0001114445-19-000016.txt : 20190809 0001114445-19-000016.hdr.sgml : 20190809 20190809073236 ACCESSION NUMBER: 0001114445-19-000016 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20190630 FILED AS OF DATE: 20190809 DATE AS OF CHANGE: 20190809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HYDRO ONE INC CENTRAL INDEX KEY: 0001114445 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-36115 FILM NUMBER: 191011312 BUSINESS ADDRESS: STREET 1: 483 BAY STREET STREET 2: SOUTH TOWER, 8TH FLOOR CITY: TORONTO STATE: A6 ZIP: M5G 2P5 BUSINESS PHONE: 416-345-5000 MAIL ADDRESS: STREET 1: 483 BAY STREET STREET 2: SOUTH TOWER, 8TH FLOOR CITY: TORONTO STATE: A6 ZIP: M5G 2P5 6-K 1 a2019q2hoi6kfsmda.htm 6-K Document


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 6-K
 
 
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934
For the month of: August 2019
Commission File Number: 001-36115
 
 
HYDRO ONE INC.
(Translation of Registrant’s name into English)
 
 
483 Bay Street, South Tower, 8th Floor, Toronto Ontario M5G 2P5 Canada
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F  ☐            Form 40-F  ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐





SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
 
HYDRO ONE INC.
 
 
 
 
 
 
/s/ Christopher Lopez
 
 
Name: Christopher Lopez
 
 
Title:   Chief Financial Officer
 
 
 
 
 
 
Date:
August 9, 2019




EXHIBIT INDEX
 
 
 
 
 
 
  
Unaudited interim consolidated financial statements of the Registrant as at and for the three and six months
ended June 30, 2019 and 2018
 
 
  
Management’s Discussion and Analysis of the Registrant as at and for the three and six months
ended June 30, 2019 and 2018
 
 
  
Certification of President and Chief Executive Officer
 
 
  
Certification of Chief Financial Officer


 EX-99.1 2 a2019q2hoi-fs.htm EXHIBIT 99.1 Exhibit
HYDRO ONE INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited)
For the three and six months ended June 30, 2019 and 2018


 
Three months ended June 30
 
Six months ended June 30
 
(millions of Canadian dollars, except per share amounts)
2019

2018

2019

2018

Revenues
 
 
 
 
Distribution (includes related party revenues of $70 and $139 (2018 - $70 and $137)
for the three and six months ended June 30, respectively) (Note 22)
1,029

1,036

2,350

2,181

Transmission (includes related party revenues of $370 and $784 (2018 - $415 and $821)
for the three and six months ended June 30, respectively) (Note 22)
374

430

803

851

 
1,403

1,466

3,153

3,032

 
 
 
 
 
Costs
 
 
 
 
Purchased power (includes related party costs of $261 and $815 (2018 - $247 and $765)
for the three and six months ended June 30, respectively) (Note 22)
653

674

1,460

1,425

Operation, maintenance and administration (Note 22)
257

243

513

502

Depreciation, amortization and asset removal costs (Note 4)
218

209

429

404

 
1,128

1,126

2,402

2,331

 
 
 
 
 
Income before financing charges and income taxes
275

340

751

701

Financing charges (Note 5)
116

103

226

202

 
 
 
 
 
Income before income taxes
159

237

525

499

Income tax expense (recovery) (Note 6)
(5
)
34

34

78

Net income
164

203

491

421

 
 
 
 
 
Other comprehensive income (loss)
—

—

(1
)
—

Comprehensive income
164

203

490

421

 
 
 
 
 
Net income attributable to:
 
 
 
 
Noncontrolling interest
2

2

3

3

Preferred shareholder
—

2

2

4

Common shareholder
162

199

486

414

 
164

203

491

421

 
 
 
 
 
Comprehensive income attributable to:
 
 
 
 
Noncontrolling interest
2

2

3

3

Preferred shareholder
—

2

2

4

Common shareholder
162

199

485

414

 
164

203

490

421

 
 
 
 
 
Earnings per common share (Note 20)
 
 
 
 
Basic
$1,139
$1,399
$3,417
$2,911
Diluted
$1,139
$1,399
$3,417
$2,911
 
 
 
 
 
Dividends per common share declared (Note 19)
$0
$7
$7
$42

See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).

 
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HYDRO ONE INC.
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS (unaudited)
At June 30, 2019 and December 31, 2018

(millions of Canadian dollars)
June 30,
2019

December 31, 2018

Assets
 
 
Current assets:
 
 
Cash and cash equivalents
—

492

Accounts receivable (Note 7)
598

625

Due from related parties (Note 22)
420

324

Other current assets (Note 8)
141

99

 
1,159

1,540

 
 
 
Property, plant and equipment (Note 9)
20,863

20,605

Other long-term assets:
 
 
Regulatory assets (Note 10)
1,869

1,721

Deferred income tax assets
801

964

Intangible assets (net of accumulated amortization - $475; 2018 - $445)
435

409

Goodwill
325

325

Other assets (Note 11)
30

5

 
3,460

3,424

Total assets
25,482

25,569

 
 
 
Liabilities
 
 
Current liabilities:
 
 
Bank indebtedness
1

—

Short-term notes payable (Note 14)
598

1,252

Long-term debt payable within one year (Notes 14, 15)
1,153

731

Accounts payable and other current liabilities (Note 12)
948

936

Due to related parties (Note 22)
15

129

 
2,715

3,048

Long-term liabilities:
 
 
Long-term debt (includes $851 measured at fair value; 2018 - $845) (Notes 14, 15)
10,825

9,978

Regulatory liabilities (Note 10)
204

326

Deferred income tax liabilities
57

55

Other long-term liabilities (Note 13)
2,173

2,164

 
13,259

12,523

Total liabilities
15,974

15,571

 
 
 
Contingencies and Commitments (Notes 24, 25)


Subsequent Events (Note 27)


 
 
 
Preferred shares (Note 18)
—

486

Noncontrolling interest subject to redemption
20

21

 
 
 
Equity
 
 
Common shares (Note 18)
3,827

4,312

Retained earnings
5,622

5,137

Accumulated other comprehensive loss
(8
)
(7
)
Hydro One shareholder’s equity
9,441

9,442

 
 
 
Noncontrolling interest
47

49

Total equity
9,488

9,491

 
25,482

25,569

See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).





 
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HYDRO ONE INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
For the six months ended June 30, 2019 and 2018

Six months ended June 30, 2019
(millions of Canadian dollars)


Common
Shares



Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)


Hydro One
Shareholder’s
Equity


Non-
controlling
Interest



Total
Equity

January 1, 2019
4,312

5,137

(7
)
9,442

49

9,491

Net income
—

488

—

488

2

490

Other comprehensive income (loss)
—

—

(1
)
(1
)
—

(1
)
Distributions to noncontrolling interest
—

—

—

—

(4
)
(4
)
Dividends on preferred shares
—

(2
)
—

(2
)
—

(2
)
Dividends on common shares
—

(1
)
—

(1
)
—

(1
)
Return of stated capital
(485
)
—

—

(485
)
—

(485
)
June 30, 2019
3,827

5,622

(8
)
9,441

47

9,488


Six months ended June 30, 2018
(millions of Canadian dollars)


Common
Shares



Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)


Hydro One
Shareholder’s
Equity


Non-
controlling
Interest



Total
Equity

January 1, 2018
4,856

5,183

(9
)
10,030

50

10,080

Net income
—

418

—

418

2

420

Distributions to noncontrolling interest
—

—

—

—

(3
)
(3
)
Dividends on preferred shares
—

(4
)
—

(4
)
—

(4
)
Dividends on common shares
—

(6
)
—

(6
)
—

(6
)
Return of stated capital
(265
)
—

—

(265
)
—

(265
)
June 30, 2018
4,591

5,591

(9
)
10,173

49

10,222

See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).


 
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HYDRO ONE INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the three and six months ended June 30, 2019 and 2018


 
Three months ended June 30
 
Six months ended June 30
 
(millions of Canadian dollars)
2019

2018

2019

2018

Operating activities
 
 
 
 
Net income
164

203

491

421

Environmental expenditures
(8
)
(6
)
(16
)
(10
)
Adjustments for non-cash items:
 
 
 
 
Depreciation and amortization (Note 4)
191

181

380

358

Regulatory assets and liabilities
(3
)
(11
)
(173
)
(3
)
Deferred income taxes
(10
)
26

19

63

Other
1

4

5

6

Changes in non-cash balances related to operations (Note 23)
(50
)
(92
)
(164
)
(142
)
Net cash from operating activities
285

305

542

693

 
 
 
 
 
Financing activities
 
 
 
 
Long-term debt issued
1,500

1,400

1,500

1,400

Long-term debt repaid
(1
)
(1
)
(229
)
(1
)
Short-term notes issued
482

1,370

2,422

2,542

Short-term notes repaid
(1,564
)
(1,311
)
(3,076
)
(2,420
)
Return of stated capital
(347
)
(136
)
(485
)
(265
)
Preferred shares redeemed
—

—

(486
)
—

Dividends paid
—

(3
)
(3
)
(10
)
Distributions paid to noncontrolling interest
(2
)
(2
)
(6
)
(5
)
Change in bank indebtedness
1

—

1

(3
)
Costs to obtain financing
(8
)
(6
)
(8
)
(6
)
Net cash from (used in) financing activities
61

1,311

(370
)
1,232

 
 
 
 
 
Investing activities
 
 
 
 
Capital expenditures (Note 23)
 
 
 
 
Property, plant and equipment
(339
)
(370
)
(617
)
(655
)
Intangible assets
(24
)
(22
)
(48
)
(36
)
Capital contributions received
3

—

3

—

Other
—

4

(2
)
7

Net cash used in investing activities
(360
)
(388
)
(664
)
(684
)
 
 
 
 
 
Net change in cash and cash equivalents
(14
)
1,228

(492
)
1,241

Cash and cash equivalents, beginning of period
14

13

492

—

Cash and cash equivalents, end of period
—

1,241

—

1,241


See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).

 
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
For the three and six months ended June 30, 2019 and 2018


1.    DESCRIPTION OF THE BUSINESS
Hydro One Inc. (Hydro One or the Company) was incorporated on December 1, 1998, under the Business Corporations Act (Ontario) and is wholly-owned by Hydro One Limited. The principal businesses of Hydro One are the transmission and distribution of electricity to customers within Ontario.
Earnings for interim periods may not be indicative of results for the year due to the impact of seasonal weather conditions on customer demand and market pricing.
Rate Setting
The Company's transmission business consists of the transmission system operated by its subsidiaries, Hydro One Networks Inc. (Hydro One Networks) and Hydro One Sault Ste. Marie LP (HOSSM), as well as an approximately 66% interest in B2M Limited Partnership (B2M LP), a limited partnership between Hydro One and the Saugeen Ojibway Nation (SON) in respect of the Bruce-to-Milton transmission line. Hydro One’s distribution business consists of the distribution system operated by its subsidiaries, Hydro One Networks and Hydro One Remote Communities Inc. (Hydro One Remote Communities).
Transmission
On March 7, 2019, the Ontario Energy Board (OEB) issued a decision on its reconsideration of its decision and order on Hydro One Networks' 2017 and 2018 transmission rates revenue requirement dated September 28, 2017 (Original Decision) with respect to the rate-setting treatment of the benefits of the deferred tax asset resulting from the transition from the payments in lieu of tax regime under the Electricity Act 1998 (Ontario) to tax payments under the federal and provincial tax regimes which occurred when Hydro One Limited became a public company listed on the Toronto Stock Exchange. See Note 10 - Regulatory Assets and Liabilities for additional information. On October 26, 2018, Hydro One filed a one-year inflation-based application with the OEB for 2019 transmission revenue requirement. On April 25, 2019, the OEB issued its decision on Hydro One Networks’ 2019 transmission rate application, and set the revenue index at 1.4% on a final basis effective May 1, 2019.
On November 23, 2018, B2M LP filed a revised 2019 revenue requirement with the OEB using the updated cost of capital parameters. On December 20, 2018, the OEB issued its decision approving the requested 2019 revenue requirement of $33 million, effective January 1, 2019.
HOSSM is under a 10-year deferred rebasing period for years 2017-2026, as approved in the OEB Mergers Acquisitions Amalgamations and Divestitures (MAAD) decision dated October 13, 2016. In July 2018, HOSSM filed a 2019 application for permission to include a revenue cap escalator index, which would allow for inflationary increases to its previously approved revenue requirement. On June 20, 2019, the OEB approved the revenue cap escalator index at 1.1% (net) which was applied to HOSSM's base revenue requirement for 2019, effective February 1, 2019, and also approved the 2019-2026 revenue cap framework.
Distribution
In March 2017, Hydro One Networks filed 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 filed its draft rate order reflecting 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 confirming these updated revenue requirements. See Note 10 - Regulatory Assets and Liabilities for additional information.
On November 5, 2018, Hydro One Remote Communities filed an application with the OEB seeking approval for increased base rates of 1.8% effective May 1, 2019. On February 11, 2019, the OEB issued a draft decision approving the requested increase, which was later finalized on March 28, 2019.
2.    SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
These unaudited condensed interim Consolidated Financial 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 Generally Accepted Accounting Principles (US GAAP) for interim financial statements and in Canadian dollars.
The accounting policies applied are consistent with those outlined in Hydro One's annual audited amended consolidated financial statements for the year ended December 31, 2018, with the exception of the adoption of new accounting standards as described below and in Note 3. These Consolidated Financial Statements reflect adjustments, that are, in the opinion of management, necessary to reflect fairly the financial position and results of operations for the respective periods. These Consolidated Financial Statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the annual audited 2018 amended consolidated financial statements.

