November 16, 2015
HYDRO ONE LTD.
Crown jewel utility + consolidation upside
INITIATING COVERAGE
H (TSX-H): $22.03
Stock Rating: Outperform
Risk Rating: Average
12-Month Target: $26.00
12-Month Total Return: 21.8% (including 3.8% cash yield)
Shares O/S (FD): 595.0 Mln
Market Cap: $13.1 Bln
HIGHLIGHTS
 Highly stable cash flows: Rate regulated Hydro One is the largest electricity transmission and
distribution utility in Ontario with ~95% and ~25% market share, respectively. Cash flows are
virtually all cost-of-service (i.e., highly stable and predictable).
 IPO of 15% stake at $20.50/sh: Prior to the IPO on Nov. 5th, the Company had been fully
owned by the Province of Ontario, which intends to reduce its interest over time to ~40%,
subject to a 180-day lock-up period following IPO (i.e., May 3, 2016). Based on the
Governance Agreement, the Province is considered an investor, not a manager.
 New leadership: Mr. Mayo Schmidt was appointed President and CEO on Aug. 20, 2015, and
prior to, served as President, CEO and director at Viterra Inc. from 2000 to 2012. Mr. Michael
Vels was appointed CFO on June 23, 2015, and prior to, served as CFO at Maple Leaf Foods
Inc. from 2004 to 2014.
 Steady organic growth: Hydro One is undertaking a five-year capex program of $7.7 billion
(~$1.5 billion per year), underpinning 4% annual organic rate base growth and supporting our
forecast 5% annual dividend growth rate through 2019e, while maintaining an earnings
payout at the low end of Hydro One's 70-80% target range.
 Investment stance: Based on a group-low cash flow risk profile (>99% cost-of-service) and
"A" credit ratings, we assign a group-high 2016e EV/Free-EBITDA valuation multiple of 18.5x
(group: 14.7x) - currently trading at 17.6x (group: 13.2x). Meanwhile, with Ontario promoting
the consolidation of LDCs (local distribution companies) via tax-based incentives, we add
$1.50/sh of risked M&A upside (~5%) to our base $24.50/sh valuation.
EQUITY
 We are initiating coverage of Hydro One with a $26 target. Based on a potential 12-month
RESEARCH
Patrick Kenny, CFA
Associate: Michael Nguyen
total return opportunity of 22%, combined with a group-low cash flow risk profile, we are
initiating coverage with an Outperform rating.
403.290.5451
416.869.7566
patrick.kenny@nbc.ca
michael.nguyen@nbc.ca
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
TABLE OF CONTENTS
EXECUTIVE SUMMARY
Overview
Growth outlook: Steady mid-single digit organic growth
Investment Stance – crown jewel utility + consolidation upside
2 2 2 3 HYDRO ONE LTD.
Background
Ontario electricity market
Overview of business operations
Growth outlook
Financial profile
Capital structure
Liquidity analysis
Dividend policy
Valuation summary
Investment stance – crown jewel utility + consolidation upside
4 4 5 6 10 14 16 16 17 17 21 MARKET COMPARABLES
22 INVESTMENT RISKS
23 APPENDIX I
24 APPENDIX II
25 APPENDIX III
26 DISCLOSURES
27 Industry Rating (Utilities): Underweight (NBF Economics & Strategy Group)
All dollar amounts in Cdn$ unless otherwise noted. All pricing as at November 11, 2015.
All NBF research mentioned in this document is available at www.nbfm.ca/en/research/
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
HYDRO ONE LTD.
Stock Information
Company Profile
Stock Ticker:
H
Last Closing Price (TSX):
Stock Rating:
OP
Risk Rating:
A
12-Month Target:
$26.00
12-Month Total Return:
Shares Outstanding (mln):
21.8%
Patrick Kenny, CFA
13,108
Enterprise Value (C$mln):
23,331
(403) 290-5451
patrick.kenny@nbc.ca
Associate:
Michael Nguyen
595
Market Capitalization (C$mln):
Dividend Yield:
NBF Research
Analyst:
Hydro One Ltd. is a holding company that owns a 100% interest in rateregulated Hydro One Inc. and non-rate-regulated Hydro One Telecom Inc.
Hydro One Ltd.’s core asset, Hydro One Inc., is the largest electricity
transmission and distribution utility in Ontario and represents >99% of Hydro
One’s business. Prior to its initial public offering (IPO) on Nov. 5, 2015,
Hydro One Inc., was fully owned by the Province of Ontario since the
reorganization of Ontario Hydro in 1999.
$22.03
(416) 869-7566
michael.nguyen@nbc.ca
Company Contacts
President, CEO and Director:
3.8%
Mayo Schmidt
CFO:
Michael Vels
Financial Estimates (Cdn$ millions)
Valuation
2013
Stock price
P/E(1)
P/CF
(1)
P/AFFO
(1)(2)
EV/EBITDA
(1)
EV/Free-EBITDA(1)(2)
Dividend yield
(3)
Q1/15
Q2/15
Q3/15e
Q4/15e
2015e
Q1/16e
Q2/16e
Q3/16e
Q4/16e
2016e
n/a
n/a
n/a
n/a
$22.03
$22.03
$22.03
$22.03
$22.03
$22.03
$22.03
n/a
n/a
n/a
n/a
n/a
19.6x
19.6x
20.4x
19.8x
18.1x
18.7x
18.7x
n/a
n/a
n/a
n/a
n/a
8.9x
8.9x
6.9x
7.3x
8.1x
8.2x
8.2x
n/a
n/a
n/a
n/a
n/a
16.8x
16.8x
12.8x
14.7x
14.6x
15.1x
15.1x
n/a
n/a
n/a
n/a
n/a
11.8x
11.8x
9.3x
9.7x
11.4x
11.6x
11.6x
n/a
n/a
n/a
n/a
n/a
18.4x
18.4x
14.3x
15.3x
17.4x
17.9x
17.9x
n/a
Leverage & Coverage
Net Debt/EBITDA
2014
n/a
2013
n/a
2014
n/a
Q1/15
n/a
Q2/15
n/a
Q3/15e
0.8%
Q4/15e
0.8%
2015e
3.8%
Q1/16e
3.8%
Q2/16e
3.8%
Q3/16e
3.8%
Q4/16e
3.8%
2016e
4.3x
4.5x
4.4x
4.4x
4.5x
5.1x
5.1x
5.2x
5.1x
5.0x
5.1x
5.1x
CF/Interest(3)
4.7x
4.3x
4.4x
4.7x
4.6x
4.6x
4.6x
4.4x
4.6x
4.8x
4.8x
4.8x
D/Cap
54%
53%
52%
52%
52%
57%
57%
57%
57%
57%
58%
Capitalization
2013
2014
Q1/15
Q2/15
Q3/15e
Q4/15e
2015e
Q1/16e
Q2/16e
Q3/16e
Q4/16e
58%
2016e
Weighted average shares - basic(4)
595
595
595
595
595
595
595
595
595
595
595
595
Weighted average shares - FD(4)
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
595
n/a
n/a
n/a
n/a
n/a
23,331
23,331
23,409
23,546
23,625
23,764
23,764
Ending shares - basic
Ending shares - FD
(4)
(4)
Enterprise value
Market capitalization
Net debt
Preferred equity
n/a
n/a
n/a
n/a
n/a
13,108
13,108
13,108
13,108
13,108
13,108
13,108
8,240
8,638
8,484
8,701
8,793
9,829
9,829
9,907
10,044
10,123
10,262
10,262
323
323
323
323
323
323
323
323
323
323
323
323
-
71
72
71
71
71
71
71
71
71
71
NCI
Dividends
2013
Dividends
Dividend per share
DRIP(5)
2014
Q1/15
Q2/15
Q3/15e
Q4/15e
2015e
Q1/16e
Q2/16e
Q3/16e
Q4/16e
71
2016e
200
270
25
25
25
25
100
125
125
125
125
500
$0.34
$0.45
$0.04
$0.04
$0.04
$0.04
$0.17
$0.21
$0.21
$0.21
$0.21
$0.84
-
-
-
-
-
-
-
-
-
-
-
0%
0%
0%
15%
21%
5%
9%
8%
6%
7%
29%
34%
29%
34%
31%
AFFO payout ratio(6)
27%
44%
8%
29%
16%
12%
13%
50%
66%
51%
67%
57%
(6)
Earnings payout ratio
Income Statement
25%
2013
37%
2014
0%
11%
Q1/15
19%
Q2/15
0%
0%
18%
Q3/15e
15%
Q4/15e
0%
15%
2015e
30%
62%
Q1/16e
30%
83%
Q2/16e
30%
62%
Q3/16e
30%
-
% DRIP participation
FFO payout ratio(6)
84%
Q4/16e
30%
71%
2016e
Adj. EBITDA by segment
Transmission
Distribution
1,154
1,194
307
266
302
274
1,150
323
291
323
291
1,230
792
742
253
179
160
230
822
221
193
221
193
827
2
1
-
-
-
-
-
-
-
-
1,948
1,937
560
462
504
544
484
544
484
2,056
-3%
-3%
2%
-3%
9%
18%
-4%
4%
(794)
Telecom
Adj. EBITDA
(2)
443
(2)
1,970
3%
-1%
5%
9%
Depreciation & amortization
Interest(7)
(676)
(722)
(187)
(190)
(191)
(191)
(759)
(199)
(199)
(199)
(199)
(378)
(397)
(98)
(98)
(107)
(113)
(415)
(107)
(108)
(108)
(109)
(432)
Taxes
(109)
(89)
(45)
(23)
(25)
(30)
(123)
(36)
(27)
(36)
(26)
(125)
y/y % chg.
NCI
Adj. Net Earnings
Adj. EPS - FD
Cash Flow Statement
Funds from operations (FFO)
-
2
785
731
$1.32
2013
$1.23
2014
$0.38
Q1/15
$0.22
Q2/15
(1)
(1)
139
170
$0.23
Q3/15e
$0.28
Q4/15e
(5)
667
$1.12
2015e
(1)
202
$0.34
Q1/16e
$0.25
Q2/16e
(1)
201
$0.34
Q3/16e
(1)
149
$0.25
Q4/16e
(4)
702
$1.18
2016e
486
274
331
386
431
371
430
370
(687)
(164)
(188)
(173)
(173)
(699)
(183)
(183)
(183)
(183)
748
608
322
86
158
213
778
248
188
247
187
870
Investing activities
(812)
(683)
(189)
(300)
(224)
(224)
(938)
(201)
(201)
(201)
(201)
(803)
Balance Sheet
Working capital
PP&E
369
8
289
$2.18
$0.82
$0.46
$0.56
$0.65
$2.48
$0.72
$0.62
$0.72
$0.62
$2.69
$1.02
$0.54
$0.14
$0.26
$0.36
$1.31
$0.42
$0.32
$0.41
$0.31
$1.46
2014
Q1/15
(265)
Q2/15
(561)
Q3/15e
(428)
(225)
Q4/15e
(520)
(756)
47
2015e
(125)
Q1/16e
(756)
(834)
(125)
Q2/16e
(971)
(125)
Q3/16e
(125)
(732)
$1.26
61
(25)
1,602
$2.31
2013
(377)
1,477
(1)
150
(627)
Financing activities
1,295
(1)
131
Maintenance capital expenditures
Adj. funds from operations (AFFO)(2)
FFO/sh - FD
AFFO/sh - FD(2)
1,375
(2)
228
Q4/16e
(500)
2016e
(1,050)
(1,189)
(1,189)
19,062
16,431
17,401
17,587
17,907
18,114
18,320
18,320
18,506
18,691
18,876
19,062
Other assets
3,136
3,699
3,702
3,676
3,676
3,676
3,676
3,676
3,676
3,676
3,676
3,676
Total Assets
19,628
20,835
20,728
21,155
21,270
21,240
21,240
21,348
21,396
21,502
21,548
21,548
Long-term debt
8,301
8,373
7,923
8,273
8,273
9,073
9,073
9,073
9,073
9,073
9,073
9,073
Other liabilities
3,912
4,515
4,653
4,625
4,626
4,652
4,652
4,682
4,705
4,735
4,758
4,758
Preferred equity
Equity
NCI
Total Liabilities and Equity
323
323
323
323
323
323
323
323
323
323
323
323
7,092
7,553
7,757
7,863
7,977
7,121
7,121
7,199
7,224
7,300
7,324
7,324
-
71
72
71
71
71
71
71
71
71
71
71
19,628
20,835
20,728
21,155
21,270
21,240
21,240
21,348
21,396
21,502
21,548
21,548
(1) Based on 12-month trailing figures.
(2) AFFO = FFO less Maintenance capex; Free-EBITDA = EBITDA less Maintenance capex.
(3) Preferred equity treated as 50% debt.
(4) Retro adjustment for share count.
(5) Common shares paid in lieu of cash dividends will be purchased from the open market and not issued from treasury.
(6) FFO payout ratio = Total dividends / FFO; AFFO payout ratio = Total dividends / AFFO; Earnings payout ratio = Total dividends / Net earnings.
(7) Includes preferred equity dividends.
Source: Company Reports, NBF Estimates, ThomsonOne
PATRICK KENNY
1
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
EXECUTIVE SUMMARY
Overview
Hydro One Ltd. (Hydro One; H: TSX) is a holding company that owns a 100% interest in rateregulated Hydro One Inc. – the largest electricity transmission and distribution utility in Ontario with
Transmission and Distribution representing over 99% of Hydro One’s 2016e EBITDA. As such, the
Company’s cash flows are virtually all cost-of-service (i.e., highly stable and predictable). Prior to
Hydro One’s IPO (initial public offering) of a 15% stake on Nov. 5, 2015, the Company had been fully
owned by the Province of Ontario since the reorganization of Ontario Hydro in 1998.
ELECTRICITY VALUE CHAIN
HYDRO ONE - SEGEMENTED 2016E EBITDA
Hydro One Inc.
