0001114445-20-000012.txt : 20200811 0001114445-20-000012.hdr.sgml : 20200811 20200811072344 ACCESSION NUMBER: 0001114445-20-000012 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20200630 FILED AS OF DATE: 20200811 DATE AS OF CHANGE: 20200811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HYDRO ONE INC CENTRAL INDEX KEY: 0001114445 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-36115 FILM NUMBER: 201091049 BUSINESS ADDRESS: STREET 1: 483 BAY STREET STREET 2: SOUTH TOWER, 8TH FLOOR CITY: TORONTO STATE: A6 ZIP: M5G 2P5 BUSINESS PHONE: 416-345-5000 MAIL ADDRESS: STREET 1: 483 BAY STREET STREET 2: SOUTH TOWER, 8TH FLOOR CITY: TORONTO STATE: A6 ZIP: M5G 2P5 6-K 1 a2020q2hoi6k-fsmda.htm 6-K Document

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 6-K
 
 
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934
For the month of: August 2020
Commission File Number: 001-36115
 
 
HYDRO ONE INC.
(Translation of Registrant’s name into English)
 
 
483 Bay Street, South Tower, 8th Floor, Toronto Ontario M5G 2P5 Canada
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F  ☐            Form 40-F  ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐




EXHIBIT INDEX
 
  Unaudited interim consolidated financial statements of the Registrant as at and for the three and six months ended June 30, 2020 and 2019
  Management’s Discussion and Analysis of the Registrant as at and for the three and six months
ended June 30, 2020 and 2019
  Certification of President and Chief Executive Officer
  Certification of Chief Financial Officer





SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
HYDRO ONE INC.
/s/ Christopher Lopez
Name: Christopher Lopez
Title:   Chief Financial Officer
Date:August 11, 2020

 EX-99.1 2 a2020q2hoifs.htm EX-99.1 Document
HYDRO ONE INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited)
For the three and six months ended June 30, 2020 and 2019
Three months ended June 30Six months ended June 30
(millions of Canadian dollars, except per share amounts)
2020201920202019
Revenues
Distribution (includes related party revenues of $72 and $142 (2019 - $70 and $139)
for the three and six months ended June 30, respectively) (Note 24)
1,201  1,029  2,640  2,350  
Transmission (includes related party revenues of $452 and $848 (2019 - $370
 and $784) for the three and six months ended June 30, respectively) (Note 24)
459  374  859  803  
1,660  1,403  3,499  3,153  
Costs
Purchased power (includes related party costs of $366 and $1,144 (2019 - $261
and $815) for the three and six months ended June 30, respectively) (Note 24)
808  653  1,815  1,460  
Operation, maintenance and administration (Note 24)
261  257  517  513  
Depreciation, amortization and asset removal costs (Note 5)
211  218  421  429  
1,280  1,128  2,753  2,402  
Income before financing charges and income tax expense380  275  746  751  
Financing charges (Note 6)
119  116  238  226  
Income before income tax expense261  159  508  525  
Income tax expense (recovery) (Note 7)
(849) (5) (834) 34  
Net income 1,110  164  1,342  491  
Other comprehensive loss (Note 8)
(14) —  (34) (1) 
Comprehensive income1,096  164  1,308  490  
Net income attributable to:
    Noncontrolling interest 2  2  4  3  
    Preferred shareholder—  —  —  2  
    Common shareholder1,108  162  1,338  486  
1,110  164  1,342  491  
Comprehensive income attributable to:
    Noncontrolling interest 2  2  4  3  
    Preferred shareholder—  —  —  2  
    Common shareholder1,094  162  1,304  485  
1,096  164  1,308  490  
Earnings per common share (Note 22)
    Basic$7,790$1,139  $9,407$3,417  
    Diluted$7,790$1,139  $9,407$3,417  
Dividends per common share declared (Note 21)
$0$0$0$7

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

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HYDRO ONE INC.
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS (unaudited)
At June 30, 2020 and December 31, 2019