 
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




Leases
Effective January 1, 2019, the Company adopted Accounting Standards Codification (ASC) 842 - Leases using the modified retrospective transition approach using the effective date of January 1, 2019, as its date of initial application. In the Company's transition to ASC 842, the Company elected the package of practical expedients and the land easement practical expedient. As a result, there was a $24 million impact to the Consolidated Balance Sheet and no adjustments were made to prior period reported financial statement amounts. There was no material impact to the Consolidated Statement of Operations and Comprehensive Income. On adoption, the Company did not identify any finance 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 certain 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 reporting 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 amortization of the ROU assets are calculated as the difference between the lease expense and the accretion of interest, which is calculated on the effective interest method. Lease modifications and impairments are assessed at each reporting period to assess the need for a re-measurement of the lease obligations or ROU assets.
3.    NEW ACCOUNTING PRONOUNCEMENTS
The following tables present ASCs and Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board that are applicable to Hydro One:
Recently Adopted Accounting Guidance
Guidance
Date issued
Description
Effective date
Impact on Hydro One
ASC 842
February 2016 - January 2019
Lessees are required to recognize the rights and obligations resulting from operating leases as assets (right to use the underlying asset for the term of the lease) and liabilities (obligation to make future lease payments) on the balance sheet.
January 1, 2019
Hydro One adopted ASC 842 on January 1, 2019 using the modified retrospective transition approach using the effective date of January 1, 2019 as its date of initial application. See Note 2 to the financial statements for impact of adoption. The Company has included the disclosure requirements of ASC 842 for interim periods in Note 17 to the financial statements.
ASU 2017-12
August 2017
Amendments will better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results.
January 1, 2019
No impact upon adoption
ASU
2018-07
June 2018
Expansion in the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. Previously, ASC 718 was only applicable to share-based payment transactions for acquiring goods and services from employees.
January 1, 2019
No impact upon adoption
ASU 2018-15
August 2018
The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement is not affected by the amendment.
January 1, 2020
Hydro One early-adopted this ASU on April 1, 2019. The ASU was applied prospectively and there was no material impact upon adoption.

 
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




Recently Issued Accounting Guidance Not Yet Adopted
Guidance
Date issued
Description
Effective date
Anticipated impact on Hydro One
ASU
2019-01
March 2019
This amendment carries forward the exemption previously provided under ASC 840 relating to the determination of the fair value of underlying assets by lessors that are not manufacturers or dealers. It also provides for clarification on cash-flow presentation of sales-type and financing leases and clarifies that transition disclosures under Topic 250 will not be applicable in the adoption of ASC 842.
January 1, 2020
Under assessment
ASU 2019-04
April 2019
This amendment clarifies, corrects and improves several aspects of the guidance under Topic 326 Financial Instruments - Credit Losses, Topic 815 Derivatives and Hedging and Topic 825 Financial Instruments.
January 1, 2020
Under assessment
ASU 2019-05
May 2019
The amendments in this update provide entities with an option to irrevocably elect the fair value option to be applied on an instrument-by-instrument basis for certain financial assets upon the adoption of Topic 326.
January 1, 2020
Under assessment
4.     DEPRECIATION, AMORTIZATION AND ASSET REMOVAL COSTS
 
 
Three months ended June 30
 
Six months ended June 30
 
(millions of dollars)
2019

2018

2019

2018

Depreciation of property, plant and equipment
162

159

324

315

Amortization of intangible assets
21

16

40

33

Amortization of regulatory assets
8

6

16

10

Depreciation and amortization
191

181

380

358

Asset removal costs
27

28

49

46

 
218

209

429

404

5.    FINANCING CHARGES
 
Three months ended June 30
 
Six months ended June 30
 
(millions of dollars)
2019

2018

2019

2018

Interest on long-term debt
123

108

234

214

Interest on short-term notes
5

4

12

7

Other
5

4

9

7

Less: Interest capitalized on construction and development in progress
(13
)
(13
)
(24
)
(26
)
  Interest earned on cash and cash equivalents
(4
)
—

(5
)
—

 
116

103

226

202


 
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




6.     INCOME TAXES
As a rate-regulated utility company, the Company’s effective tax rate excludes temporary differences that are recoverable in future rates charged to customers. Income tax expense differs from the amount that would have been recorded using the combined Canadian federal and Ontario statutory income tax rate. The reconciliation between the statutory and the effective tax rates is provided as follows:
Six months ended June 30 (millions of dollars)
 
2019

2018

 
 
 
 
Income before income taxes
 
525

499

Income taxes at statutory rate of 26.5% (2018 - 26.5%)
 
139

132

 
 
 
 
Increase (decrease) resulting from:
 
 
 
Net temporary differences recoverable in future rates charged to customers:
 
 
 
Capital cost allowance in excess of depreciation and amortization1
 
(45
)
(25
)
Overheads capitalized for accounting but deducted for tax purposes
 
(9
)
(9
)
    Pension and post-retirement benefit contributions in excess of expense
 
(8
)
(4
)
Interest capitalized for accounting but deducted for tax purposes
 
(6
)
(7
)
Environmental expenditures
 
(4
)
(4
)
Other
 
(3
)
(7
)
Net temporary differences
 
(75
)
(56
)
Incremental tax deductions from deferred tax asset sharing2
 
(32
)
—

Net permanent differences
 
2

2

Total income tax expense
 
34

78

Effective income tax rate
6.5
%
15.6
%
1 Included in current period’s amount is the accelerated tax depreciation (Accelerated CCA) of up to three times the first-year rate for certain eligible capital investments acquired after November 20, 2018 and placed in-service before January 1, 2028, as introduced in the 2019 federal and Ontario budgets and enacted in the second quarter of 2019.
2 Incremental tax deductions from deferred tax sharing represents the OEB’s prescribed allocation to ratepayers of the net deferred tax asset that originated from the transition from the payments in lieu of tax regime under the Electricity Act 1998 (Ontario) to tax payments under the federal and provincial tax regime.
7.    ACCOUNTS RECEIVABLE
(millions of dollars)
 
June 30,
2019

December 31, 2018

Accounts receivable - billed
 
311

289

Accounts receivable - unbilled
 
309

357

Accounts receivable, gross
 
620

646

Allowance for doubtful accounts
 
(22
)
(21
)
Accounts receivable, net
 
598

625

The following table shows the movements in the allowance for doubtful accounts for the six months ended June 30, 2019 and the year ended December 31, 2018:
(millions of dollars)
Six months ended
June 30,
2019
 
Year ended December 31, 2018

Allowance for doubtful accounts - beginning
 
(21
)
(29
)
Write-offs
 
8

25

Additions to allowance for doubtful accounts
 
(9
)
(17
)
Allowance for doubtful accounts - ending
 
(22
)
(21
)
8.     OTHER CURRENT ASSETS
(millions of dollars)
June 30,
2019

December 31, 2018

Regulatory assets (Note 10)
61

42

Prepaid expenses and other assets
60

37

Materials and supplies
20

20

 
141

99


 
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




9.    PROPERTY, PLANT AND EQUIPMENT
(millions of dollars)
June 30,
2019

December 31, 2018

Property, plant and equipment
30,661

30,300

Less: accumulated depreciation
(11,097
)
(10,782
)
 
19,564

19,518

Construction in progress
1,141

932

Future use land, components and spares
158

155

 
20,863

20,605

10.    REGULATORY ASSETS AND LIABILITIES
Regulatory assets and liabilities arise as a result of the rate-setting process. Hydro One has recorded the following regulatory assets and liabilities:
(millions of dollars)
June 30,
2019

December 31, 2018

Regulatory assets:
 
 
    Deferred income tax regulatory asset
971

908

    Pension benefit regulatory asset
528

547

    Environmental
151

165

    Foregone revenue deferral
99

—

    Post-retirement and post-employment benefits - non-service cost
56

39

    Stock-based compensation
39

43

    Pension cost differential
26

—

    Debt premium
19

22

    Distribution system code exemption
10

10

    Conservation and Demand Management (CDM) deferral variance
6

—

    Other
25

29

Total regulatory assets
1,930

1,763

Less: current portion
(61
)
(42
)
 
1,869

1,721

 
 
 
Regulatory liabilities:
 
 
    Post-retirement and post-employment benefits
130

130

    Green Energy expenditure variance
48

52

    Retail settlement variance account
36

39

    Tax rule changes variance
24

5

    Pension cost differential
17

55

    External revenue variance
11

26

    2015-2017 rate rider
6

6

    Deferred income tax regulatory liability
5

86

    Other
13

18

Total regulatory liabilities
290

417

Less: current portion
(86
)
(91
)
 
204

326

Deferred Income Tax Regulatory Asset and Liability
Deferred income taxes are recognized on temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable income. The Company has recognized regulatory assets and liabilities that correspond to deferred income taxes that flow through the rate-setting process. In the absence of rate-regulated accounting, the Company’s income tax expense would have been recognized using the liability method and there would be no regulatory accounts established for taxes to be recovered through future rates.
On September 28, 2017, the OEB issued its decision and order on Hydro One Networks' 2017 and 2018 transmission rates revenue requirements (Original Decision). In its Original Decision, the OEB concluded that the net deferred tax asset resulting from transition from the payments in lieu of tax regime under the Electricity Act 1998 (Ontario) to tax payments under the federal and provincial tax regime should not accrue entirely to Hydro One Limited shareholders and that a portion should be shared with ratepayers. On November 9, 2017, the OEB issued a decision and order that calculated the portion of the tax savings that should be shared with ratepayers. The OEB's calculation would result in an impairment of a portion of both Hydro One Networks' transmission and distribution deferred income tax regulatory asset. In October 2017, the Company filed a Motion to Review and Vary (Motion) the

 
9
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




Original Decision and filed an appeal with the Ontario Divisional Court (Appeal). In both cases, the Company's position was that the OEB made errors of fact and law in its determination of allocation of the tax savings between the shareholders and ratepayers. On December 19, 2017, the OEB granted a hearing of the merits of the Motion which was held on February 12, 2018. On August 31, 2018, the OEB granted the Motion and returned the portion of the Decision relating to the deferred tax asset to an OEB panel for reconsideration.
On March 7, 2019, the OEB issued its reconsideration decision and concluded that their Original Decision was reasonable and should be upheld. Also, on March 7, 2019, the OEB issued its decision for Hydro One Networks’ 2018-2022 distribution rates, in which it directed the Company to apply the Original Decision to Hydro One Networks’ distribution rates. As a result, as at December 31, 2018, the Company recognized an impairment charge of Hydro One Networks' distribution deferred income tax regulatory asset of $474 million and Hydro One Networks' transmission deferred income tax regulatory asset of $558 million, an increase in deferred income tax regulatory liability of $81 million, and a decrease in the foregone revenue deferral regulatory asset of $68 million. The regulatory balances relating to deferred tax asset sharing will continue to decrease as the tax savings are shared with ratepayers. Notwithstanding the recognition of the effects of the decision in the financial statements, on April 5, 2019, the Company filed an appeal with the Ontario Divisional Court with respect to the OEB's deferred tax benefit decision. The appeal is scheduled to be heard on November 21, 2019.
Foregone Revenue Deferral
The foregone revenue deferral account records the difference between revenue earned based on distribution rates approved by the OEB in Hydro One Networks' 2018-2022 distribution rates application, effective May 1, 2018, and revenue earned under the interim rates until the approved 2018 and 2019 rates were implemented on July 1, 2019. The balance of this account is being recovered from ratepayers over an 18-month period ending December 31, 2020. The foregone revenue deferral account also records the difference between revenue earned based on transmission rates approved by the OEB in Hydro One Networks' 2019 transmission rate application, effective May 1, 2019, and the revenue earned under the interim rates until the approved 2019 rates were implemented on July 1, 2019. The balance of this account is being recovered from ratepayers over a 6-month period ending December 31, 2019.
Post-Retirement and Post-Employment Benefits - Non-Service Cost
Hydro One applied to the OEB for a regulatory asset account to record the components other than service costs relating to its post-retirement and post-employment benefits that would have previously been capitalized to property, plant and equipment and intangible assets prior to adoption of ASU 2017-07. In May 2018 and March 2019, the OEB approved the regulatory asset account for Hydro One Networks' Transmission Business and Distribution Business, respectively. Hydro One has recorded the components other than service costs relating to its post-retirement and post-employment benefits that would have been capitalized to property, plant and equipment and intangible assets, in the Post-Retirement and Post-Employment Benefits - Non-Service Cost regulatory asset.
Pension Cost Differential
Variances between the pension cost recognized and the cost embedded in rates as part of the rate-setting process for Hydro One Networks' transmission and distribution businesses are recognized as a regulatory asset or regulatory liability, as the case may be. As part of its March 2019 decision on Hydro One Networks' 2018-2022 distribution rates, the OEB denied Hydro One's request to recover pension costs. On March 26, 2019, Hydro One filed a Motion to Review and Vary to the OEB and on April 5, 2019, an appeal to the Ontario Divisional Court was filed in respect to the recovery of pension contributions. The Company's position in the aforementioned motion and appeal is that the OEB made errors in its decision to disallow the recovery of Hydro One's pension contributions. Therefore, the Company has reflected the impact of this position in Hydro One Networks' distribution Pension Cost Differential regulatory account. The appeal is being held in abeyance pending the outcome of the motion.
Tax Rule Changes Variance
Subsequent to the 2019 federal and Ontario budgets (budgets) being enacted in the second quarter of 2019, Hydro One recorded the revenue requirement impact of accelerated depreciation rules in the tax rule changes variance account which gave rise to regulatory liabilities to be refunded to ratepayers in the future. The budgets provided certain time-limited investment incentives permitting Hydro One to deduct accelerated capital cost allowance of up to three times the first-year rate for capital investments acquired after November 20, 2018 and placed in-service before January 1, 2028.
11.    OTHER LONG-TERM ASSETS
(millions of dollars)
 
June 30,
2019

December 31, 2018

ROU assets (Note 17)
 
21

—

Other
 
9

5

 
 
30

5


 
10
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




12.    ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
(millions of dollars)
June 30,
2019

December 31, 2018

Accounts payable
128

171

Accrued liabilities
623

578

Accrued interest
104

96

Regulatory liabilities (Note 10)
86

91

Lease obligations (Note 17)
7

—

 
948

936

13.    OTHER LONG-TERM LIABILITIES
(millions of dollars)
June 30,
2019

December 31, 2018

Post-retirement and post-employment benefit liability (Note 16)
1,440

1,406

Pension benefit liability (Note 16)
528

547

Environmental liabilities
126

139

Lease obligations (Note 17)
15

—

Due to related parties (Note 22)
35

41

Long-term accounts payable
11

11

Asset retirement obligations
10

10

Other liabilities
8

10

 
2,173

2,164

14.    DEBT AND CREDIT AGREEMENTS
Short-Term Notes and Credit Facilities
Hydro One meets its short-term liquidity requirements in part through the issuance of commercial paper under its Commercial Paper Program which has a maximum authorized amount of $2.3 billion. These short-term notes are denominated in Canadian dollars with varying maturities up to 365 days. The Commercial Paper Program is supported by the Company’s committed revolving credit facilities totalling $2.3 billion (Operating Credit Facilities). On June 3, 2019, the maturity date for the Operating Credit Facilities was extended from 2022 to 2024. At June 30, 2019, no amounts have been drawn on the Operating Credit Facilities.
The Company may use the credit facilities for working capital and general corporate purposes. If used, interest on the credit facilities would apply based on Canadian benchmark rates. The obligation of each lender to make any credit extension under its credit facility is subject to various conditions including that no event of default has occurred or would result from such credit extension.
Long-Term Debt
The following table presents long-term debt outstanding at June 30, 2019 and December 31, 2018:
(millions of dollars)
June 30,
2019

December 31, 2018

Hydro One long-term debt (a)
11,845

10,573

HOSSM long-term debt (b)
164

168

 
12,009

10,741

Add: Net unamortized debt premiums
12

13

Add: Unrealized mark-to-market loss (gain)1
1

(5
)
Less: Unamortized deferred debt issuance costs
(44
)
(40
)
Total long-term debt
11,978

10,709

 
 
 
Less: Long-term debt payable within one year
(1,153
)
(731
)
 
10,825

9,978

1 The unrealized mark-to-market net loss of $1 million (December 31, 2018 - $5 million net gain) relates to $50 million of the Series 33 notes due 2020, $500 million Series 37 notes due 2019, and $300 million Series 39 notes due 2021. The unrealized mark-to-market net loss is offset by a $1 million unrealized mark-to-market net gain (December 31, 2018 - $5 million net loss) on the related fixed-to-floating interest-rate swap agreements, which are accounted for as fair value hedges.