Distribution
41%
Generation
Transmission
Distribution
Retailing
•
•
•
•
• High Voltage
• Lower Voltage
• Industrial
• Residential
• Commercial
Nuclear
Hydro
Gas
Wind
Transmission
59%
Source: NBF
Telecom
0%
Source: NBF Estimates
Hydro One’s allowable ROEs (return on equity) for Transmission and Distribution have averaged
9.33% and 9.59%, respectively, over the past five years versus the Canadian peer average of ~9% –
suggesting a relatively attractive regulatory jurisdiction. Meanwhile, Hydro One’s realized ROE has
averaged ~12% over the past five years – largely reflecting higher weather-related peak demand within
Transmission. For 2016e, we forecast a realized consolidated ROE of ~10% versus the projected
allowable ROEs of 9.19%.
9.19%
9.19%
9.85%
2016e
9.36%
9.66%
11.18%
2014
9.30%
9.30%
9.78%
8.93%
9.66%
12.81%
8.50%
2013
12.00%
9.00%
Hydro One
9.42%
9.66%
12.67%
16.00%
9.50%
Distribution
2012
10.00%
Transmission
9.66%
9.66%
11.85%
Integrated Utility
Distribution
SEGMENT AND OVERALL REALIZED ROE
ROE
20.00%
2011
5-yr Avg.
8.39%
9.85%
11.64%
Transmission
Overall Avg.
2010
5-yr Range
2015e
CANADIAN RATE-REGULATED ELECTRICITY ROE
ROE
10.50%
8.00%
8.00%
4.00%
Source: Company Reports
EMA - NS
FTS - ON
FTS - NF
FTS - BC
FTS - AB
CU - AB
HYO - ON
CU - AB
HYO - ON
7.50%
0.00%
Source: Company Reports
Growth outlook: Steady mid-single digit organic growth
Hydro One is undertaking a five-year capital investment program of $7.7 billion with annual
investments averaging ~$1.5 billion per year through 2019 – all self-funding (i.e., no external equity
needed), underpinning 4% annual organic growth in the Company’s rate base through 2019e to $20.1
billion from 2014 levels of $16.3 billion (see following figure). Overall, we forecast 5% annual dividend
growth through 2019e, while maintaining an earnings payout ratio at the low end of the Company’s
70-80% target range.
2
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
5-YR SEGMENTED CAPEX PROGRAM
18
19
2016e
2017e
20
17
2015e
19
16
13
2011
2014
12
2010
14
12
15
10
832
839
848
350
866
899
700
2009
20
15
2009-2014 CAGR: 7%
2013
1,514
1,517
1,522
5-yr CAGR: 4%
25
682
1,050
669
665
1,400
RATE BASE GROWTH FORECAST
$bln
30
Distribution
674
1,750
1,535
1,564
Transmission
678
$mln
2,100
5
Source: Company Reports
2019e
2018e
2012
2019e
2018e
2017e
2016e
0
2015e
0
Source: Company Reports, NBF Estimates
Investment Stance – crown jewel utility + consolidation upside
With a group-low cash flow risk profile (over 99% cost-of-service) and “A” credit ratings, we assign a
group-high valuation multiple of 18.5x EV/Free-EBITDA (5.0% WACC) versus the group at 14.7x
(6.1% WACC).
WEIGHTED AVERAGE COST OF CAPITAL
FREE-EBITDA MULTIPLE
High-payout:
Low-payout:
High-payout:
Low-payout:
Avg.: 14.7x
16.0x
8.0%
Avg.: 6.1%
Note: NBF Research restricted on CUS, PPL and SPB.
Note: NBF Research restricted on CUS, PPL and SPB.
Source: NBF Estimates
Source: NBF Estimates
TA
CPX
TWM
TRP
VSN
CU
ACO
KEY
ALA
EMA
FTS
IPL
VNR
H
GEI
TWM
TA
CPX
KEY
ALA
VSN
TRP
IPL
ENF
VNR
ENB
0.0x
ACO
0.0%
EMA
4.0x
CU
2.0%
H
8.0x
FTS
4.0%
ENB
12.0x
ENF
6.0%
GEI
10.0%
20.0x
Meanwhile, Ontario is promoting the consolidation of LDCs (local distribution companies) by
reducing the transfer tax rate over the next three years to 22% (from 33%), while exempting transfer
taxes and capital gains portion of the departure tax for acquired LDCs with less than 30,000
customers. In total, we highlight ~70 LDCs in Ontario, generating over $1 billion of EBITDA, and
representing ~35% “blue sky” unrisked M&A upside based on precedent transaction multiples of
~11.5x EBITDA (~9.5x including transfer tax). Assuming Hydro One captures one-third market
share, and applying a 50% risk-weighting, we include $1.50/sh of M&A upside within our $26.00
target. Based on a 12-month total return of 21.8%, combined with a group-low cash flow risk profile,
we initiate coverage of Hydro One with an Outperform rating.
LDC'S WITH <30K CUSTOMERS - M&A DCF SENSITIVITY
LDC'S WITH >30K CUSTOMERS - M&A DCF SENSITIVITY
Transaction Value(1) ($mln)
250
500
750
1,000
1,250
10.5x
$0.25
$0.50
$0.75
$1.00
$1.25
11.0x
$0.25
$0.50
$0.50
$0.75
$1.00
11.5x
$0.25
$0.25
$0.50
$0.75
$1.00
12.0x
$0.25
$0.25
$0.50
$0.75
$0.75
12.5x
$0.25
$0.25
$0.50
$0.50
$0.75
Source: NBF Estimates
EV/EBITDA
Transaction
EV/EBITDA
Transaction
Transaction Value ($mln)
7,000
8,000
9,000
10,000
11,000
8.5x
$6.50
$7.50
$8.50
$9.50
$10.25
9.0x
$5.75
$6.50
$7.25
$8.25
$9.00
9.5x
$5.00
$5.75
$6.25
$7.00
$7.75
10.0x
$4.25
$4.75
$5.50
$6.00
$6.75
10.5x
$3.50
$4.00
$4.50
$5.00
$5.75
(1) Includes 22% transfer tax.
Source: NBF Estimates
VALUATION SUMMARY
Methodology
Metric
Valuation
DDM
3.5%
$24.50
EV/Free-EBITDA
18.5x
$24.00
DCF Model
5.00%
$25.00
Equally Weighted Avg.
Risked upside
Risked Target
$24.50
50%
$1.50
$26.00
Source: NBF Estimates
PATRICK KENNY
3
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
HYDRO ONE LTD.
Background
Hydro One Ltd. (Hydro One; H: TSX) is a holding company that owns a 100% interest in rateregulated Hydro One Inc. and non-rate-regulated Hydro One Telecom Inc. (see diagram below). Hydro
One Inc. is the largest electricity transmission and distribution utility in Ontario and represents ~99%
of Hydro One’s business. Prior to its IPO (initial public offering) on Nov. 5, 2015, Hydro One’s main
subsidiary, Hydro One Inc., had been fully owned by the Province of Ontario since the reorganization
of Ontario Hydro in 1998.
HYDRO ONE CORPORATE STRUCTURE
Source: Company Reports
IPO of 15% stake at $20.50/sh
Hydro One’s Nov. 5th IPO marked the sale of a 15% stake from the Province of Ontario, which raised
gross proceeds of ~$1.8 billion at $20.50/share – implying a total equity value of $12 billion for Hydro
One. Looking ahead, the Province of Ontario intends to reduce its overall interest in Hydro One over
time to ~40% (from 85%), while being subject to a 180-day lock-up period following closing of the
IPO (i.e., expiring May 3, 2016).
Of note, prior to the sale of Hydro One Ltd. shares, Hydro One Brampton Networks Inc. was carved
out of Hydro One Inc.’s distribution business, and is currently fully owned by the Province of Ontario.
Hydro One Brampton Networks is a local distribution company with ~150,000 customers,
representing ~10% of Hydro One’s distribution customer base.
Is “Big Brother” watching?
Despite the Province of Ontario maintaining a controlling interest, Hydro One will operate as an
independent, commercially oriented public company with the ability for autonomous decision-making,
albeit with certain caveats. In other words, the Province is to be considered an investor in Hydro One,
not a manager. To maintain and support Hydro One’s presence in Ontario, the Ontario Electricity Act
requires Hydro One’s head office and principle grid control centre to remain in Ontario – prohibiting
any change to Hydro One’s jurisdiction of incorporation. As such, the Company is restricted from
selling all or substantially all of its assets that are regulated by the Ontario Energy Board while no
single stakeholder can own more than 10% of voting class securities in Hydro One, excluding the
Province of Ontario who must maintain a minimum interest in the Company of at least 40%.
On the governance front, Hydro One and the Province of Ontario signed the Governance Agreement
which, among other things, allows Ontario to nominate 40% of the directors within the Board of
Directors (comprised of 10-15 directors) that must be independent of the Company and the Province
(excluding the CEO). Furthermore, the Province has agreed not to initiate fundamental changes to
Hydro One; however, the Province is still entitled to vote on fundamental change matters.
4
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
New leadership
Mr. Mayo Schmidt was appointed the President and CEO of Hydro One on Aug. 20, 2015. Prior to
joining Hydro One, Mr. Schmidt served as President, CEO and director at Viterra Inc., a global food
ingredients company, from January 2000 to December 2012, when it was acquired by Glencore
International plc. During his tenure at Viterra, Mr. Schmidt transformed the regional agriculture and
food business to a global leader, boosting the Company’s total enterprise value from under $200
million in 2000 to ~$7.5 billion.
Mr. Michael Vels was appointed CFO of Hydro One on June 23, 2015. Prior to joining Hydro One,
Mr. Vels served as CFO at Maple Leaf Foods Inc. from 2004 to 2014. During his tenure at Maple Leaf
Foods Inc., Mr. Vels oversaw numerous M&A transactions, including ~$3 billion of divestitures.
For more details on senior management and directors at Hydro One, please see Appendix I.
Ontario electricity market
Clearing the way for more competition
In 1998, the Province of Ontario began to promote competition within its electricity market with the
introduction of its Electricity Act, resulting in the split-up of Ontario Hydro, the Crown-owned
corporation largely responsible for supplying Ontario with electricity generation, transmission and
distribution, into five separate entities – most notably: 1) Hydro One Inc., the successor to its
transmission and distribution businesses; 2) Ontario Power Generation Inc., the successor to its power
generation business; and 3) The Independent Electricity System Operator (IESO), focused on
electricity system dispatch (see diagram below).
RESTRUCTURING OF ONTARIO HYDRO
Ontario Hydro
Hydro One
(Transmission +
Distribution)
Ontario Power
Generation
(Generation)
Independent
Electricity System
Operator (System
Dispatch)
Ontario Electrical
Safety
Association
(Safety)
Ontario Electricity
Financial
Corporation (Debt
Retirement)
Source: Ontario Energy Board
Regulatory framework
Ontario’s electricity market is overseen by three main regulatory authorities, as highlighted below:
Ontario Energy Board (OEB)
Established in 1960, the OEB is an independent and impartial public regulatory agency responsible for
the regulation of natural gas and electric utilities in Ontario. As such, the OEB is responsible for,
among other things, approving: 1) transmission and distribution rates; 2) construction, expansion or
reinforcement of transmission lines greater than two kilometres in length; and 3) mergers, acquisitions,
amalgamations and divestitures involving distributors and other entities which it licenses. Overall, the
OEB sets its ROE based on a formula linked to long-term government bond yields and corporate
spreads, creating a relatively stable and predictable rate. All else equal, compared to its Canadian peers
in various Canadian jurisdictions, Hydro One’s five-year range of allowable ROEs have been relatively
more stable with Transmission and Distribution ROEs ranging from 73 bps and 36 bps, respectively,
versus the overall average of 81 bps – suggesting a relatively stable regulatory jurisdiction. Meanwhile,
Hydro One’s allowable ROEs for Transmission and Distribution has averaged 9.33% and 9.59%,
respectively, over the past five years versus the overall average of ~9% – suggesting a relatively
PATRICK KENNY
5
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
attractive regulatory jurisdiction. Furthermore, Hydro One’s realized ROE has averaged ~12% over
the past five years – largely reflecting higher weather-related peak demand within Transmission. For
2016e, we conservatively forecast a realized consolidated ROE of 9.85% versus the projected
allowable ROEs of 9.19%.
9.36%
9.66%
11.18%
2014
9.19%
9.19%
9.85%
8.93%
9.66%
12.81%
8.50%
2013
12.00%
9.00%
Hydro One
9.42%
9.66%
12.67%
16.00%
9.50%
Distribution
2012
10.00%
Transmission
9.66%
9.66%
11.85%
Integrated Utility
Distribution
SEGMENT AND OVERALL REALIZED ROE
ROE
20.00%
2011
5-yr Avg.
8.39%
9.85%
11.64%
Transmission
Overall Avg.
2010
5-yr Range
9.30%
9.30%
9.78%
CANADIAN RATE-REGULATED ELECTRICITY ROE
8.00%
8.00%
4.00%
EMA - NS
Source: Company Reports
0.00%
2016e
FTS - ON
FTS - NF
FTS - BC
FTS - AB
CU - AB
HYO - ON
CU - AB
HYO - ON
7.50%
2015e
ROE
10.50%
Source: Company Reports
Independent Electricity System Operator (IESO)
The IESO is a not-for-profit Crown corporation created from the split-up of Ontario Hydro in 1998,
and mandated to, among other things, manage the operation and reliability of Ontario’s bulk power
system and oversee the wholesale electricity market by balancing the supply and demand of electricity
in Ontario – ergo determining the price of electricity. IESO is governed by an independent board
whose chair and directors are appointed by the Province of Ontario. In 2015, the IESO merged with
Ontario Power Authority (OPA) and is now responsible for integrated medium and long-term power
system planning in Ontario, including the procurement of new sources of electricity supply and
transmission capacity.
National Energy Board (NEB)
Founded in 1959, the National Energy Board (NEB) is an independent federal agency responsible for
regulating the Canadian energy industry under federal jurisdiction, including the construction and
operation of international and interprovincial power lines deemed under federal jurisdiction. Hydro
One owns and operates 11 active international power lines connecting Ontario’s grid with Michigan,
Minnesota and New York.
Overview of business operations
The electricity industry value chain is comprised of four main businesses: 1) Generation: electricity
production; 2) Transmission: long haul transportation of electricity; 3) Distribution: delivery of
electricity to end users; and 4) Retailing: sale of electricity to consumers. Overall, Hydro One’s current
operations are focused on Transmission and Distribution, representing over 99% of its overall
business based on 2016e EBITDA, while the remainder of the Company is comprised of its non-rateregulated Telecom business. Below we highlight further details of each business unit.