As at (millions of Canadian dollars)
June 30,
2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents—  7  
Accounts receivable (Note 9)
579  699  
Due from related parties (Note 24)
398  500  
Other current assets (Note 10)
134  114  
1,111  1,320  
Property, plant and equipment (Note 11)
21,833  21,418  
Other long-term assets:
Regulatory assets (Note 12)
3,999  2,676  
Deferred income tax assets 122  643  
Intangible assets (net of accumulated amortization - $549; 2019 - $517)470  455  
Goodwill 325  325  
Other assets (Note 13)
73  80  
4,989  4,179  
Total assets27,933  26,917  
Liabilities
Current liabilities:
Bank indebtedness5  —  
Short-term notes payable (Note 16)
860  1,143  
Long-term debt payable within one year (includes $305 measured at fair value; 2019 - $nil) (Notes 16, 17)
808  653  
Accounts payable and other current liabilities (Note 14)
985  974  
Due to related parties (Note 24)
82  301  
2,740  3,071  
Long-term liabilities:
Long-term debt (includes $nil measured at fair value; 2019 - $351) (Notes 16, 17)
11,113  10,822  
Regulatory liabilities (Note 12)
202  167  
Deferred income tax liabilities —  61  
Other long-term liabilities (Note 15)
3,139  3,073  
14,454  14,123  
Total liabilities17,194  17,194  
Contingencies and Commitments (Notes 26, 27)
Subsequent Events (Note 29)
Noncontrolling interest subject to redemption 21  20  
Equity
Common shares (Note 20)
3,264  3,564  
Retained earnings7,424  6,086  
Accumulated other comprehensive loss(40) (6) 
Hydro One shareholder’s equity10,648  9,644  
Noncontrolling interest 70  59  
Total equity10,718  9,703  
27,933  26,917  

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



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HYDRO ONE INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
For the six months ended June 30, 2020 and 2019


Six months ended June 30, 2020
(millions of Canadian dollars)


Common
Shares


Retained
Earnings		Accumulated
Other
Comprehensive
Loss
Hydro One
Shareholder’s
Equity		Non-
controlling
Interest

Total
Equity
January 1, 20203,564  6,086  (6) 9,644  59  9,703  
Net income—  1,338  —  1,338  2  1,340  
Other comprehensive loss (Note 8)
—  —  (34) (34) —  (34) 
Distributions to noncontrolling interest—  —  —  —  (1) (1) 
Contributions from sale of
    noncontrolling interest (Note 4)
—  —  —  —  10  10  
Dividends on preferred shares—  —  —  —  —  —  
Dividends on common shares—  —  —  —  —  —  
Return of stated capital (Note 20)
(300) —  —  (300) —  (300) 
June 30, 20203,264  7,424  (40) 10,648  70  10,718  


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


Common
Shares

Retained
Earnings		Accumulated
Other
Comprehensive
Loss
Hydro One
Shareholder’s
Equity		Non-
controlling
Interest

Total
Equity
January 1, 20194,312  5,137  (7) 9,442  49  9,491  
Net income —  488  —  488  2  490  
Other comprehensive loss—  —  (1) (1) —  (1) 
Distributions to noncontrolling interest—  —  —  —  (4) (4) 
Dividends on preferred shares—  (2) —  (2) —  (2) 
Dividends on common shares—  (1) —  (1) —  (1) 
Return of stated capital (485) —  —  (485) —  (485) 
June 30, 20193,827  5,622  (8) 9,441  47  9,488  

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

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HYDRO ONE INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the three and six months ended June 30, 2020 and 2019



Three months ended June 30Six months ended June 30
(millions of Canadian dollars)
2020201920202019
Operating activities
Net income 1,110  164  1,342  491  
Environmental expenditures(5) (8) (11) (16) 
Adjustments for non-cash items:
Depreciation and amortization (Note 5)
186  191  375  380  
Regulatory assets and liabilities(63) (3) (2) (173) 
Deferred income tax expense (recovery)(856) (10) (853) 19  
Other24  1  29  5  
Changes in non-cash balances related to operations (Note 25)
(37) (50) 19  (164) 
Net cash from operating activities359  285  899  542  
Financing activities
Long-term debt issued—  1,500  1,100  1,500  
Long-term debt repaid(652) (1) (652) (229) 
Short-term notes issued860  482  2,145  2,422  
Short-term notes repaid(1,013) (1,564) (2,428) (3,076) 
Return of stated capital(154) (347) (300) (485) 
Preferred shares redeemed—  —  —  (486) 
Dividends paid—  —  —  (3) 
Distributions paid to noncontrolling interest—  (2) (2) (6) 
Contributions received from sale of noncontrolling interest (Note 4)
—  —  10  —  
Change in bank indebtedness5  1  5  1  
Costs to obtain financing—  (8) (5) (8) 
Net cash from (used in) financing activities(954) 61  (127) (370) 
Investing activities
Capital expenditures (Note 25)
Property, plant and equipment(386) (339) (724) (617) 
Intangible assets(29) (24) (51) (48) 
Capital contributions received—  3  —  3  
Other(2) —  (4) (2) 
Net cash used in investing activities(417) (360) (779) (664) 
Net change in cash and cash equivalents (1,012) (14) (7) (492) 
Cash and cash equivalents, beginning of period1,012  14  7  492  
Cash and cash equivalents, end of period—  —  —  —  