 
11
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




(a) Hydro One long-term debt
At June 30, 2019, long-term debt of $11,845 million (December 31, 2018 - $10,573 million) was outstanding, the majority of which was issued under Hydro One’s Medium Term Note (MTN) Program. The maximum authorized principal amount of notes issuable under the current MTN Program prospectus filed in March 2018 is $4.0 billion. At June 30, 2019, $1.1 billion remained available for issuance until April 2020.
During the three and six months ended June 30, 2019, Hydro One issued long-term debt totalling $1.5 billion (2018 - $1.4 billion) under its MTN Program as follows:
•$700 million Series 42 notes with a maturity date of April 5, 2024 and a coupon rate of 2.54%;
•$550 million Series 43 notes with a maturity date of April 5, 2029 and a coupon rate of 3.02%; and
•$250 million Series 44 notes with a maturity date of April 5, 2050 and a coupon rate of 3.64%.
During the six months ended June 30, 2019, $228 million of long-term debt was repaid (2018 - $nil) under the MTN Program. No long-term debt was repaid during the three months ended June 30, 2019 (2018 - $nil).
(b) HOSSM long-term debt
At June 30, 2019, HOSSM long-term debt of $164 million (December 31, 2018 - $168 million), with a principal amount of $142 million (December 31, 2018 - $143 million) was outstanding. During the three and six months ended June 30, 2019 and 2018, no long-term debt was issued, and $1 million (2018 - $1 million) of long-term debt was repaid.
Principal and Interest Payments
At June 30, 2019, 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)

(%)
Year 1
1,153

486

2.3
Year 2
803

463

2.1
Year 3
603

446

3.2
Year 4
133

427

6.1
Year 5
700

419

2.5
 
3,392

2,241

2.6
Years 6-10
1,400

1,922

2.9
Thereafter
7,195

4,331

5.0
 
11,987

8,494

4.1
15.    FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Non-Derivative Financial Assets and Liabilities
At June 30, 2019 and December 31, 2018, the Company’s carrying amounts of cash and cash equivalents, accounts receivable, due from related parties, bank indebtedness, short-term notes payable, accounts payable, and due to related parties are representative of fair value due to the short-term nature of these instruments.
Fair Value Measurements of Long-Term Debt
The fair values and carrying values of the Company’s long-term debt at June 30, 2019 and December 31, 2018 are as follows:
 
June 30, 2019
December 31, 2018
(millions of dollars)
Carrying Value

Fair Value

Carrying Value

Fair Value

Long-term debt measured at fair value:
 
 
 
 
    $50 million of MTN Series 33 notes
50

50

49

49

    $500 million MTN Series 37 notes
498

498

495

495

    $300 million MTN Series 39 notes
303

303

301

301

Other notes and debentures
11,127

13,111

9,864

10,820

Long-term debt, including current portion
11,978

13,962

10,709

11,665


 
12
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




Fair Value Measurements of Derivative Instruments
At June 30, 2019, Hydro One had interest-rate swaps with a total notional amount of $850 million (December 31, 2018 - $850 million) that were used to convert fixed-rate debt to floating-rate debt. These swaps are classified as fair value hedges. Hydro One’s fair value hedge exposure was approximately 7% (December 31, 2018 - 8%) of its total long-term debt. At June 30, 2019, Hydro One had the following interest-rate swaps designated as fair value hedges:
•
a $50 million fixed-to-floating interest-rate swap agreement to convert $50 million of the $350 million MTN Series 33 notes maturing April 30, 2020 into three-month variable rate debt;
•
two $125 million and one $250 million fixed-to-floating interest-rate swap agreements to convert the $500 million MTN Series 37 notes maturing November 18, 2019 into three-month variable rate debt; and
•
a $300 million fixed-to-floating interest-rate swap agreement to convert the $300 million MTN Series 39 notes maturing June 25, 2021 into three-month variable rate debt.
At June 30, 2019 and December 31, 2018, the Company had no interest-rate swaps classified as undesignated contracts.
Fair Value Hierarchy
The fair value hierarchy of financial assets and liabilities at June 30, 2019 and December 31, 2018 is as follows:
June 30, 2019 (millions of dollars)
Carrying
Value

Fair
 Value


Level 1


Level 2


Level 3

Assets:
 
 
 
 
 
    Derivative instruments - fair value hedges (interest-rate swaps)
3

3

—

3

—

 
3

3

—

3

—

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Long-term debt, including current portion
11,978

13,962

—

13,962

—

    Derivative instruments - fair value hedges (interest-rate swaps)
2

2

—

2

—

 
11,980

13,964

—

13,964

—


December 31, 2018 (millions of dollars)
Carrying
Value

Fair
 Value


Level 1


Level 2


Level 3

Liabilities:
 
 
 
 
 
Long-term debt, including current portion
10,709

11,665

—

11,665

—

    Derivative instruments - fair value hedges (interest-rate swaps)
5

5

—

5

—

 
10,714

11,670

—

11,670

—

The fair value of the hedged portion of the long-term debt is primarily based on the present value of future cash flows using a swap yield curve to determine the assumption for interest rates. The fair value of the unhedged portion of the long-term debt is based on unadjusted period-end market prices for the same or similar debt of the same remaining maturities.
There were no transfers between any of the fair value levels during the six months ended June 30, 2019 and the year ended December 31, 2018.
Risk Management
Exposure to market risk, credit risk and liquidity risk arises in the normal course of the Company’s business.
Market Risk
Market risk refers primarily to the risk of loss which results from changes in costs, foreign exchange rates and interest rates. The Company is exposed to fluctuations in interest rates, as its regulated return on equity is derived using a formulaic approach that takes anticipated interest rates into account. The Company is not currently exposed to material commodity price risk.
The Company uses a combination of fixed and variable-rate debt to manage the mix of its debt portfolio. The Company also uses derivative financial instruments to manage interest-rate risk. The Company utilizes interest-rate swaps, which are typically designated as fair value hedges, as a means to manage its interest rate exposure to achieve a lower cost of debt. The Company may also utilize interest-rate derivative instruments to lock in interest-rate levels in anticipation of future financing.
A hypothetical 100 basis points increase in interest rates associated with variable-rate debt would not have resulted in a material decrease in Hydro One’s net income for the three and six months ended June 30, 2019 and 2018.
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the Consolidated Statements of Operations and Comprehensive Income. The net unrealized loss (gain) on the hedged debt and the related interest-rate swaps for the three and six months ended June 30, 2019 and 2018 was not material.

 
13
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




Credit Risk
Financial assets create a risk that a counterparty will fail to discharge an obligation, causing a financial loss. At June 30, 2019 and December 31, 2018, there were no significant concentrations of credit risk with respect to any class of financial assets. The Company’s revenue is earned from a broad base of customers. As a result, Hydro One did not earn a material amount of revenue from any single customer. At June 30, 2019 and December 31, 2018, there was no material accounts receivable balance due from any single customer.
At June 30, 2019, the Company’s provision for bad debts was $22 million (December 31, 2018 - $21 million). Adjustments and write-offs are determined on the basis of a review of overdue accounts, taking into consideration historical experience. At June 30, 2019, approximately 7% (December 31, 2018 - 5%) of the Company’s net accounts receivable were outstanding for more than 60 days.
Hydro One manages its counterparty credit risk through various techniques including: entering into transactions with highly rated counterparties; limiting total exposure levels with individual counterparties; entering into master agreements which enable net settlement and the contractual right of offset; and monitoring the financial condition of counterparties. The Company monitors current credit exposure to counterparties 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 financial instruments result in exposure to credit risk since there is a risk of counterparty default. The credit exposure of derivative contracts, before collateral, is represented by the fair value of contracts at the reporting date. At June 30, 2019 and December 31, 2018, the counterparty credit risk exposure on the fair value of these interest-rate swap contracts was not material. At June 30, 2019, Hydro One’s credit exposure for all derivative instruments, and applicable payables and receivables, had a credit rating of investment grade, with four financial institutions as the counterparties.
Liquidity Risk
Liquidity risk refers to the Company’s ability to meet its financial obligations as they come due. Hydro One meets its short-term operating liquidity requirements using cash and cash equivalents on hand, funds from operations, the issuance of commercial paper, and the Operating Credit Facilities. The short-term liquidity under the Commercial Paper Program, Operating Credit Facilities, and anticipated levels of funds from operations are expected to be sufficient to fund normal operating requirements.
16.    PENSION AND POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
Estimated annual Pension Plan contributions for the years 2019, 2020, 2021, 2022, 2023 and 2024 are approximately $78 million, $77 million, $78 million, $79 million, $81 million and $83 million, respectively. The most recent actuarial valuation was performed effective December 31, 2017, and the next actuarial valuation will be performed no later than effective December 31, 2020. Employer contributions during the six months ended June 30, 2019 were $39 million (2018 - $25 million).
The following tables provide the components of the net periodic benefit costs for the three and six months ended June 30, 2019 and 2018:
 

Pension Benefits
 
Post-Retirement and
Post-Employment Benefits
 
Three months ended June 30  (millions of dollars)
2019

2018

2019

2018

Current service cost
36

44

14

12

Interest cost
75

70

15

14

Expected return on plan assets, net of expenses1
(115
)
(116
)
—

—

Amortization of actuarial losses
14

21

—

—

Net periodic benefit costs
10

19

29

26

 
 
 
 
 
Charged to results of operations2
6

2

11

9

 

Pension Benefits
 
Post-Retirement and
Post-Employment Benefits
 
Six months ended June 30  (millions of dollars)
2019

2018

2019

2018

Current service cost
73

88

28

24

Interest cost
151

141

30

28

Expected return on plan assets, net of expenses1
(231
)
(233
)
—

—

Amortization of actuarial losses
28

42

1

1

Net periodic benefit costs
21

38

59

53

 
 
 
 
 
Charged to results of operations2
13

10

22

20

1 
The expected long-term rate of return on pension plan assets for the year ending December 31, 2019 is 6.5% (2018 - 6.5%).
2 
The Company accounts for pension costs consistent with their inclusion in OEB-approved rates. During the three and six months ended June 30, 2019, pension costs of $14 million (2018 - $4 million) and $32 million (2018 - $24 million), respectively, were attributed to labour, of which $6 million (2018 - $2 million) and $13 million (2018

 
14
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




- $10 million), respectively, was charged to operations, $4 million (2018 - $nil) and $9 million (2018 - $nil), respectively, was recorded as regulatory assets, and $4 million (2018 - $2 million) and $10 million (2018 - $14 million), respectively, was capitalized as part of the cost of property, plant and equipment and intangible assets.
17.    LEASES
Hydro One has operating lease contracts for buildings used in administrative and service-related functions. These leases have typical terms of between three and five years with renewal options of additional three to five year terms at prevailing market rates at the time of extension. Renewal options are included in the lease term when their exercise is reasonably certain.
Other information related to the Company's operating leases was as follows:
 
Three months ended June 30
 
Six months ended June 30
 
(millions of dollars)
 
2019

 
2019

Lease expense
 
2

 
4

Lease payments made
 
1

 
3

 
 
 
 
 
June 30, 2019
 
 
 
 
Weighted-average remaining lease term
 
 
 
5

Weighted-average discount rate
 
 
 
2.9
%
At June 30, 2019, future minimum operating lease payments were as follows:
(millions of dollars)
 
 
 
 
Remainder of 2019
 
 
 
3

2020
 
 
 
11

2021
 
 
 
4

2022
 
 
 
1

2023
 
 
 
1

2024
 
 
 
1

Thereafter
 
 
 
3

Total undiscounted minimum lease payments
 
 

24

Less: discounting minimum lease payments to present value
 
 
 
(2
)
Total discounted minimum lease payments
 
 

22

At December 31, 2018, future minimum operating lease payments were as follows:
(millions of dollars)
 
 
 
 
2019
 
 
 
6

2020
 
 
 
10

2021
 
 
 
4

2022
 
 
 
1

2023
 
 
 
1

Thereafter
 
 
 
3

Total undiscounted minimum lease payments
 
 
 
25

Hydro One presents its ROU assets and lease obligations on the Consolidated Balance Sheets as follows:
(millions of dollars)
 
 
 
June 30,
2019

Other long-term assets (Note 11)
 
 
 
21

Accounts payable and other current liabilities (Note 12)
 
 
 
7

Other long-term liabilities (Note 13)
 
 
 
15

18.    SHARE CAPITAL
Common Shares
The Company is authorized to issue an unlimited number of common shares. At June 30, 2019, the Company had 142,239 common shares issued and outstanding (December 31, 2018 - 142,239).
During the three and six months ended June 30, 2019, a return of stated capital in the amount of $347 million (2018 - $136 million) and $485 million was paid (2018 - $265 million), respectively.

