We are maintaining our $35 per share fair value estimate for Hydro One (H) after the company reported first-quarter operating earnings of $0.49 per share compared with $0.47 in the same year-ago period. Our no economic moat rating remains unchanged.
Management continues to execute well on all fronts, including building regulatory relationships and delivering on its growth investment opportunities. We think Hydro One deserves a premium to its regulated utilities peers due to strong execution and above-average growth opportunities. However, Hydro One trades at over 21 times our 2024 earnings estimate, a 27% premium to the average P/E for North American utilities as of May 14. Hydro One currently trades at a 16% premium to our fair value.
The company slightly lowered its capital investment projection range to build the infrastructure for broadband internet adoption across its territory to $300 million-$700 million from $500 million-$1.5 billion. The capital expenditures currently aren’t included in our or the company’s investment plans as we await further government clarification on the timing and extent of the investment. We currently estimate the inclusion of the investment would increase our fair value $1 per share.
We continue to expect Hydro One will be able to achieve the high end of management’s 5% to 7% annual earnings growth target, supported by our expectations for Hydro One to invest more than $11 billion from 2024-27 without the need for external capital. Total capital investments and in-service additions were $913 million in the quarter, a 24% increase from the first quarter last year.
Earnings in the quarter benefited from higher approved transmission and distribution rates. Partially offsetting these benefits were higher interest costs and income tax expense.
Hydro One’s regulated transmission and distribution assets provide cash flow clarity.
The company’s capital investment plan drives our growth forecast above the midpoint of management’s 5%-7% guidance through 2028.
The company’s approved joint rate application offers opportunities for additional growth capital investment.
Hydro One faces significant political risk with the province of Ontario’s 47% ownership stake.
The Canadian regulatory environment offers lower allowed returns than in the U.S.
As with all regulated utilities, rising interest rates will raise financing costs and could make the dividend less attractive for income investors.
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