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

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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
For the three and six months ended June 30, 2020 and 2019


1. DESCRIPTION OF THE BUSINESS
Hydro One Inc. (Hydro One or the Company) was incorporated on December 1, 1998, under the Business Corporations Act (Ontario) and is wholly-owned by Hydro One Limited. The principal businesses of Hydro One are the transmission and distribution of electricity to customers within Ontario.
Earnings for interim periods may not be indicative of results for the year due to the impact of seasonal weather conditions on customer demand and market pricing.
Rate Setting
The Company's transmission business consists of the transmission system operated by its subsidiaries, Hydro One Networks Inc. (Hydro One Networks) and Hydro One Sault Ste. Marie LP (HOSSM), as well as an approximately 66% interest in B2M Limited Partnership (B2M LP), a limited partnership between Hydro One and the Saugeen Ojibway Nation (SON), and an approximately 55% interest in Niagara Reinforcement Limited Partnership (NRLP), a limited partnership between Hydro One and Six Nations of the Grand River Development Corporation and the Mississaugas of the Credit First Nation (collectively, the First Nations Partners). Hydro One’s distribution business consists of the distribution system operated by its subsidiaries, Hydro One Networks and Hydro One Remote Communities Inc. (Hydro One Remote Communities).
Transmission
On March 7, 2019, the Ontario Energy Board (OEB) issued a decision (DTA Decision) with respect to Hydro One's rate-setting treatment of the benefits of the deferred tax asset resulting from the transition from the payments in lieu of tax regime to tax payments under the federal and provincial tax regimes. On July 16, 2020, the Ontario Divisional Court rendered its decision (ODC Decision) on the Company's appeal of the OEB's DTA Decision. See Note 12 - Regulatory Assets and Liabilities and Note 29 - Subsequent Events for additional information.
On March 21, 2019, Hydro One Networks filed a three-year Custom Incentive Rate application with the OEB for 2020-2022 transmission rates. On December 10, 2019, the OEB approved Hydro One Networks' 2019 transmission revenue requirement and charges as interim effective January 1, 2020 until the new transmission revenue requirement and charges are approved by the OEB. On April 23, 2020, the OEB rendered its decision on the 2020-2022 transmission rate application (2020-2022 Transmission Decision). On July 16, 2020, the OEB issued its final rate order for the 2020-2022 transmission rates. See Note 29 - Subsequent Events for additional information.
On July 31, 2019, B2M LP filed a transmission rate application for 2020-2024, seeking a base revenue requirement of $36 million for 2020, and a revenue cap escalator index for 2021 to 2024. On January 16, 2020, the OEB approved an updated 2020 base revenue requirement of $33 million.
On October 25, 2019, NRLP filed its revenue cap incentive rate application for 2020-2024. On December 19, 2019, the OEB approved NRLP’s proposed 2020 revenue requirement of $9 million on an interim basis effective January 1, 2020. On April 9, 2020, final OEB approval was received.
On December 17, 2019, the OEB issued a decision on HOSSM’s request for transmission revenue requirement for 2020. The OEB approved a 1.5% revenue cap increase effective January 1, 2020.
Distribution
On November 15, 2019, Hydro One Remote Communities filed an application with the OEB seeking approval for a 2% increase to 2019 base rates. On April 16, 2020, the OEB approved the requested increase for new rates effective May 1, 2020, while the implementation of these rates will be deferred to November 1, 2020 due to COVID-19.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Presentation
These unaudited condensed interim consolidated financial statements (Consolidated Financial Statements) include the accounts of the Company and its subsidiaries. Inter-company transactions and balances have been eliminated.
Basis of Accounting
These Consolidated Financial Statements are prepared and presented in accordance with United States Generally Accepted Accounting Principles (US GAAP) for interim financial statements and in Canadian dollars.
The accounting policies applied are consistent with those outlined in Hydro One's annual audited consolidated financial statements for the year ended December 31, 2019, with the exception of the adoption of new accounting standards as described in Note 3. These Consolidated Financial Statements reflect adjustments, that are, in the opinion of management, necessary to reflect fairly the financial position and results of operations for the respective periods. These Consolidated Financial Statements
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