 
15
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




The amount and timing of any dividends payable by Hydro One is at the discretion of the Hydro One Board of Directors and is established on the basis of Hydro One’s results of operations, maintenance of its deemed regulatory capital structure, financial condition, cash requirements, the satisfaction of solvency tests imposed by corporate laws for the declaration and payment of dividends and other factors that the Board of Directors may consider relevant.
Preferred Shares
The Company is authorized to issue an unlimited number of preferred shares, issuable in series. At June 30, 2019 and December 31, 2018, two series of preferred shares were authorized for issuance: Class A preferred shares and Class B preferred shares.
On January 24, 2019, the Company redeemed 485,870 Class B preferred shares totalling $486 million. At June 30, 2019, the Company had no Class B preferred shares (December 31, 2018 - 485,870) and no Class A preferred shares (December 31, 2018 - nil) issued and outstanding.
19.     DIVIDENDS
During the three months ended June 30, 2019, no preferred share dividends (2018 - $2 million) and no common share dividends (2018 - $1 million) were declared and paid.
During the six months ended June 30, 2019, preferred share dividends in the amount of $2 million (2018 - $4 million) and common share dividends in the amount of $1 million (2018 - $6 million) were declared and paid.
20.    EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share (EPS) is calculated by dividing net income attributable to common shareholder of Hydro One by the weighted-average number of common shares outstanding. The weighted-average number of common shares outstanding during the three and six months ended June 30, 2019 was 142,239 (2018 - 142,239). There were no dilutive securities during the three and six months ended June 30, 2019 or 2018.
21.    STOCK-BASED COMPENSATION
Share Grant Plans
Hydro One Limited has two share grant plans (Share Grant Plans), one for the benefit of certain members of the Power Workers’ Union (the PWU Share Grant Plan) and one for the benefit of certain members of the Society of United Professionals (the Society Share Grant Plan). A summary of share grant activity under the Share Grant Plans during the three and six months ended June 30, 2019 and 2018 is presented below:
 
 
Three months ended June 30
 
Six months ended June 30
 
(number of share grants)

2019

2018

2019

2018

Share grants outstanding - beginning
4,159,439

4,737,783

4,159,439

4,737,783

    Vested and issued1
(455,694
)
(473,108
)
(455,694
)
(473,108
)
Share grants outstanding - ending
3,703,745

4,264,675

3,703,745

4,264,675

1 On April 1, 2019, Hydro One Limited issued from treasury 455,694 common shares to eligible employees in accordance with provisions of the PWU and the Society Share Grant Plans.
Directors' Deferred Share Units (DSU) Plan
A summary of DSU awards activity under the Directors' DSU Plan during the three and six months ended June 30, 2019 and 2018 is presented below:
 
Three months ended June 30
 
Six months ended June 30
 
(number of DSUs)
2019

2018

2019

2018

DSUs outstanding - beginning
35,205

214,843

46,697

187,090

    Granted
6,608

28,817

19,131

56,570

    Settled
—

—

(24,015
)
—

DSUs outstanding - ending
41,813

243,660

41,813

243,660

At June 30, 2019, a liability of $1 million (December 31, 2018 - $1 million) related to Directors' DSUs has been recorded at the closing price of Hydro One Limited common shares of $22.84 (December 31, 2018 - $20.25) and was included in other liabilities on the Consolidated Balance Sheets.

 
16
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




Management DSU Plan
A summary of DSU awards activity under the Management DSU Plan during the three and six months ended June 30, 2019 and 2018 is presented below:
 
Three months ended June 30
 
Six months ended June 30
 
(number of DSUs)
2019

2018

2019

2018

DSUs outstanding - beginning
75,083

100,526

104,041

63,760

    Granted
548

1,184

23,935

37,950

    Settled
(23,134
)
—

(75,479
)
—

DSUs outstanding - ending
52,497

101,710

52,497

101,710

At June 30, 2019, a liability of $1 million (December 31, 2018 - $2 million) related to outstanding DSUs has been recorded at the closing price of Hydro One Limited common shares of $22.84 (December 31, 2018 - $20.25) and was included in other liabilities on the Consolidated Balance Sheets.
Long-term Incentive Plan (LTIP)
Performance Share Units (PSU) and Restricted Share Units (RSU)
A summary of PSU and RSU awards activity under the LTIP during the three and six months ended June 30, 2019 and 2018 is presented below:
 
                               PSUs
                             RSUs
Three months ended June 30 (number of units)
2019

2018

2019

2018

Units outstanding - beginning
475,430

834,150

387,610

704,830

    Granted
—

11,900

—

8,750

    Vested and issued
(516
)
—

(780
)
(13,470
)
    Forfeited
(6,214
)
(10,240
)
(4,750
)
(11,440
)
    Settled
(167,360
)
—

(41,350
)
—

Units outstanding - ending1
301,340

835,810

340,730

688,670

 
                               PSUs
                             RSUs
Six months ended June 30 (number of units)
2019

2018

2019

2018

Units outstanding - beginning
594,470

425,120

432,780

388,140

    Granted
—

434,150

—

335,320

    Vested and issued
(76,038
)
—

(21,756
)
(13,470
)
    Forfeited
(15,182
)
(23,460
)
(11,674
)
(21,320
)
    Settled
(201,910
)
—

(58,620
)
—

Units outstanding - ending1
301,340

835,810

340,730

688,670

1 Units outstanding at June 30, 2019 include 16,620 PSUs and 102,260 RSUs that may be settled in cash if certain conditions are met. At June 30, 2019, a liability of $3 million has been recorded with respect to these awards and is included in accrued liabilities on the Consolidated Balance Sheet.
No awards were granted during the three and six months ended June 30, 2019. The fair value of awards granted during the three and six months ended June 30, 2018 was $nil and $16 million, respectively. The compensation expense related to the PSU and RSU awards recognized by the Company during the three and six months ended June 30, 2019 was $4 million and $9 million (2018 - $3 million and $5 million), respectively.
At June 30, 2019, $14 million (December 31, 2018 - $20 million) payable to Hydro One Limited relating to PSU and RSU awards was included in due to related parties on the Consolidated Balance Sheets.
Stock Options
A summary of stock options activity during the three and six months ended June 30, 2019 and 2018 is presented below:
 
Three months ended June 30
 
Six months ended June 30
 
number of stock options)
2019

2018

2019

2018

Stock options outstanding - beginning
949,910

1,450,880

949,910

—

    Granted
—

—

—

1,450,880

    Exercised
(129,780
)
—

(129,780
)
—

Stock options outstanding - ending1
820,130

1,450,880

820,130

1,450,880

1 During the six months ended June 30, 2019, 706,070 stock options have vested, of which 129,780 were exercised. At June 30, 2019, 243,840 stock options remain non-vested.
At June 30, 2019, the unrecognized compensation expense related to stock options not yet vested was $1 million (December 31, 2018 - $1 million).

 
17
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




At June 30, 2019, $1 million (December 31, 2018 - $1 million) payable to Hydro One Limited relating to Stock Options awards was included in due to related parties on the Consolidated Balance Sheets.
22.    RELATED PARTY TRANSACTIONS
Hydro One is owned by Hydro One Limited. The Province is a shareholder of Hydro One Limited with approximately 47.3% ownership at June 30, 2019. The Independent Electricity System Operator (IESO), Ontario Power Generation Inc. (OPG), Ontario Electricity Financial Corporation (OEFC), the OEB, Hydro One Telecom, and 2587264 Ontario Inc. are related parties to Hydro One because they are controlled or significantly influenced by the Province or by Hydro One Limited.
(millions of dollars)
Three months ended June 30
 
Six months ended June 30
 
Related Party
Transaction
2019

2018

2019

2018

IESO
Power purchased
259

245

809

758


Revenues for transmission services
370

414

783

819


Amounts related to electricity rebates
104

103

242

240


Distribution revenues related to rural rate protection
60

61

118

118


Distribution revenues related to the supply of electricity to remote northern communities
9

8

18

16


Funding received related to CDM programs
8

10

23

22

OPG
Power purchased
2

2

5

6


Revenues related to provision of services and supply of electricity
1

2

3

4

 
Costs related to the purchase of services
1

—

1

—

OEFC
Power purchased from power contracts administered by the OEFC
—

—

1

1

OEB
OEB fees
2

2

4

4

Hydro One Limited
Return of stated capital
347

136

485

265

Dividends paid
—

1

1

6

 
Stock-based compensation costs
1

6

8

12

 
Cost recovery for services provided
4

3

7

7

Hydro One Telecom
Services received – costs expensed
5

6

11

12

Revenues for services provided
—

—

1

1

2587264 Ontario Inc.
Preferred shares redeemed
—

—

486

—

Dividends paid
—

2

2

4

Sales to and purchases from related parties are based on the requirements of the OEB’s Affiliate Relationships Code. Outstanding balances at period end are interest-free and settled in cash.
23.    CONSOLIDATED STATEMENTS OF CASH FLOWS
The changes in non-cash balances related to operations consist of the following:
 
Three months ended June 30
 
Six months ended June 30
 
(millions of dollars)
2019

2018

2019

2018

Accounts receivable
34

5

24

56

Due from related parties
(85
)
(133
)
(96
)
(150
)
Other assets
2

4

(24
)
(4
)
Accounts payable
(6
)
(5
)
(39
)
(35
)
Accrued liabilities
32

39

49

72

Due to related parties
(17
)
12

(104
)
(89
)
Accrued interest
(16
)
(18
)
8

(1
)
Long-term accounts payable and other liabilities
—

(1
)
1

(2
)
Post-retirement and post-employment benefit liability
6

5

17

11

 
(50
)
(92
)
(164
)
(142
)

 
18
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




Capital Expenditures
The following tables reconcile investments in property, plant and equipment and intangible assets and the amounts presented in the Consolidated Statements of Cash Flows for the three and six months ended June 30, 2019 and 2018. The reconciling items include net change in accruals and capitalized depreciation.
 
Three months ended June 30, 2019
 
Six months ended June 30, 2019


(millions of dollars)
Property, Plant and Equipment


Intangible Assets



Total

 
Property, Plant and Equipment


Intangible Assets



Total

Capital investments
(342
)
(26
)
(368
)
 
(630
)
(47
)
(677
)
Reconciling items
3

2

5

 
13

(1
)
12

Cash outflow for capital expenditures
(339
)
(24
)
(363
)
 
(617
)
(48
)
(665
)
 
Three months ended June 30, 2018
 
Six months ended June 30, 2018


(millions of dollars)
Property, Plant and Equipment


Intangible Assets



Total

 
Property, Plant and Equipment


Intangible Assets



Total

Capital investments
(378
)
(21
)
(399
)
 
(670
)
(33
)
(703
)
Reconciling items
8

(1
)
7

 
15

(3
)
12

Cash outflow for capital expenditures
(370
)
(22
)
(392
)
 
(655
)
(36
)
(691
)
Supplementary Information
 
Three months ended June 30
 
Six months ended June 30
 
(millions of dollars)
2019

2018

2019

2018

Net interest paid
143

129

236

219

Income taxes paid
3

5

16

10

24.    CONTINGENCIES
Legal Proceedings
Hydro One is involved in various lawsuits and claims in the normal course of business. In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Hydro One, Hydro One Networks, Hydro One Remote Communities, and Norfolk Power Distribution Inc. were defendants in a class action suit commenced in 2015 in which the representative plaintiff was seeking up to $125 million in damages related to allegations of improper billing practices. In March 2019, the plaintiff’s application for leave to appeal the lower court’s refusal to certify the lawsuit as a class action was denied by the Ontario Court of Appeal, which means that the lawsuit has effectively ended.
25.     COMMITMENTS
The following table presents a summary of Hydro One’s commitments under leases, outsourcing and other agreements due in the next 5 years and thereafter:
June 30, 2019 (millions of dollars)
Year 1

Year 2

Year 3

Year 4

Year 5

Thereafter

Outsourcing and other agreements
135

74

8

2

3

15

Long-term software/meter agreement
18

12

1

2

1

1

Operating lease commitments
9

8

3

2

1

7

The following table presents a summary of Hydro One’s other commercial commitments by year of expiry in the next 5 years and thereafter:
June 30, 2019 (millions of dollars)
Year 1

Year 2

Year 3

Year 4

Year 5

Thereafter

Operating Credit Facilities1
—

—

—

—

2,300

—

Letters of credit2
163

—

—

—

—

—

Guarantees3
325

—

—

—

—

—

1 
On June 3, 2019, the maturity date for the Operating Credit Facilities was extended to 2024.
2 Letters of credit consist of a $155 million letter of credit related to retirement compensation arrangements, $5 million in letters of credit to satisfy debt service reserve requirements, and $3 million in letters of credit for various operating purposes.
3 Guarantees consist of prudential support provided to the IESO by Hydro One on behalf of its subsidiaries.

 
19
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




26.    SEGMENTED REPORTING
Hydro One has three reportable segments:
•
The Transmission Segment, which comprises the transmission of high voltage electricity across the province, interconnecting more than 70 local distribution companies and certain large directly connected industrial customers throughout the Ontario electricity grid;
•
The Distribution Segment, which comprises the delivery of electricity to end customers and certain other municipal electricity distributors; and
•
Other Segment, which includes certain corporate activities.
The designation of segments has been based on a combination of regulatory status and the nature of the services provided. Operating segments of the Company are determined based on information used by the chief operating decision maker in deciding how to allocate resources and evaluate the performance of each of the segments. The Company evaluates segment performance based on income before financing charges and income taxes from continuing operations (excluding certain allocated corporate governance costs).
Three months ended June 30, 2019  (millions of dollars)
Transmission

Distribution

Other

Consolidated

Revenues
374

1,029

—

1,403

Purchased power
—

653

—

653

Operation, maintenance and administration
104

156

(3
)
257

Depreciation and amortization
114

104

—

218

Income before financing charges and income taxes
156

116

3

275

 
 
 
 
 
Capital investments
242

126

—

368

Three months ended June 30, 2018  (millions of dollars)
Transmission

Distribution

Other

Consolidated

Revenues
430

1,036

—

1,466

Purchased power
—

674

—

674

Operation, maintenance and administration
98

141

4

243

Depreciation and amortization
107

102

—

209

Income (loss) before financing charges and income taxes
225

119

(4
)
340

 
 
 
 
 
Capital investments
242

157

—

399

Six months ended June 30, 2019  (millions of dollars)
Transmission

Distribution

Other

Consolidated

Revenues
803

2,350

—

3,153

Purchased power
—

1,460

—

1,460

Operation, maintenance and administration
207

303

3

513

Depreciation and amortization
227

202

—

429

Income (loss) before financing charges and income taxes
369

385

(3
)
751

 
 
 
 
 
Capital investments
448

229

—

677

Six months ended June 30, 2018  (millions of dollars)
Transmission

Distribution

Other

Consolidated

Revenues
851

2,181

—

3,032

Purchased power
—

1,425

—

1,425

Operation, maintenance and administration
207

288

7

502

Depreciation and amortization
210

194

—

404

Income (loss) before financing charges and income taxes
434

274

(7
)
701

 
 
 
 
 
Capital investments
432

271

—

703

Total Assets by Segment:
(millions of dollars)
June 30,
2019

December 31, 2018

Transmission
14,138

13,877

Distribution
9,437

9,277

Other
1,907

2,415

Total assets
25,482

25,569


 
20
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2019 and 2018




Total Goodwill by Segment:
(millions of dollars)
June 30,
2019

December 31, 2018

Transmission
157

157

Distribution
168

168

Total goodwill
325

325

All revenues, assets and costs, as the case may be, are earned, held or incurred in Canada.
27.     SUBSEQUENT EVENTS
Return of Stated Capital
On August 8, 2019, a return of stated capital of $146 million was approved.