ELECTRICITY VALUE CHAIN
HYDRO ONE - SEGEMENTED 2016E EBITDA
Hydro One Inc.
Generation
Transmission
Distribution
Retailing
• Nuclear
• Hydro
• Gas
• Wind
• High Voltage
• Lower Voltage
• Industrial
• Residential
• Commercial
Source: NBF
6
Distribution
41%
Transmission
59%
Telecom
0%
Source: NBF Estimates
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
Transmission – the bread and butter
Hydro One’s transmission business represents ~60% of 2016e EBITDA, and is comprised of ~291
transmission stations and ~29,000 km of high voltage lines that account for 96% of Ontario’s
transmission network. The Transmission business also includes Hydro One’s 66% interest in B2M
(Bruce-to-Milton) LP, a limited partnership between Hydro One and the Saugeen Ojibway Nation,
which largely owns all the assets related to the Bruce-to-Milton transmission line. Electricity delivered
over Hydro One’s transmission network is sourced from 116 generators across Ontario and delivers
power to 48 local distribution companies (LDCs; including Hydro One’s distribution business) and 90
large industrial customers. Hydro One’s network, controlled from a central location north of Toronto,
is connected to Manitoba, Michigan, Minnesota, New York and Québec, allowing for the import and
export of electricity.
HYDRO ONE TRANSMISSION MAP
Source: Company Reports
BRUCE-TO-MILTON TRANSMISSION MAP
Source: Company Reports
Transmission rates in Ontario are based on a cost-of-service model approved by the OEB. Hydro One
typically files a rate application every two years for transmission rates, which cover the prospective
two-year period.
1) In part one of the application process, all transmitters in Ontario apply for approval of their
revenue requirements, which covers the transmitters’ costs of providing service and an allowed
return on equity. Once approved, the revenue requirements generally cover the subsequent twoyear period with adjustments to occur in the second year to update for current cost of debt and
return on equity.
2) Next, the OEB aggregates the revenue requirements of all transmitters in Ontario to arrive at a
single uniform transmission rate.
On Jan. 8, 2015, the OEB approved Hydro One’s 2015 to 2016 transmission rate order which calls for
a revenue requirement of $1,477 million for 2015 and $1,516 million for 2016 – reflecting an approved
rate base for 2015 of $9,651 million, ROE of 9.30% and an equity thickness of 40% (i.e., 60/40
debt/equity). Meanwhile, B2M LP filed its 2015 to 2017 rate order in March 2015, and expects a
decision in Q4 2015.
Overall, Hydro One’s transmission allowable ROE has averaged 9.33% over the past five years and
has ranged from a low of 8.93% to a high of 9.66%. Transmission rates are based on monthly peak
electricity demand forecast across Hydro One’s transmission network – below we highlight the
historical five-year average monthly peak demand across Ontario, noting modest quarterly seasonality
throughout a year.
PATRICK KENNY
7
HYDRO ONE LTD.: INITIATING COVERAGE
TRANSMISSION - 5-YR ALLOWED ROE & EQUITY
ONTARIO - 5-YR AVERAGE MONTHLY PEAK DEMAND
2011
2012
2013
2014
2015
ROE
9.66%
9.42%
8.93%
9.36%
9.30%
MW
35,000
Equity
40%
40%
40%
40%
40%
30,000
5-yr Avg. ROE
NOVEMBER 16, 2015
Seasonality
Q1: 25%
Q2: 24%
Q3: 27%
Q4: 23%
25,000
9.33%
20,000
Source: Company Report
15,000
10,000
5,000
Dec.
Nov.
Oct.
Sep.
Jul.
Aug.
Jun.
May
Apr.
Mar.
Jan.
Feb.
0
Note: For the period of 2010-2014.
Source: IESO
Of note, the projected allowable ROE for 2016 is 9.19% based on the OEB’s cost of capital parameter
calculations and applying long-term bond yields and yield spreads as at September 2015. For 2017, we
calculate a move back towards 9.30% based on our Economics & Strategy Group’s forecast.
OEB - ALLOWABLE ROE CALCULATION
2016e
2017e
30-yr GCAN forecast (LCBF)
2.71
2.98
Initial ROE
9.75
9.75
(%)
Change in LCBF
Current
2.71
2.98
Base
4.25
4.25
Difference
-1.54
-1.28
0.5 x Difference
-0.77
-0.64
Change in A-rated Utility Bond Yield Spread
Current Spread
1.83
1.83
Base A-rated Utility Spread
1.42
1.42
Difference
0.42
0.42
0.5 x Difference
0.21
0.21
9.19
9.32
Revised ROE
Source: Company Reports, OEB, NBF Estimates
Distribution
The Distribution business represents ~40% of Hydro One’s 2016e EBITDA, and includes ~122,000
circuit kms of low-voltage distribution lines and ~1,000 distribution and regulating stations serving
~1.3 million residential and business customers, whom are mostly in rural areas, and 56 local
distribution companies. Given that a large portion of Hydro One’s distribution system services rural
areas of Ontario, costs to provide services are typically higher than other competing distributors who
service urban areas. Furthermore, Hydro One’s distribution system is not designed to be interconnected in loops with other distribution lines, resulting in downstream disruptions when a portion
of the distribution line is interrupted. As such, the Company must engage in significant vegetation
management (i.e., trimming or removal of trees near distribution lines) in order to mitigate disruptions
to its distribution system.
HYDRO ONE DISTRIBUTION MAP
Source: Company Reports
8
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
Distribution rates in Ontario are set on a performance-based model approved by the OEB. The
application process is similar to the transmission rate applications, although with key differences as
highlighted below.
1) Distribution rate applications typically span five-year periods.
2) Revenue requirements are approved only for the first year, while subsequent years are
determined by a formula that factors in inflation and certain productivity factors.
3) The utility is allowed to retain all or a portion of cost savings achieved in excess of those
established by the regulatory – i.e., potential to earn above the set allowable ROE.
On March 12, 2015, the OEB issued a decision on Hydro One’s distribution rates for 2015 to 2017
which calls for a revenue requirement of $1,326 million for 2015, $1,430 million for 2016 and $1,486
million for 2017 – reflecting an approved rate base for 2015 of $6,552 million, ROE of 9.30% and an
equity thickness of 40%. However, the OEB did not consider Hydro One’s application to be
sufficiently aligned with the objectives of the Renewed Regulatory Framework for Electricity Distributors: A
Performance-Based Approach (October 2012) and therefore applied a cost-of-service methodology. That
said, Hydro One anticipates that rates beyond 2017 (i.e., for the 2018 to 2022 timeframe) will be set
under the performance-based model.
Overall, Hydro One’s distribution ROE has averaged 9.59% over the past five years of allowable
ROEs and has ranged from a low of 9.30% to a high of 9.66%. Of note, the projected allowable ROE
for 2016 is 9.19% based on the OEB’s cost of capital parameter calculations (see calculation above).
DISTRIBUTION - 5-YR ALLOWED ROE & EQUITY
2011
2012
2013
2014
2015
ROE
9.66%
9.66%
9.66%
9.66%
9.30%
Equity
40%
40%
40%
40%
40%
5-yr Avg. ROE
9.59%
Source: Company Report
Telecom
Representing less than 1% of the Company’s 2016e EBITDA, the Telecom segment is comprised of
fibre-optics network assets that deliver telecommunications solutions to Hydro One, carriers, financial
institutions, enterprises, public sector organizations, utilities and more.
Unions & Labour agreements
The majority (>90%) of Hydro One’s total workforce of ~8,800 are represented by unions that
include: 1) Power Workers’ Union; 2) The Society of Energy Professionals; and 3) Canadian Union of
Skilled Workers and construction building trade unions. Below we highlight each union and recent
collective agreements.
Power Workers’ Union
The Power Workers’ Union (PWU) represents the majority of Hydro One’s workforce with ~5,400
employees under its umbrella. On April 14, 2015, Hydro One and the PWU reached an agreement for
a renewal of their collective agreement that covers a three-year period (April 1, 2015 to March 31,
2018) – providing an average annual wage increase of 1%, largely offset by an increase in annual
employee pension contributions (i.e., moving to or close to 50/50 contributions from
employer/employee).
PATRICK KENNY
9
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
The Society of Energy Professionals
The Society of Energy Professionals (SEP) represents ~1,500 of Hydro One’s workforce that are
professional and first-level supervisory staff. On July 24, 2015, Hydro One and the SEP reached an
agreement for an early renewal of their collective agreement that covers a three-year period (April 1,
2016 to March 31, 2019) – providing an average annual wage increase of 0.5%, largely offset by an
increase in annual employee pension contributions (i.e., moving to or close to 50/50 contributions
from employer/employee).
Canadian Union of Skilled Workers and construction building trade unions
The Canadian Union of Skilled Workers and construction building trade unions represents ~1,400 of
Hydro One’s workforce. On July 28, 2015, Hydro One and the Canadian Union of Skilled Workers
reached an agreement for a renewal of their collective agreement that covers a three-year period (May
1, 2014 to April 30, 2017) – the agreement was ratified by the board of directors of Hydro One, but
remains subject to ratification by the Canadian Union of Skilled Workers. Elsewhere, negotiations and
ratifications for the renewal of various collective agreements with various construction building trade
unions have commenced and are ongoing.
Growth outlook
Self-funding ~$7.7 billion capex program underpins ~4% rate base CAGR through 2019
Hydro One is undertaking a five-year capital investment program of $7.7 billion with annual investments
averaging ~$1.5 billion per year through 2019 – all self-funding (i.e., no external equity needed),
underpinning 4% annual organic growth in the Company’s rate base through 2019 to $20.1 billion from
2014 levels of $16.3 billion. Of note, $4.3 billion (56%) of capital investments are earmarked for the
Transmission business, with the remaining $3.4 billion (44%) targeting the Distribution business.
5-YR SEGMENTED CAPEX PROGRAM
RATE BASE GROWTH FORECAST
19
19
16
18
15
17
14
2013
2014
2015e
2016e
2017e
2018e
2009-2014 CAGR: 7%
12
12
13
2009
2010
2011
682
15
20
5-yr CAGR: 4%
25
20
832
839
848
866
10
899
700
5
Source: Company Reports
2019e
2018e
2017e
2016e
0
2015e
0
2019e
350
$bln
30
2012
1,514
1,517
Distribution
678
1,535
1,522
674
1,050
669
1,400
1,564
1,750
Transmission
665
$mln
2,100
Source: Company Reports, NBF Estimates
Aging infrastructure hungry for sustaining capital
With a large portion of Hydro One’s transmission and distribution assets built in the 1960s and 1970s
(or earlier), the Company expects to continue making large investments in its sustaining capex
program. Overall, total sustaining capital expenditures through 2019 are expected to be $4.8 billion,
representing ~60% of the total $7.7 billion of capital investments, and ~115% of the total $4.1 billion
of depreciation expense over the same timeframe. With all capital expenditures included in rate base,
we classify “excess” sustaining capital over and above depreciation as “growth” capital as it is additive
to the rate base while involving less regulatory and execution risk compared to the growth capital
program. Of note, our “maintenance” capex assumptions track the Company’s depreciation expense
(expenditures required to keep rate base flat). Longer term, we call for a sustaining capex run-rate of
~20% above depreciation expense.
10
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
978
892
1,022
858
955
891
19
Source: Company Reports, NBF Estimates
2019e
2018e
2017e
2015e
2019e
2018e
2017e
2016e
0
2015e
250
15
2014a
16
2016e
500
16
17
Depreciation
750
17
18
1,250
1,000
18
19
794
19
20
Sustaining Capex
905
Depreciation
759
Capex
20
Rate Base
5-YR SUSTAINING CAPEX VS DEPRECIATION
$mln
1,500
826
RATE BASE GROWTH FORECAST
$bln
21
NOVEMBER 16, 2015
Source: Company Reports
Organic growth
On the organic growth front, Hydro One expects to invest $2.0 billion over the five-year period
towards development projects within its Transmission and Distribution businesses – additions to
existing assets and large-scale projects such as new transmission lines and transmission stations – as
well as ~$0.9 billion of investments in other projects (IT / operational efficiencies; all included in rate
base). In the following figure, we highlight Hydro One’s five-year growth capex program and current
slate of major transmission projects.
Capex
2016
$123-mln
Guelph Area Transmission
Transmission Line
2016
$103-mln
Refurbishment
Upgrade
Manby Transmission Station
Transmission Station
2016
$24-mln
2018/2019
$297-mln
2018
TBD
early-2020
TBD
Toronto Midtown Transmission
495
174
567
186
379
2019e
2018e
2017e
2016e
2015e
Upgrade
Clarington Transmission Station
0
Source: Company Reports
Type
Reinforcement
321
150
444
300
470
450
Project
Other Growth
381
659
644
200
600
189
750
In-service
New Transmission Line
536
T&D Growth
900
HYDRO ONE - MAJOR TRANSMISSION PROJECTS
157
5-YR GROWTH CAPEX PROGRAM
$mln
New Transmission
Station
Supply to Essex County
New Transmission Line
Transmission Reinforcement
and Station
Northwest Bulk Transmission
New Transmission Line
Line
Source: Company Reports
Looking further out, Ontario’s peak electricity demand is forecasted to grow to ~30,000 MW by
2032e, a 1.5% CAGR from 2014 peak demand of 22,774 MW. The 1.5% CAGR is below the longterm real GDP forecast for Ontario of 2.1%, reflecting energy conservation initiatives such as the
implementation of smart metre and smart grid technologies – i.e., providing customers with
information about their electricity usage to enable them to change their consumption patterns and
reduce their costs. Based on a four-year historical reserve margin (capacity less peak demand over peak
demand) of ~45% we estimate the need for ~43,000 MW of installed generation capacity by 2032,
representing incremental generation capacity of ~8,000 MW from current capacity of ~35,000 MW.
This is in line with Ontario’s latest Long-Term Energy Plan (LTEP), which calls for an increase in
renewable generation capacity to ~20,000 MW by 2025 versus current renewable capacity of ~12,000
MW. Generation growth will support upgrades and new connections to Hydro One’s Transmission
and Distribution networks.