do not include all disclosures required in the annual financial statements and should be read in conjunction with the annual audited consolidated financial statements for the year ended December 31, 2019.
3. NEW ACCOUNTING PRONOUNCEMENTS
The following tables present Accounting Standard Updates (ASUs) issued by the Financial Accounting Standards Board that are applicable to Hydro One:
Recently Adopted Accounting Guidance
GuidanceDate issued
Description
Effective dateImpact on Hydro One
ASU
2017-04		January 2017
The amendment removes the second step of the current two-step goodwill impairment test to simplify the process of testing goodwill.
January 1, 2020No impact upon adoption
ASU
2018-13		August 2018
Disclosure requirements on fair value measurements in Accounting Standard Codification (ASC) 820 are modified to improve the effectiveness of disclosures in financial statement notes.
January 1, 2020No impact upon adoption
ASU
2019-01		March 2019
This amendment carries forward the exemption previously provided under ASC 840 relating to the determination of the fair value of underlying assets by lessors that are not manufacturers or dealers. It also provides for clarification on cash-flow presentation of sales-type and financing leases and clarifies that transition disclosures under Topic 250 are not applicable in the adoption of ASC 842.
January 1, 2020No impact upon adoption
4. BUSINESS COMBINATIONS
Acquisition of Peterborough Distribution
In July 2018, Hydro One reached an agreement to acquire the business and distribution assets of Peterborough Distribution Inc. (Peterborough Distribution), an electricity distribution company located in east central Ontario, from the City of Peterborough, for a cash purchase price of approximately $105 million, plus the funding or assumption of agreed upon liabilities, subject to final closing adjustments. On April 30, 2020, the OEB issued its decision approving Hydro One’s application for the acquisition. The Peterborough Distribution acquisition transaction was completed on August 1, 2020. See Note 29 – Subsequent Events for further details.
Acquisition of Orillia Power
In August 2016, the Company reached an agreement to acquire Orillia Power Distribution Corporation (Orillia Power), an electricity distribution company located in Simcoe County, Ontario, from the City of Orillia for approximately $41 million, including a cash payment of $26 million and the assumption of approximately $15 million in outstanding indebtedness and regulatory liabilities, subject to final closing adjustments. On April 30, 2020, the OEB issued its decision approving Hydro One’s application for the acquisition. The transaction is expected to close in the third quarter of 2020.
NRLP
On January 31, 2020, the Mississaugas of the Credit First Nation purchased an additional 19.9% equity interest in NRLP from Hydro One Networks for total cash consideration of $9.5 million. Following this transaction, Hydro One's interest in the equity portion of NRLP was reduced to 55%, with the Six Nations of the Grand River Development Corporation and the Mississaugas of the Credit First Nation owning 25% and 20%, respectively, of the equity interest in NRLP.
5.  DEPRECIATION, AMORTIZATION AND ASSET REMOVAL COSTS
Three months ended June 30Six months ended June 30
 (millions of dollars)
2020201920202019
Depreciation of property, plant and equipment165162  332  324  
Amortization of intangible assets1621  32  40  
Amortization of regulatory assets58  11  16  
Depreciation and amortization186191  375  380  
Asset removal costs2527  46  49  
211218  421  429  
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