 
21
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 EX-99.2 3 a2019q2hoi-mda.htm EXHIBIT 99.2 Exhibit
HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three and six months ended June 30, 2019 and 2018


The following Management’s Discussion and Analysis (MD&A) of the financial condition and results of operations should be read together with the unaudited condensed interim consolidated financial statements and accompanying notes thereto (Consolidated Financial Statements) of Hydro One Inc. (Hydro One or the Company) for the three and six months ended June 30, 2019, as well as the Company’s audited amended consolidated financial statements and amended MD&A for the year ended December 31, 2018. The Consolidated Financial Statements are presented in Canadian dollars and have been prepared in accordance with United States (US) Generally Accepted Accounting Principles (GAAP). All financial information in this MD&A is presented in Canadian dollars, unless otherwise indicated.
The Company has prepared this MD&A in accordance with National Instrument 51-102 - Continuous Disclosure Obligations of the Canadian Securities Administrators. Under the US/Canada Multijurisdictional Disclosure System, the Company is permitted to prepare this MD&A in accordance with the disclosure requirements of Canadian securities laws and regulations, which can vary from those of the US. This MD&A provides information for the three and six months ended June 30, 2019, based on information available to management as of August 8, 2019.
CONSOLIDATED FINANCIAL HIGHLIGHTS AND STATISTICS
 
Three months ended June 30

Six months ended June 30
(millions of dollars, except as otherwise noted)
2019

2018

Change


2019

2018

Change

Revenues
1,403

1,466

(4.3
%)
 
3,153

3,032

4.0
%
Purchased power
653

674

(3.1
%)
 
1,460

1,425

2.5
%
Revenues, net of purchased power1
750

792

(5.3
%)
 
1,693

1,607

5.4
%
Operation, maintenance and administration (OM&A) costs
257

243

5.8
%
 
513

502

2.2
%
Depreciation, amortization and asset removal costs
218

209

4.3
%
 
429

404

6.2
%
Financing charges
116

103

12.6
%
 
226

202

11.9
%
Income tax expense (recovery)
(5
)
34

(114.7
%)
 
34

78

(56.4
%)
Net income to common shareholder of Hydro One
162

199

(18.6
%)
 
486

414

17.4
%
 
 
 
 
 
 
 
 
Basic earnings per common share (EPS)

$1,139


$1,399

(18.6
%)
 

$3,417


$2,911

17.4
%
Diluted EPS

$1,139


$1,399

(18.6
%)
 

$3,417


$2,911

17.4
%
 
 
 
 
 
 
 
 
Net cash from operating activities
285

305

(6.6
%)
 
542

693

(21.8
%)
Funds from operations (FFO)1
333

393

(15.3
%)
 
698

826

(15.5
%)
 
 
 
 
 
 
 
 
Capital investments
368

399

(7.8
%)
 
677

703

(3.7
%)
Assets placed in-service
275

474

(42.0
%)
 
417

617

(32.4
%)
 
 
 
 
 
 
 
 
Transmission: Average monthly Ontario 60-minute peak demand (MW)
18,226

19,951

(8.6
%)
 
19,494

19,883

(2.0
%)
Distribution: Electricity distributed to Hydro One customers (GWh)
6,073

6,111

(0.6
%)
 
13,811

13,517

2.2
%
 
2019

2018

Debt to capitalization ratio2
57.1
%
53.6
%
1 
See section “Non-GAAP Measures” for description and reconciliation of FFO and revenues, net of purchased power.
2 
Debt to capitalization ratio has been presented at June 30, 2019 and December 31, 2018, and has been calculated as total debt (includes total long-term debt and short-term borrowings, net of cash and cash equivalents) divided by total debt plus total shareholder's equity, including preferred shares but excluding any amounts related to noncontrolling interest.
OVERVIEW
The Company's transmission business consists of the transmission system operated by its subsidiaries, Hydro One Networks Inc. (Hydro One Networks) and Hydro One Sault Ste. Marie LP (HOSSM), as well as an approximately 66% interest in B2M Limited Partnership (B2M LP), a limited partnership between Hydro One and the Saugeen Ojibway Nation (SON) in respect of the Bruce-to-Milton transmission line. Hydro One’s distribution business consists of the distribution system operated by its subsidiaries, Hydro One Networks and Hydro One Remote Communities Inc. (Hydro One Remote Communities). The other segment includes certain corporate activities.
For the six months ended June 30, 2019 and 2018, Hydro One’s business segments accounted for the Company’s total revenues, net of purchased power, as follows:
Six months ended June 30
2019

2018

Transmission
47
%
53
%
Distribution
53
%
47
%
Other
—
%
—
%

 
1
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



At June 30, 2019 and December 31, 2018, Hydro One’s business segments accounted for the Company’s total assets as follows:
 
June 30,
2019

December 31, 2018

Transmission
56
%
54
%
Distribution
37
%
36
%
Other
7
%
10
%
RESULTS OF OPERATIONS
Net Income
Net income attributable to common shareholder for the quarter ended June 30, 2019 of $162 million is a decrease of $37 million or 18.6% from the prior year. Significant influences on net income included:
•
lower revenues, net of purchased power, primarily resulting from:
•
lower average monthly Ontario 60-minute peak demand driven by cooler weather in the second quarter of 2019; and
•
deferred tax regulatory adjustment related to accelerated tax depreciation (Accelerated CCA) which will flow through to customers and is offset in lower taxes, with no impact on regulated return on equity (ROE); partially offset by
•
an increase in distribution revenues, net of purchased power, primarily due to the Ontario Energy Board's (OEB) decision on the 2018 and 2019 distribution rates;
•
higher OM&A costs primarily resulting from:
•
higher vegetation management coverage compared to previous year;
•
higher emergency power restoration costs due to a higher volume of non-storm related emergency calls; partially offset by
•
lower project and asset write-offs; and
•
lower costs due to the repatriation of the Call Centre which resulted in operational improvements;
•
higher financing charges primarily resulting from:
•
an increase in interest expense on long-term debt driven by higher weighted-average long-term debt balance outstanding in 2019;
•
lower income tax expense primarily attributable to the following:
•
changes in income before taxes in 2019, compared to 2018;
•
Accelerated CCA resulting from the enactment of certain 2019 federal and Ontario budget measures in the second quarter of 2019; and
•
incremental tax deductions from deferred tax asset sharing mandated by the OEB.
Net income attributable to common shareholder for the six months ended June 30, 2019 of $486 million is an increase of $72 million or 17.4% from the prior year. Year-to-date results were impacted by similar factors to those noted above.
Revenues
 
Three months ended June 30

Six months ended June 30
(millions of dollars, except as otherwise noted)
2019

2018

Change


2019

2018

Change

Transmission
374

430

(13.0
%)
 
803

851

(5.6
%)
Distribution
1,029

1,036

(0.7
%)
 
2,350

2,181

7.7
%
Total revenues
1,403

1,466

(4.3
%)
 
3,153

3,032

4.0
%
 
 
 
 
 
 
 
 
Transmission
374

430

(13.0
%)
 
803

851

(5.6
%)
Distribution, net of purchased power
376

362

3.9
%
 
890

756

17.7
%
Total revenues, net of purchased power
750

792

(5.3
%)
 
1,693

1,607

5.4
%
 
 
 
 
 
 
 
 
Transmission: Average monthly Ontario 60-minute peak demand (MW)
18,226

19,951

(8.6
%)

19,494

19,883

(2.0
%)
Distribution: Electricity distributed to Hydro One customers (GWh)
6,073

6,111

(0.6
%)

13,811

13,517

2.2
%

 
2
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



Transmission Revenues
Transmission revenues decreased by 13.0% during the quarter ended June 30, 2019, primarily due to the following:
•
lower average monthly Ontario 60-minute peak demand driven by cooler weather in the second quarter of 2019;
•
deferred tax regulatory adjustment related to Accelerated CCA which will flow through to customers and is offset in lower taxes, with no impact on regulated ROE; and
•
revenue recognized in the second quarter of 2018 to reflect the Company’s position with respect to the deferred tax asset, which was subsequently reversed following the OEB decision.
The decrease of 5.6% in transmission revenues for the six months ended June 30, 2019 was the result of similar factors as noted above.
Distribution Revenues, Net of Purchased Power
Distribution revenues, net of purchased power, increased by 3.9% during the quarter ended June 30, 2019, primarily due to the following:
•
impacts relating to the 2018 and 2019 distribution rates per OEB decision received in March 2019; partially offset by
•
deferred tax regulatory adjustment related to Accelerated CCA which will flow through to customers and is offset in lower taxes, with no impact on regulated ROE.
The increase of 17.7% in distribution revenues, net of purchased power, for the six months ended June 30, 2019 was the result of similar factors as noted above.
OM&A Costs
 
Three months ended June 30
 
 
Six months ended June 30
(millions of dollars)
2019

2018

Change

 
2019

2018

Change

Transmission
104

98

6.1
%
 
207

207

0.0
%
Distribution
156

141

10.6
%
 
303

288

5.2
%
Other
(3
)
4

(175.0
%)
 
3

7

(57.1
%)
 
257

243

5.8
%
 
513

502

2.2
%
Transmission OM&A Costs
The increase of 6.1% in transmission OM&A costs for the quarter ended June 30, 2019 was primarily due to higher vegetation management coverage compared to the prior year.
Transmission OM&A costs for the six months ended June 30, 2019 were consistent with the prior year. Principal impacts on the levels of transmission OM&A costs included:
•
higher vegetation management coverage compared to prior year; offset by
•
lower volume of grid sustainment work and lower corporate support costs in 2019, compared to the prior year.
Distribution OM&A Costs
The increase of 10.6% in distribution OM&A costs for the quarter ended June 30, 2019 was primarily due to:
•
higher vegetation management coverage compared to the prior year; and
•
higher emergency power restoration costs due to a higher volume of non-storm related emergency calls; partially offset by
•
lower project and inventory write-offs; and
•
lower costs due to repatriation of the Call Centre which resulted in operational improvements.
The increase of 5.2% in distribution OM&A costs for the six months ended June 30, 2019 was primarily due to similar factors as noted above, as well as mutual storm assistance costs in the first quarter of 2018 (net income neutral).
Financing Charges
The increase of $13 million or 12.6% in financing charges for the quarter ended June 30, 2019 was primarily due to an increase in interest expense on long-term debt driven by higher weighted-average long-term debt balance outstanding in 2019, mainly due to the issuance of $1.5 billion long-term debt on April 5, 2019.
The increase of $24 million or 11.9% in financing charges for the six months ended June 30, 2019 was primarily due to the factor noted above.
Income Tax Expense
Income tax recovery was $5 million and income tax expense was $34 million for the three and six months ended June 30, 2019, respectively, compared to an expense of $34 million and $78 million in the comparable periods last year. The Company realized

 
3
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



an effective tax rate (ETR) for the three and six months ended June 30, 2019 of approximately (3.1%) and 6.5%, respectively, compared to approximately 14.3% and 15.6% realized in the same periods last year.
As prescribed by the regulators, the Company recovers income taxes and is required to accrue its tax expense based on the tax liability determined without accounting for temporary differences recoverable from or refundable to customers in the future.
The decrease in income tax expense for the three months ended June 30, 2019 was primarily attributable to lower income before taxes in the three months ended June 30, 2019 compared to the same period last year, incremental tax deductions from deferred tax asset sharing mandated by the OEB and Accelerated CCA resulting from the enactment of certain 2019 federal and Ontario budget measures in the second quarter of 2019.
The decrease in income tax expense for the six months ended June 30, 2019 was primarily attributable to incremental tax deductions from deferred tax asset sharing mandated by the OEB and Accelerated CCA, partially offset by higher income before taxes in the six months ended June 30, 2019, compared to the same period last year.
QUARTERLY RESULTS OF OPERATIONS
Quarter ended (millions of dollars, except EPS and ratio)
Jun 30, 2019

Mar 31, 2019

Dec 31, 2018

Sep 30, 2018

Jun 30, 2018

Mar 31, 2018

Dec 31, 2017

Sep 30, 2017

Revenues
1,403

1,750

1,480

1,598

1,466

1,566

1,429

1,511

Purchased power
653

807

741

733

674

751

662

675

Revenues, net of purchased power1
750

943

739

865

792

815

767

836

Net income (loss) to common shareholder
162

324

(685
)
231

199

215

180

241

 
 
 
 
 
 
 
 
 
Basic and diluted EPS

$1,139


$2,278


($4,816
)

$1,624


$1,399


$1,512


$1,265


$1,694

 
 
 
 
 
 
 
 
 
Earnings coverage ratio2
2.7

2.9

2.8

3.0

3.0

2.8

2.7

2.5

1 
See section “Non-GAAP Measures” for description of revenues, net of purchased power.
2 
Earnings coverage ratio has been presented for the twelve months ended as of each date indicated above and has been calculated as net income before financing charges and income taxes attributable to shareholder of Hydro One, divided by the sum of financing charges, capitalized interest, and preferred dividends.
Variations in revenues and net income over the quarters are primarily due to the impact of seasonal weather conditions on customer demand and market pricing, as well as timing of regulatory decisions.
CAPITAL INVESTMENTS
The Company makes capital investments to maintain the safety, reliability and integrity of its transmission and distribution system assets and to provide for the ongoing growth and modernization required to meet the expanding and evolving needs of its customers and the electricity market. This is achieved through a combination of sustaining capital investments, which are required to support the continued operation of Hydro One’s existing assets, and development capital investments, which involve both additions to existing assets and large scale projects such as new transmission lines and transmission stations.
Assets Placed In-Service
The following table presents Hydro One’s assets placed in-service during the three and six months ended June 30, 2019 and 2018:
 
Three months ended June 30
 
Six months ended June 30
(millions of dollars)
2019

2018

Change

 
2019

2018

Change

Transmission
161

316

(49.1
%)
 
215

354

(39.3
%)
Distribution
114

158

(27.8
%)
 
202

263

(23.2
%)
Total assets placed in-service
275

474

(42.0
%)
 
417

617

(32.4
%)
Transmission Assets Placed In-Service
Transmission assets placed in-service decreased by $155 million or 49.1% during the second quarter of 2019 primarily due to the following:
•
timing of assets placed in-service in the second quarter of 2018 for the Clarington transmission station; partially offset by
•
timing of assets placed in-service in the second quarter of 2019 for station sustainment investments (primarily at Enfield and Hanmer transmission stations).
Transmission assets placed in-service decreased by $139 million or 39.3% during the six months ended June 30, 2019 primarily due to similar factors as noted above, as well as timing of assets placed in-service in the first quarter of 2019 at St.Isidore, Cherrywood, Kenilworth and Horning transmission stations, partially offset by Orillia transmission station.