PATRICK KENNY
11
HYDRO ONE LTD.: INITIATING COVERAGE
ONTARIO PEAK DEMAND ELECTRICITY FORECAST
Peak Demand
ONTARIO INSTALLED GENERATION CAPACITY
Hydro
8,462 MW
24%
Reserve Margin
Wind
3,209 MW
9%
Biofuel
455 MW
1%
Solar
140 MW
1%
Gas
9,920 MW
28%
Nuclear
12,978 MW
37%
2011
2012
2013
2014
2015e
2016e
2017e
2018e
2019e
2020e
2021e
2022e
2023e
2024e
2025e
2026e
2027e
2028e
2029e
2030e
2031e
2032e
MW
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
NOVEMBER 16, 2015
Note: Assumes forward reserve margin of 45% (based on 4-yr historical avg.).
Note: As of August 14, 2015.
Source: IESO, NBF Estimates
Source: IESO
ONTARIO'S LONG-TERM ECONOMIC OUTLOOK
Actual
Forecast
1982-2013
2014-2017
2018-2022
2023-2027
2028-2032
2033-2035
2014-2035
Nominal GDP
5.3%
4.2%
4.1%
3.8%
4.0%
4.1%
4.0%
Real GDP
2.6%
2.5%
2.1%
1.9%
2.1%
2.1%
2.1%
CPI
3.0%
1.9%
2.0%
2.0%
2.0%
2.0%
2.0%
Source: Ontario's Long-term Report on the Economy (2014).
ONTARIO'S LONG-TERM POPULATION GROWTH OUTLOOK
Source: Ontario's Long-term Report on the Economy (2014).
Elsewhere, Ontario’s LTEP has made connecting remote northwestern First Nation communities to
the grid a priority for Ontario – creating further opportunities for Hydro One to expand its
Transmission and Distribution footprint. Overall, the province identified ~25 remote First Nation
communities in the northwest region that are not connected to the grid and currently draw electricity
from on-site diesel fuel generators.
KEY AREAS AND PROJECTS IN NORTHWESTERN ONTARIO
Source: Ontario's 2013 Long Term Energy Plan
12
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
M&A upside: LDC consolidation opportunities
Ontario currently has ~70 local distribution companies (LDCs) that are mostly owned or jointly
owned by municipalities. To improve competition, operational efficiencies, as well as access to private
sector capital the Province is promoting the consolidation of LDCs across Ontario, by reducing the
transfer tax rate over the next three years to 22% (from 33%), while exempting transfer taxes and
capital gains portion of the departure tax for acquired LDCs with less than 30,000 customers. Year-todate, Hydro One completed the acquisition of Haldimand County Hydro (~21k customers) and
Woodstock Hydro Services Inc. (~16k customers) at an average EV/2014 EBITDA of ~11.5x (see
table below).
HYDRO ONE PRECEDENT LCD M&A TRANSACTIONS
Takeout Target
Date
Price
'14 EBITDA EV/EBITDA
Norfolk Power Distr.
24-Aug-14
$
93
$
5
19.5x
Haldimand County Hydro
30-Jun-15
$
75
$
6
11.75x
Woodstock Hydro Serv.
31-Oct-15
$
46
$
4
Average
11.0x
14.0x
Note: Values in mlns.
Source: Company Reports
In total, we highlight ~40 LDCs remaining in Ontario with less than 30,000 customers and generating
an aggregate 2014 EBITDA of ~$100 million (see Appendix II & III for a map and list of all LDCs in
Ontario). As such, based on an ~11.5x EV/2014 EBITDA transaction multiple, we highlight over $1
billion of near-term M&A opportunities for Hydro One related to the consolidation of “small” LDCs
in Ontario – representing ~$1/sh (~5%) of unrisked upside to our base valuation. Meanwhile, the ~30
LDCs with greater than 30,000 customers represent 2014 EBITDA of ~$950 million, or ~$9 billion of
M&A potential based on an after-transfer tax equivalent price tag of 9.5x, representing a further
~$8/sh (~30%) unrisked upside to our valuation.
LDC CONSOLIDATION OPPORTUNITIES IN ONTARIO
LDCs with less than 30,000 customers
Aggregate EBITDA(1)
LDCs with more than 30,000 customers
103
Precedent EV/EBITDA transactions
11.5x
Implied M&A opportunities (pre-tax)
1,183
Transfer tax rate
0%
Implied M&A opportunities
1,183
Aggregate EBITDA(1)
969
Equivalent after-transfer tax EV/EBITDA(2)
9.5x
Implied M&A opportunities (pre-tax)
Transfer tax rate
9,206
22%
Implied M&A opportunities
11,232
Note: Values in $mln.
(1) Based on 2014 EBITDA.
(2) Equivalent after-transfer tax multiple to maintain ~11.5x EBITDA economics after a 22% transfer tax.
Source: Company Reports, NBF Estimates, OEB
LDC'S WITH <30K CUSTOMERS - M&A DCF SENSITIVITY
LDC'S WITH >30K CUSTOMERS - M&A DCF SENSITIVITY
Transaction Value
250
500
750
1,000
1,250
10.5x
$0.25
$0.50
$0.75
$1.00
$1.25
11.0x
$0.25
$0.50
$0.50
$0.75
$1.00
11.5x
$0.25
$0.25
$0.50
$0.75
$1.00
12.0x
$0.25
$0.25
$0.50
$0.75
$0.75
12.5x
$0.25
$0.25
$0.50
$0.50
$0.75
Source: NBF Estimates
EV/EBITDA
Transaction
EV/EBITDA
Transaction
Transaction Value ($mln)
(1)
($mln)
7,000
8,000
9,000
10,000
11,000
8.5x
$6.50
$7.50
$8.50
$9.50
$10.25
9.0x
$5.75
$6.50
$7.25
$8.25
$9.00
9.5x
$5.00
$5.75
$6.25
$7.00
$7.75
10.0x
$4.25
$4.75
$5.50
$6.00
$6.75
10.5x
$3.50
$4.00
$4.50
$5.00
$5.75
(1) Includes 22% transfer tax.
Source: NBF Estimates
PATRICK KENNY
13
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
Financial profile
For 2016, we forecast EPS (FD) and AFFO/sh (FD) of $1.18 and $1.46 on EBITDA of $2,056
million, reflecting modest growth over 2015e levels owing to rate base growth, partially offset by a
reduced allowable ROE on both the Transmission and Distribution business (9.19% versus 9.30%).
Based on an initial quarterly dividend of $0.21/sh ($0.84/sh annualized), we estimate a 2016e AFFO
payout ratio of 57% (group avg.: 48%) and an earnings payout ratio of 71% (group avg.: 89%), sitting
at the low end of the Company’s target range of 70-80%. On the leverage front, we forecast 2016e Net
Debt/EBITDA of 5.1x versus low-payout peers at 6.0x.
HYDRO ONE LTD. - FINANCIAL PROFILE
Market Capitalization
2013
Stockt Price
2014
n/a
2015e
n/a
2016e
$22.03
HYDRO ONE LTD. STOCK CHART
2017e
$22.03
2018e
$22.03
2019e
$22.03
2020e
$22.03
$22.03
$/sh
$22.50
Vol. (mln)
35
28
595
13,108
13,108
$21.50
21
8,240
8,638
9,829
10,262
10,644
10,976
11,258
11,547
$21.00
14
323
323
323
323
323
323
323
323
$20.50
7
$20.00
0
Net Debt
Preferred Equity
NCI
Enterprise Value
Financial Information
-
71
71
71
71
71
71
71
n/a
n/a
23,331
23,764
24,146
24,478
24,760
25,049
2013
2014
2015e
2016e
2017e
2018e
2019e
2020e
Adj. EBITDA by Segment
Transmission
Distribution
1,154
1,194
1,150
1,230
1,250
1,290
1,330
792
742
822
827
872
903
937
2
1
-
-
-
-
-
1,948
1,937
2,056
2,121
2,192
2,267
2,326
Telecom
Adj. EBITDA
(2)
1,970
(722)
(759)
(378)
(397)
(415)
(432)
(433)
(433)
(431)
(457)
Taxes
(109)
(89)
(123)
(125)
(129)
(135)
(142)
(147)
-
Realized ROE
Adj. EBITDA
Interest(1)
Cash Taxes
2
729
762
798
826
9.8%
9.9%
10.1%
10.1%
1,948
1,937
1,970
2,056
2,121
2,192
2,267
2,326
(378)
(397)
(415)
(432)
(433)
(433)
(431)
(457)
(111)
(79)
(93)
(19)
(19)
(20)
(21)
(22)
2
(5)
(4)
(4)
(4)
(4)
(4)
21
-
-
-
-
-
1,477
1,602
1,665
1,735
1,811
1,843
(168)
1,295
(627)
(687)
(699)
(732)
(764)
(807)
(818)
748
608
778
870
901
928
993
1,018
200
270
100
500
525
551
579
608
-
66
58
-
-
-
-
-
Acquisitions
760
Equity Issued
838
866
803
758
710
696
(825)
-
-
-
-
-
-
-
8,800
9,991
10,424
10,805
11,138
11,419
11,709
4.3x
4.5x
5.1x
5.1x
5.1x
5.1x
5.0x
5.0x
4.7x
4.3x
4.6x
4.8x
4.9x
5.1x
5.3x
5.1x
D/Cap
54%
53%
57%
58%
58%
58%
58%
2013
Ending Net Debt
2014
2015e
2016e
2017e
2018e
2019e
58%
2020e
$13.85
$14.52
$16.52
$17.25
$17.89
$18.45
$18.92
$19.41
EBITDA
$3.27
$3.26
$3.31
$3.46
$3.57
$3.68
$3.81
$3.91
EPS - FD
$1.32
$1.23
$1.12
$1.18
$1.23
$1.28
$1.34
$1.39
FFO - FD
AFFO - FD(2)
$2.31
$2.18
$1.26
$1.02
$1.31
$1.46
$1.52
$1.56
$1.67
$1.71
Dividends
FFO Payout Ratio (4)
$0.34
$0.45
$0.17
$0.84
$0.88
$0.93
$0.97
$1.02
15%
21%
7%
31%
32%
32%
32%
33%
AFFO Payout Ratio
(4)
Earnings Payout Ratio (4)
Trading Metrics
P/E(5)
P/CF(5)
P/AFFO
(2)(5)
EV/EBITDA(5)
27%
25%
2013
44%
37%
2014
$2.48
$2.69
13%
57%
15%
2015e
71%
2016e
$2.80
58%
72%
2017e
$2.92
59%
72%
2018e
$3.04
58%
72%
2019e
$3.10
Telecom
0%
Transmission
60%
Source: NBF Estimates
2016E ENTERPRISE STRUCTURE
NCI
0%
Market
Capitalization
55%
Preferred
Equity
2%
Net Debt
43%
Source: NBF Estimates
2016E CASH FLOW RISK PROFILE
Margin
based
0%
60%
74%
2020e
n/a
n/a
19.6x
18.7x
18.0x
17.2x
16.4x
n/a
n/a
8.9x
8.2x
7.9x
7.6x
7.2x
7.1x
n/a
n/a
16.8x
15.1x
14.5x
14.1x
13.2x
12.9x
n/a
n/a
11.8x
11.6x
11.4x
11.2x
10.9x
10.8x
15.9x
EV/Free-EBITDA(2)(5)
n/a
n/a
18.4x
17.9x
17.8x
17.7x
17.1x
16.7x
Dividend Yield
n/a
n/a
0.8%
3.8%
4.0%
4.2%
4.4%
4.6%
(1) Includes preferred equity dividends.
2016E EBITDA BY SEGMENT
Distribution
40%
700
8,402
CF/Interest (3)
Per Share
Source: Bloomberg
(4)
702
9.9%
1,375
Growth Capex
(4)
667
9.8%
(84)
Ending Net Debt (incl. 50% pref.)
Net Debt/EBITDA (3)
(4)
731
11.2%
Other
Dividends
(4)
(892)
785
-
FFO
(4)
(892)
12.8%
NCI
Maintenance Capex
(2)
AFFO
(5)
(858)
956
(676)
NCI
(826)
1,370
Depreciation & Amortization
Interest(1)
Adj. Net Earnings
(794)
11-Nov-15
595
13,108
10-Nov-15
595
13,108
9-Nov-15
595
13,108
8-Nov-15
595
13,108
7-Nov-15
595
n/a
6-Nov-15
595
n/a
5-Nov-15
595
Market Capitalization
4-Nov-15
Shares Outstanding - FD
$22.00
Cost-of-service
100%
Source: NBF Estimates
(2) AFFO = FFO less Maintenance capex; Free-EBITDA = EBITDA less Maintenance capex.
(3) Preferred equity treated as 50% debt.
(4) FFO payout ratio = Total dividends / FFO; AFFO payout ratio = Total dividends / AFFO; Earnings payout ratio = Total dividends / Net earnings.
(5) Based on 12-month trailing figures.
Source: Company Reports, NBF Estimates
14
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
Cash flow risk profile
With over 99% of Hydro One’s cash flows under rate regulation (i.e., cost-of-service) we forecast a
group low cash flow risk profile of 1.0 – based on a weighted-average calculation of 2016e operating
margin multiplied by risk profile, i.e., cost-of-service = 1; fee-for-service = 2; margin-based = 3; and
commodity-based = 4.
CASH FLOW RISK PROFILE(1)
Low
RISK
High
1
2
3
4
Cost-of-Service
Fee-for-Service
Margin-Based
CommodityBased
Weighted-average
Risk Profile
High Payout
VNR
93%
7%
0%
0%
1.1
VSN
72%
18%
0%
10%
1.5
IPL
58%
37%
0%
5%
1.5
TWM
60%
26%
15%
0%
1.5
ENF
39%
61%
0%
0%
1.6
ALA
34%
62%
0%
5%
1.8
GEI
17%
54%
20%
9%
2.2
KEY
0%
75%
15%
10%
2.3
Average
53%
38%
5%
4%
1.7
Low Payout
H
100%
0%
0%
0%
1.0
FTS
96%
4%
0%
0%
1.0
EMA
92%
0%
0%
8%
1.2
CU
83%
12%
0%
5%
1.3
ACO
80%
15%
0%
5%
1.3
ENB
57%
39%
0%
4%
1.5
TRP
59%
33%
0%
8%
1.6
TA
0%
75%
0%
25%
2.5
CPX
0%
52%
0%
48%
3.0
Average
47%
38%
0%
16%
1.6
(1) Represents percentage of 2016e operating margins or earnings.
