thereafter:
As at December 31, 2022 (millions of dollars)
Year 1
Year 2
Year 3
Year 4
Operating Credit Facilities1
Letters of credit2
Guarantees3
—
186
517
—
2
—
—
—
—
—
—
—
Year 5
2,550
—
—
Thereafter
—
—
—
1 On June 1, 2022, the maturity date for the Operating Credit Facilities was extended to 2027.
2 Leters of credit consist of $163 million leters of credit related to retirement compensation arrangements, a $18 million leter of credit provided to the IESO for prudential suppor,
$4 million in leters of credit to satisfy debt service reserve requirements, and $3 million in leters of credit for various operating purposes.
3 Guarantees consist of $475 million prudential suppor provided to the IESO by Hydro One Inc. on behalf of its subsidiaries, as well as guarantees provided by Hydro One to the Minister
of Natural Resources (Canada) and ONroute of $7 million and $30 million, respectively, relating to OCN LP (OCN Guarantee) and $5 million relating to Aux Energy Inc., the Company's
indirect subsidiary. OPG has provided a $2.5 million guarantee to Hydro One related to the OCN Guarantee.
Prudential Suppor
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 leters 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 leters of credit plus the
amount of the parental guarantees.
94
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
Retirement Compensation Arrangements
Bank leters 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 leters 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 repor
as well as leters of credit sufcient to secure Hydro One Inc.’s liability
under the plan, to pay benefts payable under the plan and to pay the
leter of credit fee. The maximum potential payment is the face value of
the leters of credit.
32. SEGMENTED REPORTING
Hydro One has three reporable segments:
● The Transmission Segment, which comprises the transmission
of high voltage electricity across the province, interconnecting
local distribution companies and cerain large directly connected
industrial customers throughout the Ontario electricity grid;
● The Distribution Segment, which comprises the delivery of electricity
to end customers and cerain other municipal electricity distributors;
and
● Other Segment, which includes cerain corporate activities,
investments including a joint venture that owns and operates
electric vehicle fast charging stations across Ontario under the Ivy
Charging Network brand, and the operations of the Company’s
telecommunications business and of a wholly-owned subsidiary that
provides energy solutions to commercial and industrial clients. The
Other Segment includes the DTA which arose from the revaluation
of the tax bases of Hydro One’s assets to fair market value when the
Company transitioned from the provincial payments in lieu of tax
regime to the federal tax regime at the time of Hydro One’s initial
public ofering in 2015. This DTA is not required to be shared with
ratepayers, the Company considers it to not be par of the regulated
transmission and distribution segment assets, and it is included in
the other segment.
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 perormance of each of the segments. The
Company evaluates segment perormance based on income before
fnancing charges and income tax expense from continuing operations
(excluding cerain allocated corporate governance costs).
Year ended December 31, 2022 (millions of dollars)
Transmission
Distribution
Other
Consolidated
Revenues
Purchased power
Operation, maintenance and administration
Depreciation, amorization and asset removal costs
Income (loss) before fnancing charges and income tax expense
Capital investments
2,077
—
445
509
1,123
1,209
5,660
3,724
739
448
749
899
43
—
74
9
(40)
24
7,780
3,724
1,258
966
1,832
2,132
Year ended December 31, 2021 (millions of dollars)
Transmission
Distribution
Other
Consolidated
1,824
—
397
485
942
1,320
5,359
3,579
658
428
694
787
Revenues
Purchased power
Operation, maintenance and administration
Depreciation, amorization and asset removal costs
Income (loss) before fnancing charges and income tax expense
Capital investments
Total Assets by Segment:
As at December 31 (millions of dollars)
Transmission
Distribution
Other
Total assets
Total Goodwill by Segment:
As at December 31 (millions of dollars)
Transmission
Distribution
Total goodwill
All revenues, assets and substantially all costs, as the case may be, are earned, held or incurred in Canada.
42
—
57
9
(24)
18
2022
18,778
11,893
786
31,457
2022
157
216
373
7,225
3,579
1,112
922
1,612
2,125
2021
18,138
11,487
758
30,383
2021
157
216
373
95
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
33. SUBSEQUENT EVENTS
Sustainable Financing Framework
On January 12, 2023, Hydro One Limited published a Sustainable
Financing Framework, which allows Hydro One Limited and its
subsidiaries to issue sustainable fnancing instruments.
Debt Issuance
On January 27, 2023, Hydro One Inc. issued sustainable bonds totaling
$1,050 million under its MTN Program as follows:
a. $300 million Series 53 notes with a maturity date of November 30,
2029 and a coupon rate of 3.93%; and
b. $450 million Series 54 notes with a maturity date of January 27, 2033
and a coupon rate of 4.16%; and
c. $300 million Series 55 notes with a maturity date of January 27, 2053
and a coupon rate of 4.46%.
Dividends
On February 13, 2023, common share dividends of $167 million ($0.2796
per common share) were declared.
96
Notes to Consolidated Financial Statements (continued)For the years ended December 31, 2022 and 2021Hydro One Limited Annual Report 2022
Corporate and Shareholder Information
Corporate Ofce
483 Bay Street, South Tower
Toronto, ON
M5G 2P5
1.416.345.5000
www.HydroOne.com
Customer Inquiries
Customer Service: 1.888.664.9376
Repor 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 cerifcates, share
transfers or estate setlements, 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 fnancial
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 commited to continuing to
grow responsibly and we focus our social
and environmental sustainability efors
where we can make the most meaningful
impacts on both. To learn more, visit
htps://www.hydroone.com/sustainability
or email Sustainability@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 60 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
S&P/TSX Canadian Dividend Aristocrats 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 commited to open and full
fnancial disclosure and best practices in
corporate governance. We invite you to visit
the Investor Relations section of
www.HydroOne.com/Investors where you
will fnd additional information about our
business, including events and presentations,
news releases, regulatory flings, governance
practices, sustainability and our continuous
disclosure materials, including quarerly
fnancial 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
2023 Expected Dividend Dates
Declaration Date
Record Date
Payment Date
February 13, 2023 March 15, 2023
March 31, 2023
May 4, 2023
June 7, 2023
June 30, 2023
August 8, 2023
September 13, 2023 September 29, 2023
November 7, 2023
December 13, 2023 December 29, 2023
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 ofers 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
maintaining and enhancing
constructive 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 (IESO)
Wholesale power market rules, intermediary,
North American reliability standards
Canadian Energy Regulator
Federal regulator, international
power lines and substations
North American Electric Reliability
Corporation (NERC)
Continent-wide bulk power reliability
standards, certification, monitoring
Northeast Power Coordinating Council (NPCC)
Northeastern North American grid reliability,
standards, compliance
For more information, visit
www.HydroOne.com/Regulatory
Hydro One Limited Annual Report 2022 97
www.HydroOne.com