 
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



Distribution Assets Placed In-Service
Distribution assets placed in-service decreased by $44 million or 27.8% during the second quarter of 2019 primarily due to lower volume of storm-related asset replacements in the second quarter of 2019 compared to prior year.
Distribution assets placed in-service decreased by $61 million or 23.2% during the six months ended June 30, 2019 primarily due to the factor noted above, as well as cumulative investments that were placed in-service for the Advanced Distribution System project and the Advanced Metering Infrastructure Wireless project work in the first half of 2018.
Capital Investments
The following table presents Hydro One’s capital investments during the three and six months ended June 30, 2019 and 2018:
 
Three months ended June 30
 
Six months ended June 30
(millions of dollars)
2019

2018

Change

 
2019

2018

Change

Transmission
 
 
 
 
 
 
 
    Sustaining
208

211

(1.4
%)
 
382

366

4.4
%
    Development
30

24

25.0
%
 
49

47

4.3
%
    Other
4

7

(42.9
%)
 
17

19

(10.5
%)
 
242

242

—
%
 
448

432

3.7
%
Distribution
 
 
 
 
 
 
 
    Sustaining
64

101

(36.6
%)
 
110

160

(31.3
%)
    Development
53

48

10.4
%
 
97

94

3.2
%
    Other
9

8

12.5
%
 
22

17

29.4
%
 
126

157

(19.7
%)
 
229

271

(15.5
%)
 
 
 
 
 
 
 
 
Total capital investments
368

399

(7.8
%)
 
677

703

(3.7
%)
Transmission Capital Investments
Transmission capital investments during the second quarter of 2019 were consistent with the prior year. Principal impacts on the levels of capital investments included:
•
higher volume of station refurbishments and replacements;
•
timing of investments in multi-year development projects;
•
timing of power transformer purchases for the spare transformer program to provide adequate coverage of aging transformer failures;
•
lower volume of overhead lines refurbishments and replacements; and
•
timing of information technology (IT) projects, including Tech Transformation and Windows 10 projects, and delayed minor asset purchases in 2019.
Transmission capital investments increased by $16 million or 3.7% during the six months ended June 30, 2019 primarily due to the following:
•
higher volume of overhead lines refurbishments and replacements; and
•
higher volume of work for the North American Electric Reliability Corporation Critical Infrastructure Protection project; partially offset by:
•
timing of IT projects, including Tech Transformation and Windows 10 projects, and delayed minor asset purchases in 2019.
Distribution Capital Investments
Distribution capital investments decreased by $31 million or 19.7% during the second quarter of 2019. Principal impacts on the levels of capital investments included:
•
lower volume of storm-related asset replacements;
•
lower spend in metering programs due to the completion of the Advanced Metering Infrastructure Wireless project last year, and lower volume of meter sustainment work;
•
lower expenditures due to disallowance of pension costs as a result of the OEB decision on the 2018-2022 distribution application; and
•
timing of IT projects, including Tech Transformation and Windows 10 projects, and delayed minor asset purchases in 2019; partially offset by
•
higher volume of equipment replacements due to emergency calls;
•
higher volume of new connections; and
•
higher volume of station refurbishments and replacements.

 
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



Distribution capital investments decreased by $42 million or 15.5% during the six months ended June 30, 2019 primarily due to the following:
•
lower volume of storm-related asset replacements; and
•
lower costs due to disallowance of pension costs as a result of the OEB decision on the 2018-2022 distribution application; partially offset by:
•
higher volume of new connections;
•
higher volume of equipment replacements due to emergency calls; and
•
higher volume of station refurbishments and replacements.
Major Transmission Capital Investment Projects
The following table summarizes the status of significant transmission projects as at June 30, 2019:

Project Name

Location

Type
Anticipated
In-Service Date
Estimated
Cost
Capital Cost
To Date

 
 
 
(year)
               (millions of dollars)
Development Projects:
 
 
   Niagara Reinforcement Project
Niagara area
Southwestern Ontario
New transmission line
20191
135
127

   East-West Tie Station Expansion
Northern Ontario
New transmission connection
and station expansion
20222
157
28

   Waasigan Transmission Line
Thunder Bay-Atikokan
Northwestern Ontario
New transmission line
20243
353
13

   Wataynikaneyap Power LP Line
Connection
Northwestern Ontario
New transmission connection
2021
31
1

   Leamington Area Transmission
Reinforcement4
Leamington
Southwestern Ontario
New transmission line
and stations
20264
3254
—

 
 
 
 
 
 
Sustainment Projects:
 
 
 
 
 
   Richview Transmission Station
Circuit Breaker Replacement
Toronto
Southwestern Ontario
Station sustainment
2020
109
104

   Bruce A Transmission Station
Tiverton
Southwestern Ontario
Station sustainment
2020
147
130

   Beck #2 Transmission Station
Circuit Breaker Replacement
Niagara area
Southwestern Ontario
Station sustainment
2022
112
71

   Lennox Transmission Station
Circuit Breaker Replacement
Napanee
Southeastern Ontario
Station sustainment
2023
111
69

   Middleport Transmission Station
Circuit Breaker Replacement
Middleport
Southwestern Ontario
Station sustainment
2025
1175
16

1 See section Regulation - Niagara Reinforcement Limited Partnership for additional information.
2 The majority of the East-West Tie Station Expansion project is expected to be placed in-service in 2021, enabling the connection and energization of the new East-West Tie transmission line. Additional work to complete the upgrades is expected to be placed in-service in 2022.
3 The in-service date and the costs of the Waasigan Transmission Line project (formerly known as Northwest Bulk Transmission Line Development project) relate to the development phase.
4 The Leamington Area Transmission Reinforcement project consists of the construction of a new double-circuit line between Chatham and Leamington and associated transmission stations and connections. The project is currently in the development stage. The anticipated in-service dates for the line and stations are between 2020 and 2026, and the total estimated cost is in the range of $290 million to $325 million, with approximately $143 million of the total estimated cost included in the projected capital investments tables in section "Future Capital Investments" below.
5 Approximately $107 million of the total estimated cost is included in the projected capital investments tables in section "Future Capital Investments" below.
Future Capital Investments
Following is a summary of estimated capital investments by Hydro One over the years 2019 to 2023. The Company’s estimates are based on management’s expectations of the amount of capital expenditures that will be required to provide transmission and distribution services that are efficient, reliable, and provide value for customers, consistent with the OEB’s Renewed Regulatory Framework.
The 2019 to 2022 distribution capital investments estimates differ from prior disclosures, representing a decrease to reflect Hydro One’s five-year rate application for 2018-2022 distribution rates. The projections and the timing of the transmission 2020-2023 expenditures are subject to approval by the OEB.

 
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



The following table summarizes Hydro One’s annual projected capital investments for 2019 to 2023, by business segment:
(millions of dollars)
2019

2020

2021

2022

2023

Transmission
1,049

1,203

1,329

1,380

1,381

Distribution
632

671

645

620

757

Total capital investments
1,681

1,874

1,974

2,000

2,138

The following table summarizes Hydro One’s annual projected capital investments for 2019 to 2023, by category:
(millions of dollars)
2019

2020

2021

2022

2023

Sustainment
1,068

1,182

1,397

1,479

1,530

Development
408

493

419

376

468

Other1
205

199

158

145

140

Total capital investments
1,681

1,874

1,974

2,000

2,138

1 
“Other” capital expenditures consist of special projects, such as those relating to IT.
SUMMARY OF SOURCES AND USES OF CASH
Hydro One’s primary sources of cash flows are funds generated from operations, capital market debt issuances and bank credit facilities that are used to satisfy Hydro One’s capital resource requirements, including the Company’s capital expenditures, servicing and repayment of debt, and dividend payments.
Three months ended June 30
 

Six months ended June 30
 
(millions of dollars)
2019

2018

 
2019

2018

Cash provided by operating activities
285

305

 
542

693

Cash provided by (used in) financing activities
61

1,311

 
(370
)
1,232

Cash used in investing activities
(360
)
(388
)
 
(664
)
(684
)
Increase (decrease) in cash and cash equivalents
(14
)
1,228

 
(492
)
1,241

Cash provided by operating activities
Cash from operating activities decreased by $20 million during the three months ended June 30, 2019, compared to the same period in 2018. Changes in cash from operating activities were primarily impacted by various factors, including lower cash earnings in the second quarter of 2019, changes in receivable balances related to energy sales, and changes in accrual balances related to purchased power.
Cash from operating activities decreased by $151 million during the six months ended June 30, 2019, compared to the same period in 2018. Changes in cash from operating activities were primarily impacted by various factors, including lower cash earnings in 2019, changes in certain regulatory variance and deferral accounts, and changes in accrual balances related to purchased power.
Cash provided by (used in) financing activities
Sources of cash
•
During the second quarter and six months ended June 30, 2019, the Company issued $1.5 billion of long-term debt, compared to $1.4 billion long-term debt issued in the same periods last year.
•
The Company received proceeds of $482 million and $2,422 million from the issuance of short-term notes in the three and six months ended June 30, 2019, respectively, compared to $1,370 million and $2,542 million received in the same periods last year.
Uses of cash
•
The Company repaid $1,564 million and $3,076 million of short-term notes in the three and six months ended June 30, 2019, respectively, compared to $1,311 million and $2,420 million repaid in the same periods last year.
•
The Company redeemed all of its preferred shares totalling $486 million in the six months ended June 30, 2019, all in the first quarter, compared to no preferred shares redeemed in the same periods last year.
•
The Company repaid $1 million and $229 million of long-term debt during the three and six months ended June 30, 2019, respectively, compared to $1 million and $1 million of long-term debt repaid in the same periods last year.
•
In the three and six months ended June 30, 2019, the Company made returns of stated capital of $347 million and $485 million, respectively, compared to returns of stated capital of $136 million and $265 million made in the same periods last year.
•
Dividends paid in the three and six months ended June 30, 2019 were $nil and $3 million, respectively, compared to dividends of $3 million and $10 million paid in the same periods last year.

 
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



Cash used in investing activities
Uses of cash
•
Capital expenditures were $29 million and $26 million lower in the second quarter of 2019 and year-to-date 2019, respectively, primarily due to lower volume and timing of capital investment work.
LIQUIDITY AND FINANCING STRATEGY
Short-term liquidity is provided through FFO, Hydro One's commercial paper program, and the Company’s consolidated bank credit facilities. Under the commercial paper program, Hydro One is authorized to issue up to $2.3 billion in short-term notes with a term to maturity of up to 365 days. On March 25, 2019, the maximum number of short-term notes authorized for issuance was increased from $1.5 billion to $2.3 billion.
At June 30, 2019, Hydro One had $598 million in commercial paper borrowings outstanding, compared to $1,252 million outstanding at December 31, 2018. The interest rates on the commercial paper borrowings outstanding at June 30, 2019 ranged from 1.8% to 2.3%. In addition, the Company has revolving bank credit facilities (Operating Credit Facilities) with total availability of $2.3 billion. On June 3, 2019, the maturity date for the Operating Credit Facilities was extended from 2022 to 2024. At June 30, 2019 and December 31, 2018, no amounts were drawn on the Operating Credit Facilities. The Company may use these credit facilities for working capital and general corporate purposes. The short-term liquidity under the commercial paper program, the Operating Credit Facilities, and anticipated levels of FFO are expected to be sufficient to fund the Company’s normal operating requirements.
At June 30, 2019, the Company had long-term debt outstanding in the principal amount of $11,987 million, which included $11,845 million of long-term debt issued by Hydro One and long-term debt in the principal amount of $142 million issued by HOSSM. The majority of long-term debt issued by Hydro One has been issued under its Medium Term Note (MTN) Program. The long-term debt consists of notes and debentures that mature between 2019 and 2064, and at June 30, 2019, had a weighted-average term to maturity of approximately 15.5 years and a weighted-average coupon rate of 4.1%.
The maximum authorized principal amount of notes issuable under the current MTN Program prospectus filed in March 2018 is $4.0 billion, and at June 30, 2019, $1.1 billion remained available for issuance until April 2020.
Compliance
At June 30, 2019, the Company was in compliance with all financial covenants and limitations associated with the outstanding borrowings and credit facilities.
OTHER OBLIGATIONS
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 
8
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



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:

June 30, 2019 (millions of dollars)

Total

Less than
1 year


   1-3 years

   
3-5 years

More than
5 years

Contractual obligations (due by year)
 
 
 
 
 
Long-term debt - principal repayments
11,987

1,153

1,406

833

8,595

Long-term debt - interest payments
8,494

486

909

846

6,253

Short-term notes payable
598

598

—

—

—

Pension contributions1
437

78

156

162

41

Environmental and asset retirement obligations
180

24

62

59

35

Outsourcing and other agreements
237

135

82

5

15

Lease obligations
30

9

11

3

7

Long-term software/meter agreement
35

18

13

3

1

Total contractual obligations
21,998

2,501

2,639

1,911

14,947

 
 
 
 
 
 
Other commercial commitments (by year of expiry)
 
 
 
 
 
Operating Credit Facilities2
2,300

—

—

2,300

—

Letters of credit3
163

163

—

—

—

Guarantees4
325

325

—

—

—

Total other commercial commitments
2,788

488

—

2,300

—

1 
Contributions to the Hydro One Pension Fund are generally made one month in arrears. Company and employee contributions to the Pension Plan are based on actuarial reports, including valuations performed at least every three years, and actual or projected levels of pensionable earnings, as applicable.  
2 
On June 3, 2019, the maturity date for the Operating Credit Facilities was extended to 2024.
3 
Letters of credit consist of a $155 million letter of credit related to retirement compensation arrangements, $5 million in letters of credit to satisfy debt service reserve requirements, and $3 million in letters of credit for various operating purposes.
4 
Guarantees consist of prudential support provided to the Independent Electricity System Operator (IESO) by Hydro One on behalf of its subsidiaries.  
SHARE CAPITAL
Hydro One is authorized to issue an unlimited number of common shares. The amount and timing of any dividends payable by Hydro One is at the discretion of the Hydro One Board and is established on the basis of Hydro One’s results of operations, maintenance of its deemed regulatory capital structure, financial condition, cash requirements, the satisfaction of solvency tests imposed by corporate laws for the declaration and payment of dividends and other factors that the Board may consider relevant. At August 8, 2019, Hydro One had 142,239 issued and outstanding common shares.
The Company is authorized to issue an unlimited number of preferred shares, issuable in series. The Company has two series of preferred shares authorized for issuance: the Class A preferred shares and Class B preferred shares. At August 8, 2019, the Company had no Class A or Class B preferred shares issued and outstanding.
REGULATION
The OEB approves both the revenue requirements of and the rates charged by Hydro One’s regulated transmission and distribution businesses. The rates are designed to permit the Company’s transmission and distribution businesses to recover the allowed costs and to earn a formula-based annual rate of return on its deemed 40% equity level invested in the regulated businesses. This is done by applying a specified equity risk premium to forecasted interest rates on long-term bonds. In addition, the OEB approves rate riders to allow for the recovery or disposition of specific regulatory deferral and variance accounts over specified time frames.