Note: NBF Research restricted on CUS, PPL and SPB.
Source: NBF Estimates
RELATIVE CASH FLOW RISK RANKING
Cash Flow Risk
Profile
4.00
3.50
Low Payout:
High Payout:
Highest Risk
Lowest Risk
3.00
2.50
2.00
Average: 1.6
1.50
1.00
0.50
CPX
TA
GEI
KEY
ALA
ENF
TRP
TWM
IPL
ENB
VSN
ACO
CU
EMA
VNR
H
FTS
0.00
Note: Based on a weighted average calculation of margins multiplied by risk profile; i.e., cost-of-service = 1,
fee-for-service = 2, margin-based = 3 and commodity-based = 4. NBF Research restricted on CUS, PPL, and SPB.
Source: NBF Estimates
PATRICK KENNY
15
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
Capital structure
For 2016, we forecast a capital structure of 57% debt, 41% equity and 2% preferred equity versus
Ontario’s rate-regulated deemed capital structure of 60% debt and 40% equity. As such, we highlight
Hydro One’s balance sheet capacity for ~$1 billion of incremental debt to align its capital structure
with the rate-regulated regime. Meanwhile, with preferred shares representing just 2% of the
Company’s capital structure versus an estimated 15% maximum under the ‘A’ credit rating model, we
note the potential for Hydro One to issue up to $2.3 billion of preferred shares to partially fund future
organic growth and M&A opportunities, reducing the need for additional common equity to partially
fund future growth.
2016E CAPITAL STRUCTURE
CREDIT RATINGS
Rating agency
Preferred
Equity
2%
Equity
41%
Rating
Outlook
A (high)
Under review
Moody's
A2
Negative
S&P
A
Stable
DBRS
Source: Company Reports
Net Debt
57%
Source: NBF Estimates
Liquidity analysis
We forecast ample cash available through 2017 of ~$1.8 billion to fully fund its capital expenditure
program as well as the retirement of ~$1 billion of debt maturing by mid-2016, while maintaining a
D/Cap ratio below 60%.
213
870
901
224
803
758
6,000
(12)
67
143
25
500
525
(37)
(433)
(382)
Q4 2015e
Available credit facilities
2016e
3,000
2017e
70
2,583
2,150
2,000
2,550
n/a
n/a
Equity + DRIP
-
-
-
1,000
Preferred equity
-
-
-
-
Free cash flows (net of dividends)
Liquidity position
Debt metrics
D/Cap(2)
(37)
2,583
Target
<75%
Q4 2015e
57%
(433)
2,150
2016e
(382)
1
2
1,769
2017e
58%
58%
D/EBITDA(2)
n/a
5.1x
5.1x
5.1x
FFO/D(2)
n/a
15%
15%
15%
600
Available cash resources
Opening cash balance(1)
4,000
650
Free cash flow (net of dividends)
5,000
978
Less dividends
600
Free cash flow
2017e
50
Less growth capex
2016e
1,016
Adjusted funds from operations
DEBT MATURITY SCHEDULE
$mlns
7,000
Q4 2015e
5,395
LIQUIDITY ANALYSIS
Values in $mlns
3
4
5
Years to Maturity(1)
6-10
10+
(1) As at June 30, 2015.
Source: Company Reports
(1) As at June 30, 2015; net of $200 mln departure tax, $800 mln payment to the
Province of Ontario, and $800 mln debt recapitalization.
(2) Preferred equity treated as 50% debt.
Source: Company Reports
16
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
Dividend policy
Hydro One established a quarterly dividend of $0.21/share ($0.84/sh annualized) commencing Q1
2016, while targeting an earnings payout ratio of 70% to 80%. Overall, we forecast annual dividend
growth of ~5% through 2019e versus the Utility peer average of 7%. Hydro One also adopted a
Dividend Reinvestment Plan (DRIP) at a 0% discount; however, shares will not be issued from
treasury, but rather repurchased by Hydro One on the open market.
UTILITIES - 5-YR DIVIDEND GROWTH RATE
10%
12%
10%
14%
Avg.: 7%
6%
8%
10%
6%
4%
5%
8%
4%
2%
VNR
H
FTS
EMA
ACO'X
CU
0%
Source: NBF Estimates
Valuation summary
Our valuation methodology is based on a cash flow approach that focuses on underlying fundamentals
of the individual businesses within our Energy Infrastructure group – i.e., discounted cash flow (DCF)
valuation and EV/Free-EBITDA methodologies. Meanwhile, to maintain an honest check on whether
or not the current yield fairly compensates income-based investors, we include the dividend discount
model (DDM) valuation to round out our equally weighted three-pronged valuation.
Cost of equity assumption
Our cost of equity assumption begins with our long-term outlook for the 10-year Government of
Canada (GOC) bond rate of 3.0% plus our long-term credit spread assumption of 2.0% (i.e., ‘A’ bond
yield spread to 10-year GOC bond rates), as well as an equity risk premium – largely premised on three
attributes, including: 1) cash flow risk profile; 2) leverage; and 3) yield safety.
On a relative cash flow risk basis we rank Hydro One first out of our coverage universe with over 99%
of cash flows under cost-of-service.
2016E CASH FLOW RISK RANKING
3.5
High-payout:
Low-payout:
3.0
2.5
2.0
Avg.: 1.6
1.5
1.0
0.5
TA
CPX
KEY
GEI
ALA
ENF
TRP
TWM
IPL
ENB
VSN
CU
ACO
EMA
VNR
H
FTS
0.0
Note: Based on weighted average calculation of margins multiplied by risk profile;
i.e., cost-of-service = 1, fee-for-service = 2, margin-based = 3, and
commodity-based = 4; NBF Research restricted on CUS, PPL, and SPB.
Source: NBF Estimates
PATRICK KENNY
17
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
On the leverage front, Hydro One ranks 9th in our coverage space with a 2016e Net Debt/EBITDA
of 5.1x versus the average of 4.8x.
2016E NET DEBT/EBITDA
High-payout:
Low-payout:
8.0x
6.0x
Avg.: 4.8x
4.0x
2.0x
ENB
EMA
FTS
TRP
TA
ALA
IPL
H
CU
ENF
VSN
CPX
VNR
GEI
ACO
KEY
TWM
0.0x
Note: EMA estimates pro forma major acquisition; NBF Research restricted on
CUS, PPL and SPB.
Source: NBF Estimates
Lastly, with dividend payments continuing to represent the sector’s main attraction (over and above
growth), we expect yield-oriented investors to pay a premium valuation for companies with rock solid
dividends (i.e., lowest payout ratios). As highlighted below, Hydro One ranks 10th in terms of lowest
2016e AFFO payout ratio at 57%, largely in line with the group average of 56% (low-payout avg.: 48%).
2016E AFFO PAYOUT RATIO
(1)
High-payout:
Low-payout:
120%
100%
80%
60%
Avg.: 56%
40%
20%
VSN
VNR
IPL
GEI
ENF
ALA
EMA
H
CPX
ENB
FTS
TA
KEY
TRP
CU
ACO
TWM
0%
(1) AFFO payout ratio = Total dividends / (FFO - Maintenance capex)
Note: NBF Research restricted on CUS, PPL and SPB.
Source: NBF Estimates
Overall, we apply a group-low cost of equity assumption of 7.0% (group avg.: 8.2%) – with the ~120
basis point premium largely reflecting the Company’s high-quality cash flow streams (i.e., over 99%
cost-of-service).
COST OF EQUITY
High-payout:
Low-payout:
12.00%
10.00%
Avg.: 8.2%
8.00%
6.00%
4.00%
2.00%
TA
TWM
GEI
CPX
KEY
VSN
TRP
ACO
IPL
ALA
ENF
ENB
CU
EMA
VNR
FTS
H
0.00%
Note: NBF Research restricted on CUS, PPL, and SPB.
Source: NBF Estimates
18
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
Discounted cash flow (DCF) valuation approach
Using the DCF approach, we discount future unlevered free cash flows using our long-term after-tax
weighted-average cost of capital estimate (AT-WACC). Overall, the DCF approach allows us to more
accurately capture varying cash flow profiles provided within each business segment that may be
growing, remaining flat or perhaps declining. Relative to the group, we estimate an AT-WACC of
5.0% for Hydro One – based on our cost of equity assumption of 7.0% and the Company’s long-term
capital structure of 40% equity and 60% debt – which is below the group average of 6.1% and ranks
the lowest cost of capital in our coverage universe.
HYDRO ONE - DISCOUNTED CASH FLOW VALUATION
2,121
2,192
2019e
2020e
2,267
(19)
(19)
(20)
(21)
(22)
Maint. Capex
(732)
(764)
(807)
(818)
(825)
Growth Capex
(803)
(758)
(710)
(696)
-
Unlevered FCF
502
580
655
732
1,479
526
566
603
1,159
8.0%
4.0%
FY S/O (FD)
595.0
DCF/sh
GEI
TWM
TA
CPX
KEY
ALA
VSN
IPL
TRP
10,223
14,927
ENF
FY Ending Net Debt
Equity Value
VNR
0.0%
25,151
(1)
ENB
NPV
2.0%
21,818
H
479
Avg.: 6.1%
6.0%
5.0%
Present Value
High-payout:
Low-payout:
10.0%
2,326
Cash Taxes
AT-WACC
WEIGHTED AVERAGE COST OF CAPITAL
Terminal
ACO
2,056
2018e
CU
EBITDA
2017e
EMA
2016e
FTS
($mlns)
Note: NBF Research restricted on CUS, PPL and SPB.
Source: NBF Estimates
$25.00
(1) Includes preferred equity and NCI.
Source: NBF Estimates
EV/Free-EBITDA valuation approach
Our Free-EBITDA valuation approach uses a multiple of future EBITDA, less maintenance capex
(capital expenditures required to maintain current assets in working order). Our estimated multiple is a
function of future growth rates and cost of capital (i.e., inverse of pre-tax WACC above, adjusted for
growth rate). As shown below, our Free-EBITDA valuation multiple of 18.5x (currently trading at
17.6x) sits above the group average of 14.7x (currently at 13.2x) and ranks the highest among our
coverage list – partly a function of the Company’s attractive tax attributes – i.e., nominal cash taxes
payable for an estimated 12 years owing to the $1.2 billion deferred tax asset arising from Hydro One
leaving the PILs regime (Payment in Lieu) and entering the corporate tax regime.
HYDRO ONE - EV/FREE-EBITDA VALUATION
(1) Includes preferred equity and NCI.
Note: NBF Research restricted on CUS, PPL and SPB.
Source: NBF Estimates
Source: NBF Estimates
TA
TWM
CPX
GEI
0.0x
TRP
595
$24.00
VSN
Valuation/sh
4.0x
CU
14,271
ACO
Equity Value
8.0x
KEY
10,223
EMA
24,494
FY Ending Net Debt(1)
ALA
Enterprise Value
12.0x
FTS
18.5x
Avg.: 14.7x
IPL
EV/Free-EBITDA Multiple
16.0x
VNR
1,324
FY S/O - FD
PATRICK KENNY
(732)
Free-EBITDA
High-payout:
Low-payout:
ENB
Maintenance Capex
2,056
H
2016e EBITDA
FREE-EBITDA MULTIPLE
20.0x
ENF
$mlns
19
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
Dividend discount model (DDM) valuation approach
Our DDM valuation capitalizes Hydro One’s dividend rate of $0.84 per annum, discounted at our riskadjusted yield of 3.5%, below the group average of 4.3% owing to the Company’s relative cost of
equity, partially offset by a slightly lower dividend growth rate forecast relative to peers.
HYDRO ONE - DIVIDEND DISCOUNT MODEL VALUATION
2016e
DPS
2017e
$0.84
Risk-adjusted Yield
$0.88
3.5%
Present Value
$0.81
Valuation/sh
2018e
$0.93
3.5%
3.5%
$0.82
$0.82
2019e
2020e
$0.97
RISK-ADJUSTED DIVIDEND YIELD
Terminal
$1.02
3.5%
8.0%
3.5%
$0.83
High-payout:
Low-payout:
10.0%
$0.84
6.0%
$20.47
$24.50
Avg.: 4.3%
4.0%
Source: NBF Estimates
2.0%
TA
VSN
CPX
VNR
IPL
ENF
GEI
ALA
TRP
H
EMA
FTS
CU
ENB
KEY
ACO
TWM
0.0%
Note: NBF Research restricted on CUS, PPL and SPB.
Source: NBF Estimates
Risked upside
Starting with our “blue sky” valuation accretion for a full consolidation of all Ontario LDCs we
highlight unrisked valuation upside of ~$9/share – which is based on over $1 billion of small LDC
(i.e., <30,000 customers) M&A opportunities, representing ~$1/share of unrisked upside, and over
$11 billion (~$9 billion excluding transfer tax) of large LDC (i.e., >30,000 customers) M&A
opportunities, representing ~$8/share of unrisked upside (see bottom two tables). Meanwhile, assuming
Hydro One captures one-third market share of the LDC consolidation opportunity, highlighting net
unrisked upside of ~$3/share. Finally, we conservatively risk Hydro One’s net unrisked upside by
50%, resulting in risked valuation upside of $1.50/share.
RISKED UPSIDE CALCULATION
$/sh
Unrisked small LDC M&A upside (<30k)
$1.00
Unrisked large LDC M&A upside (>30k)
$7.75
Total unrisked LDC M&A upside
$8.75
Hydro One's participation in LDC consolidation
33%
(1)
Hydro One's net unrisked upside
$3.00
NBF risk-weighting
50%
Risked upside
$1.50
(1) Rounded to nearest $0.25.