 
9
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



The following table summarizes the status of Hydro One’s major regulatory proceedings with the OEB:
Application
Years
Type
Status
 
 
 
 
Electricity Rates

Hydro One Networks
2017-2018
Transmission – Cost-of-service
OEB decision received1
Hydro One Networks
2019
Transmission – Revenue Cap
OEB decision received
Hydro One Networks
2020-2022
Transmission – Custom
OEB decision pending
Hydro One Networks
2018-2022
Distribution – Custom
OEB decision received2
B2M LP
2015-2019
Transmission – Cost-of-service
OEB decision received
B2M LP
2020-2024
Transmission – Revenue Cap
OEB decision pending
HOSSM
2017-2026
Transmission – Revenue Cap
OEB decision received
 
 
 
 
Mergers Acquisitions Amalgamations and Divestitures (MAAD)
 
Orillia Power
n/a
Acquisition
OEB decision pending3
Peterborough Distribution
n/a
Acquisition
OEB decision pending
 
 
 
 
Leave to Construct
 
 
 
East-West Tie Station Expansion
n/a
Section 92
OEB decision received
Lake Superior Link Project
n/a
Section 92
OEB decision received4
1 
On March 7, 2019, the OEB upheld its Original Decision relating to the deferred tax asset. On April 5, 2019, the Company filed an appeal with the Ontario Divisional Court.
2 
On March 26, 2019, the Company filed a motion to review and vary the OEB's decision with respect to recovery of pension costs. On April 5, 2019, the Company filed an appeal with the Ontario Divisional Court, which is being held in abeyance pending the outcome of the motion.
3 In September 2018, Hydro One filed a new MAAD application with the OEB to acquire Orillia Power.
4 On February 11, 2019, the OEB issued its decision awarding the construction of the East-West Tie Line to NextBridge, as directed by the Province of Ontario (Province) on January 30, 2019.
The following table summarizes the key elements and status of Hydro One’s electricity rate applications:

Application


Year
 ROE
 Allowed (A)
or Forecast (F)
 Rate Base
 Allowed (A)
or Forecast (F)


Rate Application Status


Rate Order Status
 
 
 
 
 
 
Transmission
 
 
 
 
 
Hydro One Networks
2019
 n/a1
n/a1
Filed in October 2018
Approved in June 2019
 
2020
 8.98% (F)
$12,375 million2 (F)
Filed in March 2019
To be filed
 
2021
 8.98% (F)
$13,093 million2 (F)
Filed in March 2019
To be filed
 
2022
 8.98% (F)
$13,917 million2 (F)
Filed in March 2019
To be filed
 
 
 
 
 
 
B2M LP
2019
 8.98% (A)
$496 million (A)
Approved in December 2015
Approved in December 2018
B2M LP
2020-2024
 8.98% (F)
$490 million (F)
Filed in July 2019
To be filed
 
 
 
 
 
 
HOSSM
2017-2026
 9.19% (A)
$218 million (A)
Approved in October 2016
Approved in July 20193
 
 
 
 
 
 
Distribution
 
 
 
 
 
Hydro One Networks
2018
 9.00% (A)
$7,637 million (F)
Filed in March 20174
Approved in June 2019
 
2019
 8.98% (A)
$7,894 million (F)
Filed in March 20174
Approved in June 2019
 
2020
 8.98% (F)
$8,175 million (F)
Filed in March 20174
To be filed in 2019
 
2021
 8.98% (F)
$8,517 million (F)
Filed in March 20174
To be filed in 2020
 
2022
 8.98% (F)
$8,813 million (F)
Filed in March 20174
To be filed in 2021
1 The Revenue Cap application is a formulaic adjustment to the approved revenue requirement and does not consider ROE or rate base.
2 On June 19, 2019, Hydro One filed updates to the application reflecting recent financial results and other adjustments.
3 
In October 2016, the OEB approved the 2017-2026 revenue requirements. In June 2019, the OEB approved the request for an inflationary increase (revenue cap escalator index) to the 2019 revenue requirement. On July 18, 2019, the OEB issued the final rate order including a final 2019 revenue requirement of $38 million to be included in the 2019 Uniform Transmission Rates (UTRs).
4 
On June 11, 2019, the OEB approved Hydro One Networks' rate order which included the rate base amounts shown above.  
Electricity Rates Applications
Hydro One Networks - Transmission
On September 28, 2017, the OEB issued its decision and order on Hydro One Networks' 2017 and 2018 transmission rates revenue requirements (Original Decision), with 2017 rates effective January 1, 2017.
In its Original Decision, the OEB concluded that the net deferred tax asset resulting from transition from the payments in lieu of tax regime under the Electricity Act, 1998 (Ontario) to tax payments under the federal and provincial tax regime should not accrue entirely to Hydro One shareholders and that a portion should be shared with ratepayers. On November 9, 2017, the OEB issued a

 
10
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



decision and order that calculated the portion of the tax savings that should be shared with ratepayers. The OEB's calculation would result in an impairment of a portion of both Hydro One Networks' transmission and distribution deferred income tax regulatory asset. In October 2017, the Company filed a Motion to Review and Vary (Motion) the Original Decision and filed an appeal with the Ontario Divisional Court (Appeal). In both cases, the Company's position was that the OEB made errors of fact and law in its determination of allocation of the tax savings between the shareholders and ratepayers. On December 19, 2017, the OEB granted a hearing of the merits of the Motion which was held on February 12, 2018. On August 31, 2018, the OEB granted the Motion and returned the portion of the Original Decision relating to the deferred tax asset to an OEB panel for reconsideration.
On March 7, 2019, the OEB issued its reconsideration decision and concluded that their Original Decision was reasonable and should be upheld. Also, on March 7, 2019 the OEB issued its decision for Hydro One Networks’ 2018-2022 distribution rates, in which it directed the Company to apply the Original Decision to Hydro One Networks’ distribution rates. As a result, as at December 31, 2018, the Company recognized an impairment charge of Hydro One Networks' distribution deferred income tax regulatory asset of $474 million and Hydro One Networks' transmission deferred income tax regulatory asset of $558 million, an increase in deferred income tax regulatory liability of $81 million, and a decrease in the foregone revenue deferral regulatory asset of $68 million. After recognition of the related $314 million deferred tax asset, the Company recorded an $867 million one-time decrease in net income as a reversal of revenues of $68 million, and charge to deferred tax expense of $799 million, which is expected to result in an annual decrease to FFO in the range of $50 million to $60 million. Notwithstanding the recognition of the effects of the decision in the 2018 financial statements, on April 5, 2019, the Company filed an appeal with the Ontario Divisional Court with respect to the OEB's deferred tax asset decision. The appeal is scheduled to be heard on November 21, 2019.
On October 26, 2018, Hydro One filed a one-year inflation based application with the OEB for 2019 transmission revenue requirement. On December 20, 2018, the OEB issued a decision approving Hydro One's 2018 revenue requirement as interim for 2019. On April 25, 2019, the OEB issued its decision on Hydro One’s 2019 transmission rate application, and set the revenue index at 1.4% on a final basis effective May 1, 2019.
On March 21, 2019, the Company filed a three-year Custom Incentive Rate application with the OEB for 2020-2022 transmission rates. On June 19, 2019, Hydro One filed updates to the application reflecting recent financial results and other adjustments. The OEB decision is pending.
Hydro One Networks - Distribution
On March 31, 2017, Hydro One Networks filed a custom application with the OEB for 2018-2022 distribution rates under the OEB’s incentive-based regulatory framework (2018-2022 Distribution Application), which was subsequently updated on June 7 and December 21, 2017. The application reflects the level of capital investments required to minimize degradation in overall system asset condition, to meet regulatory requirements, and to maintain current reliability levels.
On March 7, 2019, the OEB rendered its decision on the 2018-2022 Distribution Application. In accordance with the OEB decision, the Company filed its draft rate order reflecting 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 confirming these updated revenue requirements. See above in “- Hydro One Networks - Transmission” for impacts relating to the distribution deferred income tax regulatory asset.
On March 26, 2019, the Company filed a motion to review and vary the OEB's decision with respect to recovery of pension costs, and on April 5, 2019, the Company filed an appeal with the Ontario Divisional Court. The appeal is being held in abeyance pending the outcome of the motion.
Hydro One Remote Communities
On November 5, 2018, Hydro One Remote Communities filed an application with the OEB seeking approval for increased base rates of 1.8% effective May 1, 2019. On February 11, 2019, the OEB issued a draft decision approving the requested increase, which was later finalized on March 28, 2019.
Hydro One Remote Communities is fully financed by debt and is operated as a break-even entity with no ROE.
Niagara Reinforcement Limited Partnership (NRLP)
On September 19, 2018, NRLP was formed to own and operate a new 230 kV transmission line in the Niagara region that will enable generators in the Niagara area to connect to the load centres of the Greater Toronto and Hamilton areas. NRLP is designed to include minority participation of local First Nations partners in a structure similar to B2M LP.
On September 27, 2018, Hydro One filed a transmission licence application with the OEB for NRLP. On October 25, 2018, Hydro One filed two other applications with the OEB relating to NRLP requesting approval for Hydro One Networks to sell the applicable assets to NRLP and approval of interim rates to include in the 2019 UTRs. On December 20, 2018, the OEB issued a decision finding that the request for approval for an interim revenue requirement effective January 1, 2019 was premature but indicated that there would be an opportunity to adjudicate the matter at a later date.

 
11
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



In January 2019, construction on the project was halted due to a land dispute with the Haudenosaunee Confederacy Chiefs Council (HCCC). On March 1, 2019, Hydro One filed a letter with the OEB requesting that the three previously-filed applications be heard together once the land dispute is resolved. On March 15, 2019, the OEB put the NRLP applications in abeyance per Hydro One’s request.
Hydro One filed an application with the Ontario Superior Court of Justice for injunctive relief (injunction) against members of the HCCC amongst others. On July 15, 2019, Hydro One was granted an injunction order. Hydro One has resumed construction. On August 1, 2019, Hydro One filed an update to the three previously-filed OEB applications and asked that the OEB resume adjudication of the applications.
HOSSM
HOSSM is under a 10-year deferred rebasing period for years 2017-2026, as approved in the OEB MAAD decision dated October 13, 2016. In July 2018, HOSSM filed a 2019 application to allow for inflationary increase (revenue cap escalator index) to its previously approved revenue requirement. The revenue cap escalator index is designed to add inflationary increases to the revenue requirement on an annual basis. On June 20, 2019, the OEB approved the revenue cap escalator index at 1.1% (net) which was applied to HOSSM's base revenue requirement for 2019, effective February 1, 2019, and also approved the 2019-2026 revenue cap framework.
B2M LP
On July 31, 2019, B2M LP filed a transmission rate application for 2020-2024, seeking a base revenue requirement of $36 million for 2020, and a 1.4% revenue cap escalator index for 2021 to 2024.
MAAD Applications
Orillia Power MAAD Application
In 2016, Hydro One filed a MAAD application (2016 Application) with the OEB to acquire Orillia Power Distribution Corporation (Orillia Power) from the City of Orillia, Ontario. On April 12, 2018, the OEB issued a decision denying Hydro One's proposed acquisition of Orillia Power. On September 26, 2018, Hydro One filed a new MAAD application (2018 Application) with the OEB to acquire Orillia Power. The evidence in the 2018 Application is similar to that provided in the 2016 Application. However, it includes additional information that was not available at the time Hydro One filed its 2016 MAAD Application, including updates to reflect current variables to costs and other metrics, as well as future cost structures pertaining to the acquired entity.
On October 16, 2018, the School Energy Coalition (SEC) filed a motion with the OEB seeking an order dismissing the 2018 Application. On January 16, 2019, Hydro One and Orillia Power filed submissions on the SEC motion, maintaining that the motion should be dismissed, and that the 2018 Application should be heard by the OEB. On March 12, 2019, the OEB dismissed SEC's motion. At the request of Hydro One, on March 21, 2019, the OEB cancelled the deadlines for interrogatories to allow Hydro One to file amended or supplemental evidence in response to the OEB decision on Hydro One’s 2018-2022 Distribution Application. Hydro One filed the supplemental evidence on April 26, 2019. A transcribed technical conference is scheduled for October 3-4, 2019. The OEB decision is pending.
Peterborough Distribution MAAD Application
On October 12, 2018, the Company filed an application with the OEB for approval of the acquisition of business and distribution assets of Peterborough Distribution Inc. (Peterborough Distribution). On October 25, 2018, an advance ruling certification application was filed with the Competition Bureau. On November 14, 2018, the Competition Bureau issued a no action letter, meaning that transaction can proceed from the Competition Bureau’s perspective. At the request of Hydro One, on March 21, 2019, the OEB allowed Hydro One to file amended or supplemental evidence in response to the OEB decision on Hydro One’s 2018-2022 Distribution Application. Hydro One filed the supplemental evidence on April 26, 2019. A transcribed technical conference is scheduled for October 3-4, 2019. The OEB decision is pending.
OTHER DEVELOPMENTS
Collective Agreements
On March 25, 2019, Hydro One and the Society of United Professionals (Society) announced the tentative settlement of a two-year collective agreement covering approximately 1,500 employees in critical engineering, supervisory and administrative roles. The agreement covering the period from April 1, 2019 to March 31, 2021 was ratified by the Society on April 30, 2019.
Litigation
Hydro One, Hydro One Networks, Hydro One Remote Communities, and Norfolk Power Distribution Inc. were defendants in a class action suit commenced in 2015 in which the representative plaintiff was seeking up to $125 million in damages related to allegations of improper billing practices. In March 2019, the plaintiff’s application for leave to appeal the lower court’s refusal to certify the lawsuit as a class action was denied by the Ontario Court of Appeal, which means that the lawsuit has effectively ended.

 
12
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



2019 Federal and Ontario Budgets
Impact
Certain 2019 federal and Ontario budget measures enacted during the six months ended June 30, 2019 provide certain time-limited investment incentives permitting Hydro One to deduct Accelerated CCA of up to three times the first-year rate for eligible capital investments acquired after November 20, 2018 and placed in-service before January 1, 2028. The Accelerated CCA resulted in a temporary reduction in the Company’s ETR and the recognition of a tax regulatory liability relating to the Accelerated CCA that has not been reflected in the OEB approved rates. The timing of the disposition of the tax regulatory liability is subject to OEB approval, and may have a material impact on Hydro One’s future cash flows in the near term.
Estimated ETR Change
Hydro One expects that the OEB’s March 7, 2019 decision relating to the sharing of the Company’s deferred tax asset and the Accelerated CCA will lower the Company's ETR in 2019 and in the next 5 years.
HYDRO ONE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
Board of Directors
On June 24, 2019, Hydro One announced that Board of Directors (Board) Chair Tom Woods would be stepping down from the Board on July 31, 2019. On July 2, 2019, Hydro One announced that Tim Hodgson has been appointed by the Board to serve as the Board Chair commencing August 1, 2019.
Executive Officers
On March 28, 2019, Hydro One announced the appointment of Mark Poweska as President and Chief Executive Officer (CEO) of Hydro One and Hydro One Limited, effective May 10, 2019.
In April 2019, Greg Kiraly, Chief Operating Officer, and Jamie Scarlett, Executive Vice President and Chief Legal Officer, left the Company following a period of planned leadership transition. 
On May 8, 2019, Chris Lopez was appointed as the Chief Financial Officer of Hydro One and Hydro One Limited, effective May 9, 2019.
On July 10, 2019, Hydro One announced the appointment of Saylor Millitz-Lee, as Executive Vice President and Chief Human Resources Officer, effective immediately. 
Executive Compensation
On March 8, 2019, Hydro One released a revised executive compensation framework for its Board, the CEO and other executives that was approved by the Management Board of Cabinet of the Province.
NON-GAAP MEASURES
FFO
FFO is defined as net cash from operating activities, adjusted for (i) changes in non-cash balances related to operations, (ii) dividends paid on preferred shares, and (iii) distributions to noncontrolling interest. Management believes that FFO is helpful as a supplemental measure of the Company’s operating cash flows as it excludes timing-related fluctuations in non-cash operating working capital and cash flows not attributable to common shareholders. As such, FFO provides a consistent measure of the cash generating performance of the Company’s assets.
Three months ended June 30
 

Six months ended June 30
 
(millions of dollars)
2019

2018


2019

2018

Net cash from operating activities
285

305

 
542

693

Changes in non-cash balances related to operations
50

92

 
164

142

Preferred share dividends
—

(2
)
 
(2
)
(4
)
Distributions to noncontrolling interest
(2
)
(2
)
 
(6
)
(5
)
FFO
333

393

 
698

826


 
13
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



Revenues, Net of Purchased Power
Revenues, net of purchased power is defined as revenues less the cost of purchased power. Management believes that revenue, net of purchased power is helpful as a measure of net revenues for the distribution segment, as purchased power is fully recovered through revenues.
Three months ended June 30
 

Six months ended June 30
 
(millions of dollars)
2019

2018


2019

2018

Revenues
1,403

1,466

 
3,153

3,032

Less: Purchased power
653

674

 
1,460

1,425

Revenues, net of purchased power
750

792

 
1,693

1,607

Three months ended June 30
 
 
Six months ended June 30
 
(millions of dollars)
2019

2018

 
2019

2018

Distribution revenues
1,029

1,036

 
2,350

2,181

Less: Purchased power
653

674

 
1,460

1,425

Distribution revenues, net of purchased power
376

362

 
890

756

FFO, revenues, net of purchased power, and distribution revenues, net of purchased power are not recognized measures under US GAAP and do not have a standardized meaning prescribed by US GAAP. They are therefore unlikely to be directly comparable to similar measures presented by other companies. They should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under US GAAP.
RELATED PARTY TRANSACTIONS
Hydro One is owned by Hydro One Limited. The Province is a shareholder of Hydro One with approximately 47.3% ownership at June 30, 2019. The IESO, Ontario Power Generation Inc. (OPG), Ontario Electricity Financial Corporation (OEFC), the OEB, Hydro One Telecom, and 2587264 Ontario Inc. are related parties to Hydro One because they are controlled or significantly influenced by the Province or by Hydro One Limited. The following is a summary of the Company’s related party transactions during the three and six months ended June 30, 2019 and 2018:
(millions of dollars)
Three months ended June 30
 
Six months ended June 30
 
Related Party
Transaction
2019

2018

2019

2018

IESO
Power purchased
259

245

809

758

 
Revenues for transmission services
370

414

783

819

 
Amounts related to electricity rebates
104

103

242

240

 
Distribution revenues related to rural rate protection
60

61

118

118

 
Distribution revenues related to the supply of electricity to remote northern communities
9

8

18

16

 
Funding received related to Conservation and Demand Management programs
8

10

23

22

OPG
Power purchased
2

2

5

6

 
Revenues related to provision of services and supply of electricity
1

2

3

4

 
Costs related to the purchase of services
1

—

1

—

OEFC
Power purchased from power contracts administered by the OEFC
—

—

1

1

OEB
OEB fees
2

2

4

4

Hydro One Limited
Return of stated capital
347

136

485

265

Dividends paid
—

1

1

6

 
Stock-based compensation costs
1

6

8

12

 
Cost recovery for services provided
4

3

7

7

Hydro One Telecom
Services received – costs expensed
5

6

11

12

Revenues for services provided
—

—

1

1

2587264 Ontario Inc.
Preferred shares redeemed
—

—

486

—

Dividends paid
—

2

2

4


 
14
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over financial reporting as defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings. Internal control, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and due to its inherent limitations, may not prevent or detect all misrepresentations.
There were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2019, that materially affected, or are reasonably likely to materially affect, the Company’s disclosure controls and procedures and internal control over financial reporting.
NEW ACCOUNTING PRONOUNCEMENTS
The following tables present Accounting Standards Codifications (ASCs) and Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board that are applicable to Hydro One:
Recently Adopted Accounting Guidance
Guidance
Date issued
Description
Effective date
Impact on Hydro One
ASC 842
February 2016 - January 2019
Lessees are required to recognize the rights and obligations resulting from operating leases as assets (right to use the underlying asset for the term of the lease) and liabilities (obligation to make future lease payments) on the balance sheet.
January 1, 2019
Hydro One adopted ASC 842 on January 1, 2019 using the modified retrospective transition approach using the effective date of January 1, 2019 as its date of initial application. See Note 2 to the financial statements for impact of adoption. The Company has included the disclosure requirements of ASC 842 for interim periods in Note 17 to the financial statements.
ASU 2017-12
August 2017
Amendments will better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results.
January 1, 2019
No impact upon adoption
ASU
2018-07
June 2018
Expansion in the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. Previously, ASC 718 was only applicable to share-based payment transactions for acquiring goods and services from employees.
January 1, 2019
No impact upon adoption
ASU 2018-15
August 2018
The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement is not affected by the amendment.
January 1, 2020
Hydro One early-adopted this ASU on April 1, 2019. The ASU was applied prospectively and there was no material impact upon adoption.
Recently Issued Accounting Guidance Not Yet Adopted
Guidance
Date issued
Description
Effective date
Anticipated impact on Hydro One
ASU
2019-01
March 2019
This amendment carries forward the exemption previously provided under ASC 840 relating to the determination of the fair value of underlying assets by lessors that are not manufacturers or dealers. It also provides for clarification on cash-flow presentation of sales-type and financing leases and clarifies that transition disclosures under Topic 250 will not be applicable in the adoption of ASC 842.
January 1, 2020
Under assessment
ASU 2019-04
April 2019
This amendment clarifies, corrects and improves several aspects of the guidance under Topic 326 Financial Instruments - Credit Losses, Topic 815 Derivatives and Hedging and Topic 825 Financial Instruments.
January 1, 2020
Under assessment
ASU 2019-05
May 2019
The amendments in this update provide entities with an option to irrevocably elect the fair value option to be applied on an instrument-by-instrument basis for certain financial assets upon the adoption of Topic 326.
January 1, 2020
Under assessment

 
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



FORWARD-LOOKING STATEMENTS AND INFORMATION
The Company’s oral and written public communications, including this document, often contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the Company’s business and the industry, regulatory and economic environments in which it operates, and include beliefs and assumptions made by the management of the Company. Such statements include, but are not limited to, statements regarding: the Company’s transmission and distribution rate applications, including resulting decisions, rates and expected impacts and timing; the Company’s liquidity and capital resources and operational requirements; the Operating Credit Facilities; expectations regarding the Company’s financing activities; the Company’s maturing debt; ongoing and planned projects and initiatives, including expected results and completion dates; expected future capital investments, including expected timing and investment plans; contractual obligations and other commercial commitments; expected impacts relating to the deferred tax asset; Hydro One's appeal of the OEB's deferred tax asset decision; the motion to review and vary the OEB’s decision relating to recovery of pension costs and the related appeal; NRLP, related regulatory applications, and expectations related to the project, including timing; collective agreements; the pension plan, future pension contributions, valuations and expected impacts; the anticipated impacts of the Accelerated CCA on Hydro One, including timing of such impacts; the Company’s expectations relating to its ETR; non-GAAP measures; internal control over financial reporting and disclosure; recent accounting-related guidance; and the Company’s acquisitions and mergers, including Orillia Power and Peterborough Distribution. Words such as “expect”, “anticipate”, “intend”, “attempt”, “may”, “plan”, “will”, “believe”, “seek”, “estimate”, “goal”, “aim”, “target”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve assumptions and risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed, implied or forecasted in such forward-looking statements. Hydro One does not intend, and it disclaims any obligation, to update any forward-looking statements, except as required by law.
These forward-looking statements are based on a variety of factors and assumptions including, but not limited to, the following: no unforeseen changes in the legislative and operating framework for Ontario’s electricity market or for Hydro One specifically; favourable decisions from the OEB and other regulatory bodies concerning outstanding and future rate and other applications; no unexpected delays in obtaining the required approvals; no unforeseen changes in rate orders or rate setting methodologies for the Company’s distribution and transmission businesses; continued use of US GAAP; a stable regulatory environment; no unfavourable changes in environmental regulation; no significant changes to the Company's current credit ratings; no unforeseen impacts of new accounting pronouncements; and no significant event occurring outside the ordinary course of business. These assumptions are based on information currently available to the Company, including information obtained from third party sources. Actual results may differ materially from those predicted by such forward-looking statements. While Hydro One does not know what impact any of these differences may have, the Company’s business, results of operations, financial condition and credit stability may be materially adversely affected. Factors that could cause actual results or outcomes to differ materially from the results expressed or implied by forward-looking statements include, among other things:
•
risks associated with the Province’s share ownership of Hydro One's parent corporation and other relationships with the Province, including potential conflicts of interest that may arise between Hydro One, the Province and related parties;
•
regulatory risks and risks relating to Hydro One’s revenues, including risks relating to rate orders, actual performance against forecasts and capital expenditures, or denials of applications;
•
the risk that the Company may be unable to comply with regulatory and legislative requirements or that the Company may incur additional costs for compliance that are not recoverable through rates;
•
the risk of exposure of the Company’s facilities to the effects of severe weather conditions, natural disasters or other unexpected occurrences for which the Company is uninsured or for which the Company could be subject to claims for damage;
•
public opposition to and delays or denials of the requisite approvals and accommodations for the Company’s planned projects;
•
the risk that Hydro One may incur significant costs associated with transferring assets located on reserves (as defined in the Indian Act (Canada));
•
the risks associated with information system security and maintaining a complex IT system infrastructure;
•
the risk of labour disputes and inability to negotiate appropriate collective agreements on acceptable terms consistent with the Company’s rate decisions;
•
the risks related to the Company’s work force demographic and its potential inability to attract and retain qualified personnel;
•
risk that the Company is not able to arrange sufficient cost-effective financing to repay maturing debt and to fund capital expenditures;
•
the risk of a credit rating downgrade and its impact on the Company’s funding and liquidity;
•
risks associated with fluctuations in interest rates and failure to manage exposure to credit risk;
•
the risk that the Company may not be able to execute plans for capital projects necessary to maintain the performance of the Company’s assets or to carry out projects in a timely manner;
•
the risk of non-compliance with environmental regulations or failure to mitigate significant health and safety risks and inability to recover environmental expenditures in rate applications;
•
the risk that assumptions that form the basis of the Company’s recorded environmental liabilities and related regulatory assets may change;

 
16
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2019 and 2018



•
the risk of not being able to recover the Company’s pension expenditures in future rates and uncertainty regarding the future regulatory treatment of pension, other post-employment benefits and post-retirement benefits costs;
•
the potential that Hydro One may incur significant expenses to replace functions currently outsourced if agreements are terminated or expire before a new service provider is selected;
•
the risks associated with economic uncertainty and financial market volatility;
•
the inability to prepare financial statements using US GAAP;
•
the impact of the ownership by the Province of lands underlying the Company’s transmission system; and
•
the risk related to the impact of the new accounting pronouncements.
Hydro One cautions the reader that the above list of factors is not exhaustive. Some of these and other factors are discussed in more detail in the section “Risk Management and Risk Factors” in the 2018 amended MD&A.
In addition, Hydro One cautions the reader that information provided in this MD&A regarding the Company’s outlook on certain matters, including potential future investments, is provided in order to give context to the nature of some of the Company’s future plans and may not be appropriate for other purposes.
Additional information about Hydro One, including the Company’s Annual Information Form, is available on SEDAR at www.sedar.com, 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.

 
17
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 EX-99.3 4 a2019q2hoiceocert.htm EXHIBIT 99.3 Exhibit



FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS – FULL CERTIFICATE
I, Mark Poweska, President and Chief Executive Officer, Hydro One Inc., certify the following:
 

1.
 Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hydro One Inc. (the “issuer”) for the interim period ended June 30, 2019.
2.
No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4.
Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5.
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a)
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i)
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii)
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b)
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.




5.1
Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
5.2
N/A
5.3
N/A
6.
Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2019 and ended on June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
 
 
 
 
Date:  
 
August 9, 2019
 
 
 
 
/s/ Mark Poweska
 
 
President and Chief Executive Officer



 EX-99.4 5 a2019q2hoicfocert.htm EXHIBIT 99.4 Exhibit


FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS – FULL CERTIFICATE
I, Christopher Lopez, Chief Financial Officer, Hydro One Inc., certify the following:
 

1.
 Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hydro One Inc. (the “issuer”) for the interim period ended June 30, 2019.
2.
No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4.
Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5.
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a)
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i)
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii)
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b)
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.




5.1
Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
5.2
N/A
5.3
N/A
6.
Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2019 and ended on June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
 
 
 
 
Date:  
 
August 9, 2019
 
 
 
 
/s/ Christopher Lopez
 
 
Chief Financial Officer



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