Source: NBF Estimates
LDC CONSOLIDATION OPPORTUNITIES IN ONTARIO
LDCs with less than 30,000 customers
Aggregate EBITDA(1)
LDCs with more than 30,000 customers
103
Precedent EV/EBITDA transactions
11.5x
Implied M&A opportunities (pre-tax)
1,183
Transfer tax rate
0%
Implied M&A opportunities
1,183
Aggregate EBITDA(1)
969
Equivalent after-transfer tax EV/EBITDA(2)
9.5x
Implied M&A opportunities (pre-tax)
9,206
Transfer tax rate
22%
Implied M&A opportunities
11,232
Note: Values in $mln.
(1) Based on 2014 EBITDA.
(2) Equivalent after-transfer tax multiple to maintain ~11.5x EBITDA economics after a 22% transfer tax.
Source: Company Reports, NBF Estimates, OEB
LDC'S WITH <30K CUSTOMERS - M&A DCF SENSITIVITY
LDC'S WITH >30K CUSTOMERS - M&A DCF SENSITIVITY
Transaction Value
250
500
750
1,000
1,250
10.5x
$0.25
$0.50
$0.75
$1.00
$1.25
11.0x
$0.25
$0.50
$0.50
$0.75
$1.00
11.5x
$0.25
$0.25
$0.50
$0.75
$1.00
12.0x
$0.25
$0.25
$0.50
$0.75
$0.75
12.5x
$0.25
$0.25
$0.50
$0.50
$0.75
Source: NBF Estimates
EV/EBITDA
Transaction
EV/EBITDA
Transaction
Transaction Value ($mln)
(1)
($mln)
7,000
8,000
9,000
10,000
11,000
8.5x
$6.50
$7.50
$8.50
$9.50
$10.25
9.0x
$5.75
$6.50
$7.25
$8.25
$9.00
9.5x
$5.00
$5.75
$6.25
$7.00
$7.75
10.0x
$4.25
$4.75
$5.50
$6.00
$6.75
10.5x
$3.50
$4.00
$4.50
$5.00
$5.75
(1) Includes 22% transfer tax.
Source: NBF Estimates
20
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
Initiating coverage with a $26.00 target
Based on our equally-weighted, three-pronged valuation
approach and risked upside M&A potential, we are initiating
coverage on Hydro One with a $26.00 target, based on a riskadjusted dividend yield of 3.5% applied to our 2016e dividend of
$0.84/share, an 18.5x multiple of our 2016e Free-EBITDA of
$1.3 billion, our discounted cash flow per share valuation of
$24.50 and 50% risked M&A upside potential of $1.50/share.
VALUATION SUMMARY
Methodology
Metric
Valuation
DDM
3.5%
$24.50
EV/Free-EBITDA
18.5x
$24.00
DCF Model
5.00%
$25.00
Equally Weighted Avg.
$24.50
Risked upside
50%
$1.50
Risked Target
$26.00
Source: NBF Estimates
Investment stance – crown jewel utility + consolidation upside
With a group-low cash flow risk profile (>99% rate-regulated) and “A” credit ratings, we assign a
group-high valuation multiple of 18.5x EV/Free-EBITDA (5.0% WACC) versus the group at 14.7x
(6.1% WACC).
WEIGHTED AVERAGE COST OF CAPITAL
FREE-EBITDA MULTIPLE
High-payout:
Low-payout:
High-payout:
Low-payout:
20.0x
Avg.: 14.7x
16.0x
8.0%
Avg.: 6.1%
Note: NBF Research restricted on CUS, PPL and SPB.
Note: NBF Research restricted on CUS, PPL and SPB.
Source: NBF Estimates
Source: NBF Estimates
TA
TWM
GEI
TRP
VSN
CU
ACO
KEY
ALA
EMA
FTS
IPL
VNR
H
GEI
TWM
TA
CPX
KEY
ALA
VSN
TRP
IPL
ENF
VNR
ENB
ACO
0.0x
CU
4.0x
0.0%
EMA
2.0%
H
8.0x
FTS
4.0%
ENB
12.0x
ENF
6.0%
CPX
10.0%
Meanwhile, Ontario is promoting the consolidation of LDCs (local distribution companies) by
reducing the transfer tax rate over the next three years to 22% (from 33%), while exempting transfer
taxes and capital gains portion of the departure tax for acquired LDCs with less than 30,000
customers. In total, we highlight ~70 LDCs in Ontario, generating over $1 billion of EBITDA, and
representing ~35% “blue sky” unrisked M&A upside based on precedent transaction multiples of
~11.5x EBITDA (~9.5x including transfer tax). Assuming Hydro One captures one-third market
share, and applying a 50% risk-weighting, we include $1.50/sh of M&A upside within our $26.00
target. Based on a 12-month total return of 21.8%, combined with a group-low cash flow risk profile,
we initiate coverage with an Outperform rating.
LDC'S WITH <30K CUSTOMERS - M&A DCF SENSITIVITY
LDC'S WITH >30K CUSTOMERS - M&A DCF SENSITIVITY
(1)
Transaction Value
250
500
750
1,000
1,250
10.5x
$0.25
$0.50
$0.75
$1.00
$1.25
11.0x
$0.25
$0.50
$0.50
$0.75
$1.00
11.5x
$0.25
$0.25
$0.50
$0.75
$1.00
12.0x
$0.25
$0.25
$0.50
$0.75
$0.75
12.5x
$0.25
$0.25
$0.50
$0.50
$0.75
Source: NBF Estimates
EV/EBITDA
Transaction
EV/EBITDA
Transaction
Transaction Value ($mln)
($mln)
7,000
8,000
9,000
10,000
11,000
8.5x
$6.50
$7.50
$8.50
$9.50
$10.25
9.0x
$5.75
$6.50
$7.25
$8.25
$9.00
9.5x
$5.00
$5.75
$6.25
$7.00
$7.75
10.0x
$4.25
$4.75
$5.50
$6.00
$6.75
10.5x
$3.50
$4.00
$4.50
$5.00
$5.75
(1) Includes 22% transfer tax.
Source: NBF Estimates
VALUATION SUMMARY
Methodology
Metric
Valuation
DDM
3.5%
$24.50
EV/Free-EBITDA
18.5x
$24.00
DCF Model
5.00%
$25.00
Equally Weighted Avg.
Risked upside
Risked Target
$24.50
50%
$1.50
$26.00
Source: NBF Estimates
PATRICK KENNY
21
22
VSN
29,877
1,616
13,108
10,647
43,243
8,880
1,884
9,197
8,690
3,059
656
255
R
R
7,001
7,866
2,068
21,200
R
65,251
7,153
23,331
24,440
90,688
25,151
3,832
18,573
16,040
4,667
879
271
R
R
8,738
13,260
3,299
35,590
R
9,412
$mln
EV
Source: Company Reports, NBF Estimates, pricing per ThomsonOne
Note: UP = Underperform; SP = Sector Perform; OP = Outperform; NR = Not Rated
(1) Net debt as at Q4 2015 or pro-forma equity issues.
Low-payout Average
$5.76
$42.14
TA
TRP
TransAlta
TransCanada
$38.04
$22.03
FTS
Fortis
$50.07
$42.91
$18.90
$34.58
$37.93
$10.39
H
ENB
Enbridge
Hydro One
CPX
EMA
Capital Power
Emera
CU
Canadian Utilities
ATCO
Low-payout
ACO'X
$17.12
VNR
Valener
Veresen
High-payout Average
$1.43
TWM
$10.40
$31.31
$41.02
Tidewater
KEY
Keyera
$23.46
$16.40
PPL
IPL
SPB
GEI
Gibson Energy
Inter Pipeline
$30.50
Superior Plus
ENF
Enbridge Income Fund
$1.25
4,791
$mln
11-Nov-15
$33.05
Cap
Price
Pembina Pipeline
ALA
CUS
AltaGas
Ticker
Canexus
High-payout
Company Name
55%
54%
77%
44%
56%
52%
65%
51%
50%
46%
31%
34%
25%
0%
R
R
20%
41%
37%
40%
R
49%
2016E
D / EV
6.0x
6.9x
5.3x
5.1x
6.3x
7.3x
9.9x
4.1x
5.1x
3.9x
3.8x
4.6x
4.0x
0.0x
R
R
2.7x
5.2x
3.0x
4.9x
R
5.8x
2016E
EBITDA
Net Debt/
5.4%
5.2%
12.5%
3.8%
3.9%
4.1%
4.4%
7.9%
3.7%
2.8%
6.1%
9.6%
6.2%
2.8%
R
R
3.8%
6.6%
8.1%
5.9%
R
6.1%
%
Yield
Cash
12.0%
13.0%
26.1%
6.6%
8.1%
8.0%
8.1%
14.7%
11.0%
11.9%
9.8%
9.6%
7.4%
12.2%
R
R
8.1%
9.4%
11.8%
9.1%
R
10.6%
%
Yield
AFFO
48%
41%
48%
57%
50%
53%
68%
54%
34%
24%
66%
99%
85%
23%
R
R
49%
75%
69%
69%
R
58%
2016E
Payout
AFFO
16.6x
15.9x
12.2x
18.7x
18.8x
19.7x
18.4x
17.9x
15.3x
12.3x
n/a
n/a
16.3x
n/a
R
R
n/a
n/a
n/a
n/a
R
19.9x
2016E
Earnings
Price/
9.8x
7.7x
3.8x
15.1x
12.4x
12.5x
12.3x
6.8x
9.1x
8.4x
10.5x
10.4x
13.5x
8.2x
R
R
12.4x
10.6x
8.4x
11.0x
R
9.5x
2016E
AFFO
Price/
10.6x
10.8x
6.8x
11.3x
10.8x
13.2x
15.3x
8.5x
9.9x
8.2x
11.5x
12.8x
16.3x
7.1x
R
R
11.9x
12.8x
7.5x
11.9x
R
12.1x
2016E
EBITDA
EV/
NBF PIPELINES, UTILITIES & ENERGY INFRASTRUCTURE COMPARABLES
Market
14.0x
11.8x
10.1x
17.6x
14.9x
14.5x
20.3x
9.9x
13.7x
12.9x
12.3x
13.0x
16.3x
8.2x
R
R
13.3x
13.3x
8.6x
13.0x
R
13.0x
2016E
EV/FreeEBITDA(1)
$57.00
$9.00
$26.00
$43.00
$65.00
$50.00
$26.00
$43.00
$46.00
$15.00
$18.00
$2.25
R
R
$55.00
$34.00
$28.00
$41.00
R
$46.00
Target
33.4%
40.5%
68.8%
21.8%
17.0%
34.0%
20.9%
45.4%
28.0%
24.1%
47.4%
54.0%
11.3%
60.1%
R
R
37.9%
51.5%
78.8%
40.3%
R
45.3%
%
Total
Return
12 mo.
SP
SP
OP
SP
SP
SP
SP
SP
SP
SP
SP
OP
R
R
OP
OP
OP
OP
R
OP
Ratings
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
MARKET COMPARABLES
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
INVESTMENT RISKS
Capital markets funding – There is no assurance that the Company will have favourable access to
capital markets to fund its future growth projects.
Environmental – Assets can experience unplanned events that could damage property or cause harm
to the environment, increasing current and/or long-term liabilities. In addition, future environmental
laws and regulations surrounding greenhouse gas emissions could result in additional capital
expenditures and/or reduced profitability.
Financial leverage and liquidity – There is no assurance that the Company will be able to refinance
its debt obligations on favourable terms, potentially having an adverse effect on earnings and cash
flows. In addition, funding requirements for future growth projects are dependent on future capital
market conditions, which may deteriorate over time.
Interest rates / credit spreads – Share prices of dividend-paying Utilities tend to move in the
opposite direction of interest rates, as lower / higher rates reduce / increase the required yield for
income investors. In a rising interest rate, or widening credit spread environment, share prices may
come under pressure.
Class action lawsuit – On July 22, 2015, a $125 million lawsuit was commenced against Hydro One
and four of its subsidiaries, alleging improper billing and account management practices. The claim is
in its early stages and has been proposed as a class action – Hydro One intends to defend the action.
Operational – Inherent in the operation of energy infrastructure assets is the risk of equipment failure
due to wear and tear, accidental damage or mechanical breakdown, which could adversely impact
availability of the assets, potentially resulting in lower cash flows from the assets. In addition, the
operational integrity of the assets is exposed to catastrophic events such as natural disasters, fires,
explosions, leaks, acts of terrorism and other similar events that are generally beyond the control of the
management.
Pension plan risk – Hydro One offers a defined benefit pension plan for a majority of its employees,
subject to changes in benefits, actuarial assumptions, workforce retirements and portfolio returns the
pension plan may require significant funding commitments from the Company.
Political risk – With the Electricity Act restricting the Province of Ontario from owning less than
40% of the voting securities in Hydro One and restrictions on any individual investor owning more
than 10%, the Province will maintain a significant influence over the Company. As such, there is no
assurance that the Province’s engagement in the business and affairs of the Company will be aligned
with the interest of other shareholders.
Regulatory – Changes to regulatory frameworks may adversely impact future earnings and cash flow
generated by existing assets. As well, there is no assurance that future regulatory reforms will attract
further investment in growth opportunities.
Work force demographic risk – There is no assurance that the Company be able to retain and/or
attract sufficient qualified staff to replace its retiring workforce. By the end of 2015, up to 19% of
Hydro One’s workforce will be eligible for retirement, with a significant portion currently in senior
level roles.
PATRICK KENNY
23
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
APPENDIX I
SENIOR MANAGEMENT AND DIRECTORS OF HYDRO ONE LTD.
Name
Residence
Position
Principle Occupation
Mayo Schmidt
Ontario, Canada
President, CEO, and Director
President and CEO, Hydro One Ltd.
Michael Vels
Ontario, Canada
CFO
CFO, Hydro One Ltd.
Alexander Struthers
Ontario, Canada
COO
COO, Hydro One Ltd.
David Denison
Ontario, Canada
Director and Chairman of the Board
Chair, Hydro One Ltd.
Ian Bourne
Alberta, Canada
Director
Chair, Ballard Power Systems Inc.
Charles Brindamour
Ontario, Canada
Director
CEO, Intact Financial Corp.
Marcello Caira
Ontario, Canada
Director
Vice-Chairman, Restaurant Brands
Christie Clark
Ontario, Canada
Director
Corporate Director
George Cooke
Ontario, Canada
Director
President, Martello Associates
International Inc.
Consulting / Chair, OMERS
Administration Corp.
Margaret Harris
Ontario, Canada
Director
Corporate Director
James Hinds
Ontario, Canada
Director
Corporate Director
Kathryn Jackson
Pennsylvania, U.S.
Director
Corporate Director
Roberta Jamieson
Ontario, Canada
Director
President and CEO, Indspire
Frances Lankin
Ontario, Canada
Director
Corporate Director
Philip Orsino
Ontario, Canada
Director
Consultant and Corporate Director
Jane Peverett
B.C., Canada
Director
Corporate Director
Gale Rubenstein
Ontario, Canada
Director
Partner, Goodmans LLP
Source: Company Reports
24
PATRICK KENNY
PATRICK KENNY
Source: IESO
Note: As at January 2015
MAP OF ONTARIO LOCAL DISTRIBUTION COMPANIES
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
APPENDIX II
25
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
APPENDIX III
ONTARIO LOCAL DISTRIBUTION COMPANIES
Local Distribution Company
Number of
Customer
Customers
Market Share
Service
Area (km2)
Total km
'14 Earnings
'14 EBITDA
of Lines
($'000s)
($'000s)
>30,000 Customers
Toronto Hydro-Electric System Ltd.
744,252
15%
630
10,184
94,946
321,332
PowerStream Inc.
353,284
7%
806
7,601
36,114
90,739
Hydro Ottawa Ltd.
319,536
6%
1,104
5,506
28,070
84,087
Horizon Utilities Corp.
240,076
5%
430
3,473
18,367
53,081
Enersource Hydro Mississauga Inc.
201,359
4%
292
5,180
26,002
77,006
London Hydro Inc.
152,544
3%
421
2,916
12,537
36,618
Hydro One Brampton Networks Inc.
149,618
3%
269
3,242
14,500
43,107
Veridian Connections Inc.
117,494
2%
639
2,558
6,282
23,077
91,143
2%
409
1,904
10,664
23,562
EnWin Utilities Ltd.
86,662
2%
120
1,157
14,038
31,245
Oakville Hydro Electricity Distribution Inc.
66,530
1%
143
1,834
6,430
20,971
Burlington Hydro Inc.
66,366
1%
188
1,520
6,100
13,336
Oshawa PUC Networks Inc.
54,731
1%
149
950
3,098
8,982
Waterloo North Hydro Inc.
54,674
1%
672
1,581
4,574
16,228
Guelph Hydro Electric Systems Inc.
52,963
1%
93
1,109
7,488
15,903
Cambridge and North Dumfries Hydro Inc.
52,684
1%
306
1,143
5,659
13,369
Kitchener-Wilmot Hydro Inc.
Niagara Peninsula Energy Inc.
51,824
1%
827
1,977
4,079
12,765
Thunder Bay Hydro Electricity Distribution Inc.
50,482
1%
387
1,138
2,017
6,862
Greater Sudbury Hydro Inc.
47,187
1%
410
996
450
8,830
Whitby Hydro Electric Corp.
41,488
1%
148
1,073
5,102
11,275
Entegrus Powerlines Inc.
40,503
1%
96
955
3,838
9,395
Brantford Power Inc.
38,789
1%
74
500
2,822
8,300
Bluewater Power Distribution Corp.
36,115
1%
201
788
2,607
9,853
Peterborough Distribution Inc.
36,058
1%
64
564
786
5,345
Milton Hydro Distribution Inc.
35,111
1%
371
1,009
2,942
7,819
Newmarket-Tay Power Distribution Ltd.
34,871
1%
74
845
2,999
8,456
PUC Distribution Inc.
Sub-total for LDCs with >30,000 customers
33,487
1%
342
744
1,147
7,543
3,249,831
65%
9,665
62,447
323,656
969,087
<30,000 Customers
Essex Powerlines Corp.
1%
104
461
2,112
5,359
Canadian Niagara Power Inc.
28,627
1%
357
1,011
3,340
10,721
Kingston Hydro Corp.
27,356
28,640
1%
32
357
2,213
5,439
North Bay Hydro Distribution Ltd.
23,975
0%
330
566
1,985
6,807
Westario Power Inc.
22,822
0%
64
517
2,102
5,013
Welland Hydro-Electric System Corp.
22,470
0%
81
466
1,129
3,320
Halton Hills Hydro Inc.
21,534
0%
281
1,527
3,419
5,443
Haldimand County Hydro Inc.
21,323
0%
1,252
1,731
3,141
6,443
Festival Hydro Inc.
20,362
0%
45
258
768
4,127
Norfolk Power Distribution Inc.
19,559
0%
693
793
404
4,752
Erie Thames Powerlines Corp.
18,265
0%
1,887
342
1,201
4,275
St. Thomas Energy Inc.
16,918
0%
33
258
1,161
3,340
COLLUS PowerStream Corp.
16,426
0%
45
347
923
2,339
Innpower Corp.
15,790
0%
292
818
388
Woodstock Hydro Services Inc.
15,745
0%
29
249
882
4,226
Orillia Power Distribution Corp.
13,340
0%
27
242
1,206
3,339
2,991
Lakeland Power Distribution Ltd.
13,264
0%
161
375
1,897
3,614
Wasaga Distribution Inc.
12,985
0%
61
284
460
1,252
E.L.K. Energy Inc.
12,398
0%
Orangeville Hydro Ltd.
11,685
0%
17
208
715
2,015
Algoma Power Inc.
11,650
0%
14,200
1,848
2,777
8,592
Grimsby Power Inc.
11,038
0%
69
245
271
1,540
Ottawa River Power Corp.
10,820
0%
35
167
360
1,464
Lakefront Utilities Inc.
9,996
0%
27
191
413
2,170
Brant County Power Inc.
9,971
0%
256
554
990
2,447
Niagara-on-the-Lake Hydro Inc.
8,672
0%
133
326
1,114
2,383
Midland Power Utility Corp.
22
157
832
1,610
7,035
0%
20
129
898
1,767
Tillsonburg Hydro Inc.
6,935
0%
24
133
607
1,070
Centre Wellington Hydro Ltd.
6,729
0%
10
151
553
1,474
Northern Ontario Wires Inc.
6,062
0%
28
370
260
870
Rideau St. Lawrence Distribution Inc.
5,858
0%
18
105
253
709
Kenora Hydro Electric Corporation Ltd.
5,558
0%
24
98
387
1,101
Hydro Hawkesbury Inc.
5,499
0%
8
68
Renfrew Hydro Inc.
4,246
0%
13
79
89
553
West Coast Huron Energy Inc.
3,797
0%
8
61
405
985
Fort Frances Power Corp.
3,753
0%
26
76
122
282
Wellington North Power Inc.
3,731
0%
14
76
198
848
Espanola Regional Hydro Distribution Corp.
3,301
0%
102
138
559
739
Sioux Lookout Hydro Inc.
2,779
0%
536
286
181
494
Hearst Power Distribution Company Ltd.
2,718
0%
93
68
96
430
Cooperative Hydro Embrun Inc.
1,985
0%
5
33
125
257
Atikokan Hydro Inc.
1,663
0%
380
92
389
610
Chapleau Public Utilities Corp.
1,235
0%
2
27
148
227
Hydro 2000 Inc.
1,221
0%
9
21
119
209
519,736
10%
21,853
16,309
41,966
118,302
Sub-total for LDCs with <30,000 customers
373
658
Hydro One Networks Inc.
1,219,292
24%
650,000
119,392
189,153
686,510
Grand total
4,988,859
100%
681,518
198,148
554,774
1,773,900
(1) As at December, 31, 2014.
Source: OEB
26
PATRICK KENNY
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
DISCLOSURES
Ratings And What They Mean: PRIMARY STOCK RATING: NBF has a three-tiered rating system that is relative to the coverage universe of the particular analyst. Here is a
brief description of each: Outperform – The stock is expected to outperform the analyst’s coverage universe over the next 12 months; Sector Perform – The stock is projected
to perform in line with the sector over the next 12 months; Underperform – The stock is expected to underperform the sector over the next 12 months. SECONDARY STOCK
RATING: Under Review  Our analyst has withdrawn the rating because of insufficient information and is awaiting more information and/or clarification; Tender  Our analyst is
recommending that investors tender to a specific offering for the company’s stock; Restricted  Because of ongoing investment banking transactions or because of other
circumstances, NBF policy and/or laws or regulations preclude our analyst from rating a company’s stock. INDUSTRY RATING: NBF has an Industry Weighting system that
reflects the view of our Economics & Strategy Group, using its sector rotation strategy. The three-tiered system rates industries as Overweight, Market Weight and
Underweight, depending on the sector’s projected performance against broader market averages over the next 12 months. RISK RATING: NBF utilizes a four-tiered risk rating
system, Below Average, Average, Above Average and Speculative. The system attempts to evaluate risk against the overall market. In addition to sector-specific criteria,
analysts also utilize quantitative and qualitative criteria in choosing a rating. The criteria include predictability of financial results, share price volatility, credit ratings, share liquidity
and balance sheet quality.
General – National Bank Financial (NBF) is an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on Canadian
stock exchanges.
The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are
based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein.
Research Analysts – The Research Analyst(s) who prepare these reports certify that their respective report accurately reflects his or her personal opinion and that no part of
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All of the views expressed in this research report accurately reflect the research analysts’ personal views regarding any and all of the subject securities or issuers. No part of the
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different from those in this report. To make further inquiry related to this report, United States residents should contact their NBCFI registered representative.
UK Residents – In respect of the distribution of this report to UK residents, National Bank Financial Inc. has approved the contents (including, where necessary, for the purposes of
Section 21(1) of the Financial Services and Markets Act 2000). National Bank Financial Inc. and/or its parent and/or any companies within or affiliates of the National Bank of Canada
group and/or any of their directors, officers and employees may have or may have had interests or long or short positions in, and may at any time make purchases and/or sales as
principal or agent, or may act or may have acted as market maker in the relevant securities or related financial instruments discussed in this report, or may act or have acted as
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investments contained in this report are not available to retail customers. This report does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to
buy or subscribe for the securities described herein nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever.
This information is only for distribution to Eligible Counterparties and Professional Clients in the United Kingdom within the meaning of the rules of the Financial Conduct
Authority. National Bank Financial Inc. is authorised and regulated by the Financial Conduct Authority and has its registered office at 71 Fenchurch Street, London, EC3M 4HD..
National Bank Financial Inc. is not authorised by the Prudential Regulation Authority and the Financial Conduct Authority to accept deposits in the United Kingdom.
Copyright – This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions
or conclusions contained in it be referred to without in each case the prior express written consent of National Bank Financial.
NBF is a member of the Canadian Investor Protection Fund.
NBF quarterly ratings summary and the total ratings by month can be found on our website under Research and Analysis/Equities/About NBF Research/Quarterly Ratings
Summary (link attached) http://www.nbcn.ca/cmst/site/index.jhtml?navid=803&templateID=249
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Click on the following link to see the company specific disclosures http://www.nbcn.ca/contactus/disclosures.html
Click on the following link to see National Bank Financial Markets Statement of Policies http://nbfm.ca/en/statement-of-policies/
If a company specific disclosure is not found herein for a listed company, NBF at this time does not provide research coverage or stock rating for the company in
question.
Additional company related disclosures for Hydro One Limited (2,3,4,5,7)
2
3
4
5
7
National Bank Financial Inc. has acted as an underwriter with respect to this issuer within the past 12 months.
National Bank Financial Inc. has provided investment banking services for this issuer within the past 12 months.
National Bank Financial Inc. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months.
National Bank Financial Inc. or an affiliate has received compensation for investment banking services from this issuer within the past 12 months.
The issuer is a client, or was a client, of National Bank Financial Inc. or an affiliate within the past 12 months.
PATRICK KENNY
27
HYDRO ONE LTD.: INITIATING COVERAGE
NOVEMBER 16, 2015
NOTES
28
PATRICK KENNY
RESEARCH TEAM
Ihor Danyliuk Director of Research 416.869.7522 Caroline Jukes Administrative Manager 416.869.8039 Tanya Bouchard Supervisory Analyst 416.869.7934 ECONOMICS AND STRATEGY Stéfane Marion Chief Economist & Strategist FINANCIAL SERVICES 514.879.3781 Paul‐André Pinsonnault Senior Fixed Income Economist 514.879.3795 Marc Pinsonneault Senior Economist 514.879.2589 Krishen Rangasamy Senior Economist 514.879.3140 Matthieu Arseneau Senior Economist 514.879.2252 Banking & Insurance Peter Routledge Associate: Parham Fini Associate: Paul Poon Diversified Financials Shubha Khan Associate: Jaeme Gloyn 416.869.7442 416.869.6515 416.507.8006 416.869.6425 416.869.8042 MERCHANDISING & CONSUMER PRODUCTS Vishal Shreedhar Associate: Ryan Li 416.869.7930 416.869.6767 ENERGY Agriculture and Energy Services Greg Colman 416.869.6775 Associate: Andrew Jacklin 416.869.7571 Associate: Michael Storry‐Robertson 416.507.8007 Junior & Intermediate Oil and Gas Dan Payne Brian Milne Associate: Mark Hirsch Associate: Tim Sargeant Associate: Chris Haughn Associate: Matt Taylor 403.290.5441 403.290.5625 403.441.0928 403.441.0952 403.290.5445 403.290.5624 Senior and Intermediate Yield Oil and Gas Kyle Preston 403.290.5102 Associate: Jason Wai 403.355.6643 Associate: John Hunt 403.441.0955 Pipelines, Utilities & Energy Infrastructure 403.290.5451 Patrick Kenny Associate: Michael Nguyen 416.869.7566 METALS & MINING Shane Nagle Associate: Greg Doyle 416.869.7936 416.869.6538 Steve Parsons Associate: Don DeMarco 416.869.6766 416.869.7572 Adam Melnyk Associate: David Lee 604.643.2864 416.869.8045 Associate: Raj Ray 416.507.8105 REAL ESTATE Matt Kornack Associate: Dawoon Chung Associate: Ammar Shah 416.507.8104 416.507.8102 416.869.7476 Trevor Johnson Associate: Endri Leno Associate: Kyle Stanley Associate: Alex Bauer 416.869.8511 416.869.8047 416.507.8108 416.869.7935 SPECIAL SITUATIONS Trevor Johnson Associate: Endri Leno Associate: Kyle Stanley Associate: Alex Bauer 416.869.8511 416.869.8047 416.507.8108 416.869.7935 SPECIAL SITUATIONS Leon Aghazarian Associate: Frederic Tremblay Associate: Connor Sedgewick 514.879.2574 514.412.0021 514.390.7825 Chris Bowes Associate: John Xu 416.869.7937 416.507.9115 SUSTAINABILITY AND CLEAN TECH Rupert Merer Associate: Ryan Wong Associate: Steven Hong 416.869.8008 416.869.6763 416.869.7538 TECHNOLOGY Kris Thompson Associate: Auritro Kundu Associate: Steven Walt 416.869.8049 416.869.7495 416.869.7938 TELECOM, MEDIA & GAMING Adam Shine Associate: Peter Stusio Associate: Luc Troiani 514.879.2302 514.879.2564 416.869.6585 TRANSPORTATION & INDUSTRIALS Cameron Doerksen 514.879.2579 Associate: Umayr Allem 416.869.8577 TECHNICAL ANALYSIS Dennis Mark 416.869.7427 ETFs & FINANCIAL PRODUCTS Daniel Straus Associate: Ling Zhang Associate: Tiffany Zhang 416.869.8020 416.869.7942 416.869.8022 GEOPOLITICAL ANALYSIS Pierre Fournier Associate: Angelo Katsoras 514.879.2423 514.879.6458 Research Publications
Vanda Bright Manager, Publishing Services 416.869.7141 Wayne Chau Associate 416.869.7140 National Bank Financial (the Firm) is an indirect wholly owned subsidiary of National Bank of Canada. The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The Firm may act as financial advisor, fiscal agent or underwriter for certain of the companies mentioned herein and may receive a remuneration for its services. The Firm and/or its officers, directors, representatives, associates, may have a position in the securities mentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise. To U.S. residents: NBF Securities (USA) Corp., an affiliate of the Firm, accepts responsibility for the contents of this report, subject to any terms set out above. Any U.S. person wishing to effect transactions in any security discussed herein should do so only through NBF Securities (USA) Corp. This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express consent of National Bank Financial. Baie-Comeau • 337, boulevard Lasalle, Baie-Comeau QC, G4Z 2Z1 • 418.296.8838
Barrie•126 Collier St., Barrie QC, L4M 1H4 • 418.296.8838
Beauce•11505, 1re Ave. est, Bureau 100 St-Georges, Beauce QC, G5Y 7X3 • 418.227.0121
Berthierville•779, rue Notre-Dame, Berthierville QC, J0K 1A0 • 450.836.2727
Bin-Scarth • 24 Binscarth Rd ,Toronto ON, M4W 1Y1 • 450.836.2727
Brampton • 10520 Binscarth Rd, Brampton ON, L6R 2S3 • 905.456.1515
Brandon • 633-C, 18th Street, Brandon, MB, R7A 5B3 • 204.571.3200
Burnaby • 218-4211 Kingway St., Burnaby BC, V5H 1Z9 • 604.541.8500
Calgary • Suite 2800, 450-1 St SW, Calgary AB, T2P 5H1 • 403.531-8401
Calgary • Suite 1100, 10655 Southport Rd., Southland Tower, Calgary AB, T2W 4Y1 • 403.301-4859
Charlottetown • 310-119 Kent St., BDC Tower, Campbellville PEI, C1A 1N3 • 905.569.8813
Chatham • 380 St. Clair St., Chatham ON, N7L 3K2 • 519.351.7645
Chicoutimi • 1180, boulevard, Talbot Suite 201, Chicoutimi QC, G7H 4B6 • 418.549.8888
DIX30 • 9160 boulevard Leduc, 7ième étage, Brossard, QC, J4Y 0E3 • 450.462.2552
Drumheller • 356 Centre St., Drumheller AB, T0J 0Y0 • 403.823.6857
Drummondville • 150, rue Marchand, Bureau 401, Drummondville QC, J2C 4N1 • 819.477.5024
Duncan • 206-2763, Beverly St., Duncan BC, V9L 6X2 • 250.715.3050
Edmonton • Manulife Place, 10180-101st St., Suite 3500, Edmonton AB, T5J 3S4 • 780.412.6600
Edmonton • TD Tower, 10088-102 Ave., Suite 903, Edmonton AB, T5J 2Z1 • 780.412.4455
Fredericton • 551 King St., Suite B, Fredericton NB, E3B 1E7 • 506.453.9040
Gatineau • 920, St-Joseph, Bureau 100, Gatineau QC, J8Z 1S9 • 819.770.5337
Granby • 150, rue St-Jacques Bureau 202, Granby QC, J2G 8V6 • 450.378.0442
Grand-Mère • 602, 6e Ave., Grand-Mère QC, G9T 2H5 • 819.538.8628
Halifax • Purdy’s Wharf Tower II, 1969 Upper Water St., Suite 1601, Halifax NS, B3J 3R7 • 902.496.7700
Halifax • 5670 Spring Garden Rd., Suite 901, Halifax NS, B3J 1H6 • 902.425.1283
Halifax • 1741 Brunswick St., Suite 120B, Halifax NS, B3J 3X8 • 902.425.2318
Joliette • 40, rue Gauthier sud, Bureau 3500, Joliette QC, J6E 4J4 • 450.760.9595
Kelowna • 1632 Dickson Ave., Suite 500, Kelowna BC, V1Y 7T2 • 250.717.5510
Kentville • 402 Main St., Kentville NS, B4N 3X7 • 902.679.0077
La Pocatière • 608 C, 4e Ave., La Pocatière QC, G0R 1Z0 • 418.856.4566
Lac Mégantic • 4947 Boulevard des Vétérans, Lac Mégantic, QC, G6B 2G4 • 819.583.6035
L’Assomption • 821, L’Ange Gardien Nord, Bureau 107A, L’Assomption QC, J5W 1P5 • 450.589.1138
Laval • 2500, boulevard Daniel-Johnson, Bureau 610, Laval QC, H7T 2P6 • 450.686.5700
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London • City Centre 802-380 Wellington Ave., London ON, N6B 5B5 • 519.646.5711
London • 333 Dufferin Ave., London ON, N6B 1Z3 • 519.439.6228
Mississauga • 350 Burnhamthorpe Rd. W., Suite 603 Mississauga ON, L5B 3J1 • 905.272.2799
Mississauga • 295 Eglinton Ave. E., Delaware Sq., Mississauga ON, L4Z 3K6 • 905.507-4883
Moncton • 735 Main St., Suite 300, Moncton NB, E1C 1E5 • 506.857.9926
Montréal • 1, Place Ville-Marie, Bureau 1805, Montréal QC, H3B 4A9 • 514.879.5200 514.871.9000
Montréal • 1, Place Ville-Marie, Bureau 2201, Montréal QC, H3B 3M4 • 514.879.2509
Montréal • Édifice Sun Life, 1155, rue Metcalfe, Montréal QC, H3B 4S9 • 514.879.2222
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Montréal • 600 de la Gauchetière Ouest, Niveau A, Montréal QC, H3B 4L2 • 514.871.5021
Mont Laurier • 906, Albiny-Paquette, Mont Laurier QC, J9L 1L4 • 819.623.6002
Mont-St-Hilaire • 436, boul. Sir Wilfrid-Laurier, bureau 100, Mont-St-Hilaire QC, J3H 3N9 • 450.467.4770
Nanaimo • 75 Commercial Street, Nanaïmo, BC, V9R 5G3 • 250.751.1111
North Bay • 680 Cassells St., Suite 101, North Bay ON, P1B 4A2 • 705.476.6360
Oakville • 105 Robinson St., Oakville ON, L6J 1G1 • 905.842.1925
Ottawa • MetLife Centre, 50 O’Connor St., Suite 1602, Ottawa ON, K1P 6L2 • 613.236.0103
Outremont • 1160, Laurier Ouest #1, Outremont QC, H2V 2L5 • 514.276.3532
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Plessisville • 1719 rue St Calixte, Plessisville, QC, G6L 1R2 • 819.362.6000
Pointe-Claire • 1, rue Holiday, Tour est Bureau 145, Pointe-Claire QC, H9R 5N3 • 514.426.2522
Québec • 900, boul. René Lévesque est, Bureau 640, Québec QC, G1R 2B5 • 418.649.2525
Québec • 3 Edifice Delta 3 2875, boul. Laurier, Bureau 700, Québec QC, G1V 2M2 • 418.651.0680
Red Deer • 200-4719 48th Ave., Red Deer AB, T4N 3T1 • 403.348.2600
Regina • 1770-1881 Scarth St., 17th Floor, Regina SK, S4P 4K9 • 306.781.0500
Repentigny • 534, rue Notre-Dame, Bureau 201, Repentigny QC, J6A 2T8 • 450.582.7001
Richmond • 135-8010 Saba Rd., Richmond BC, V6Y 4B2 • 604.658.8050
Richmond Hill • 500 Highway 7 East, Gr. Floor, Richmond Hill ON, L4B 1J1 • 905.477.2002
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Rivière-du-Loup • 10, rue Beaubien, Rivière-du-Loup QC, G5R 1H7 • 418.867.7900
Rosemère • 218, boul. Curé-Labelle, Rosemère QC, J7A 2H4 • 450.437.3456
Rouyn-Noranda • 74, Ave. Principale, Rouyn-Noranda QC, J9X 4P2 • 819.762.4347
Saint John • 72 Prince William St., Saint John NB, E2L 2B1 • 506.642.1740
Sainte-Marie-de-Beauce • 100-249, Du Collège, Ste-Marie-de-Beauce QC, E2L 2B1 • 418.387.8155
Saint-Félicien • 1120, boul. Sacré-Coeur, St-Félicien QC, G8K 1P7 • 418.679.2684
Saint-Jérôme • 100-265, rue St-George, St-Jérôme QC, J7Z 5A1 • 450.569.8383
Saint-Nicolas • 425, rue des Chutes, Bureau 100, St-Nicolas QC, G7A 1E7 • 450.261.5268
Saskatoon • 1220-8th St. East, Saskatoon SK, S7H 0S6 • 306.657.3465
Saskatoon • 410-22nd St. East, Suite 1360, Saskatoon SK, S7K 5T6 • 306.657.4400
Sept-Iles • 1005, boul Laure, Suite 305, Sept-Iles QC, G4R 4S6 • 418.962.9154
Sherbrooke • 1802, rue King Ouest, Suite 200, Sherbrooke QC J1J 0A2 • 819.566.7212
Sidney • 2537 Beacon Ave., Suite 205, Sidney BC, V8L 1Y3 • 250.657.2200
Sorel • 26, Pl. Charles-de-Montmagny, Sorel-Tracy QC, J3P 7E3 • 450.743.8474
St. Catharines • 40 King St., St. Catharines ON, L2R 3H4 • 905.641.1221
St-Jean-sur-Richelieu • 383, Boul du Séminaire N., Bu.224, St Jean sur Richelieu QC, J3B 8C5 • 450.349.7777
St-Hyacinthe • 1355, rue Johnson Ouest, Suite 4100, St-Hyacinthe QC, J2S 8W7 • 450.774.5354
Steinbach • 102-344 Main St., Steinbach MB, R5G 1Z1 • 204.320.9536
Sudbury • 10 Elm St., 5th Floor, Sudbury ON, P3C 1S8 • 705.671.1160
Swift Current • 202-406 Cheadle St. W, Swift Current SK, S9H 0B6 • 306.778.4770
Thedford-Mines • 222 boul. Frontenac Ouest, Thedford-Mines QC, G6G 6N7 • 418.338.6183
Thunder Bay • Hydro Blg 34 Cumberland St. N., 7th FI, Thunder Bay, ON P7A 4L3 • 807.683.1777
Toronto • 130 King St. W., 4th Floor Podium, Toronto ON, M5X 1J9 • 416.869.3707
Toronto • 130 King St. W., Suite 3200, Toronto ON, M5X 1J9 • 416.869.3707
Trois-Rivières • 7200, rue Marion, Trois-Rivières QC, G9A 0A5 • 819.379.0000
Valleyfield • 1356, boul. Monseigneur-Langlois, Valleyfield, QC, J6S 1E3 • 450.370.4656
Val d’Or • 840, 3e Ave., Val d’Or QC, J9P 1T1 • 819.824.3687
Vancouver • Park Place, 666 Burrard St., Suite 3300, Vancouver BC, V6C 2X8 • 604.623.6777
Vancouver • 550 Burrard St., Suite 1028, Vancouver BC, V6C 2B5 • 604.686.6371
Vancouver • 1333 W. Broadway Ave., Suite 1488, Vancouver BC, V6H 4C1 • 604.738.5655
Vernon • 3100-30th Ave., Suite 101, Vernon BC, V1T 2C2 • 250.260.4580
Victoria • 700-737 Yates St., Victoria BC, V8W 1L6 • 250.953.8400
Victoria Fort • 1480 Fort St., Victoria BC, V8S 1Z5 • 250.953.8400
Victoriaville • 650, rue Jutras Est, Bureau 150, Victoriaville QC, G6S 1E1 • 819.758.3191
Waterloo • Allen Square 180 King St. S., Suite 340, Waterloo, ON, N2J 1P8 • 519.742.9991
West Vancouver • 202-545, Clyde Ave., West Vancouver BC, V7T 1C5 • 604.925.5640
White Rock • 2121 160th St., Surrey BC, V3S 9N6 • 604.541.4925
Willowdale • 3640 Victoria Park Ave., 3rd Floor, Willowdale ON, M2H 3B2 • 416.756.4016
Windsor • 1 Riverside Drive W., Suite 600, Windsor ON, N9A 5K3 • 519.258.5810
Winnipeg • 400-200 Waterfront Drive, Winnipeg MB, R3B 3P1 • 204.925.2250
Yorkton • 89 Broadway St. W., Yorkton SK, S3N 0L9 • 306.782.6450
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65 East 55th Street, 31st Floor
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Tel.: 212.632.8610
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