6. FINANCING CHARGES
Three months ended June 30Six months ended June 30
(millions of dollars)
2020201920202019
Interest on long-term debt125  123  247  234  
Interest on short-term notes2  5  7  12  
Other5  5  9  9  
Less: Interest capitalized on construction and development in progress(12) (13) (22) (24) 
           Interest earned on cash and cash equivalents(1) (4) (3) (5) 
119  116  238  226  
7. INCOME TAXES
As a rate regulated utility company, the Company’s effective tax rate excludes temporary differences that are recoverable in future rates charged to customers. Income tax expense differs from the amount that would have been recorded using the combined Canadian federal and Ontario statutory income tax rate. The reconciliation between the statutory and the effective tax rates is provided as follows:
Six months ended June 30 (millions of dollars)
20202019
Income before income tax expense508  525  
Income tax expense at statutory rate of 26.5% (2019 - 26.5%)135  139  
Increase (decrease) resulting from:
Net temporary differences recoverable in future rates charged to customers:
Capital cost allowance in excess of depreciation and amortization1
(52) (45) 
Impact of tax deductions from deferred tax asset sharing2
(22) (32) 
Overheads capitalized for accounting but deducted for tax purposes(10) (9) 
Pension and post-retirement benefit contributions in excess of pension expense(3) (8) 
Interest capitalized for accounting but deducted for tax purposes(7) (6) 
Environmental expenditures(4) (4) 
Other(5) (3) 
Net temporary differences(103) (107) 
Net permanent differences1  2  
Recognition of deferred income tax regulatory asset (Notes 12, 29)
(867) —  
Total income tax expense (recovery)(834) 34  
Effective income tax rate(164.2)%6.5 %
1 Includes accelerated tax depreciation of up to three times the first-year rate for certain eligible capital investments acquired after November 20, 2018 and placed in-service before January 1, 2028, as introduced in the 2019 federal and Ontario budgets and enacted in the second quarter of 2019.
2 Impact of tax deductions from deferred tax sharing represents the OEB’s prescribed allocation to ratepayers of the net deferred tax asset that originated from the transition from the payments in lieu of tax regime under the Electricity Act, 1998 (Ontario) to tax payments under the federal and provincial tax regime.
8. OTHER COMPREHENSIVE LOSS
Three months ended June 30,Six months ended June 30,
(millions of dollars)2020201920202019
Recognition of assets relating to other post-employment benefit transfer (Note 18)
23  —  23  —  
Recognition of other post-employment benefit liability (Note 18)
(32) —  (32) —  
Loss on cash flow hedges (interest-rate swap agreements) (Note 17)
(3) —  (23) —  
Loss on cash flow hedges (bond forward agreements) (Note 17)
(2) —  (2) —  
Other—  —  —  (1) 
(14) —  (34) (1) 
9. ACCOUNTS RECEIVABLE
As at (millions of dollars)
June 30,
2020		December 31, 2019
Accounts receivable - billed309  330  
Accounts receivable - unbilled310  391  
Accounts receivable, gross619  721  
Allowance for doubtful accounts(40) (22) 
Accounts receivable, net579  699  
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


The following table shows the movements in the allowance for doubtful accounts for the six months ended June 30, 2020 and the year ended December 31, 2019:
(millions of dollars)Six months ended
June 30,
2020		Year ended December 31, 2019
Allowance for doubtful accounts – beginning(22) (21) 
Write-offs7  18  
Additions to allowance for doubtful accounts1
(25) (19) 
Allowance for doubtful accounts – ending(40) (22) 
1 Additions to allowance for doubtful accounts for the six months ended June 30, 2020 include $14 million (year ended December 31, 2019 - $nil) related to the impact of the COVID-19 pandemic. In accordance with accounting guidance issued by the OEB on March 25, 2020, the Company has established a regulatory deferral account to track incremental costs, including costs relating to bad debt expenses, incurred as a result of the COVID-19 pandemic. The estimated amount relating to incremental bad debt expenses has been recognized as a regulatory asset. See Note 12 - Regulatory Assets and Liabilities.
10.  OTHER CURRENT ASSETS
As at (millions of dollars)
June 30,
2020		December 31, 2019
Prepaid expenses and other assets56  41  
Regulatory assets (Note 12)
53  52  
Materials and supplies20  21  
Derivative assets (Note 17)
5  —  
134  114  
11. PROPERTY, PLANT AND EQUIPMENT
As at (millions of dollars)
June 30,
2020		December 31, 2019
Property, plant and equipment32,061  31,716  
Less: accumulated depreciation(11,656) (11,345) 
20,405  20,371  
Construction in progress1,261  887  
Future use land, components and spares167  160  
21,833  21,418  
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


12. REGULATORY ASSETS AND LIABILITIES
Regulatory assets and liabilities arise as a result of the rate-setting process. Hydro One has recorded the following regulatory assets and liabilities:
As at (millions of dollars)
June 30,
2020		December 31, 2019
Regulatory assets:
    Deferred income tax regulatory asset2,442  1,128  
    Pension benefit regulatory asset1,113  1,125  
    Environmental132  141  
    Post-retirement and post-employment benefits105  105  
    Post-retirement and post-employment benefits - non-service cost82  77  
    Foregone revenue deferral65  67  
    Stock-based compensation38  42  
    Conservation and Demand Management (CDM) variance20  —  
    Debt premium 14  17  
    COVID-19 emergency deferral14  —  
    Other27  26  
Total regulatory assets4,052  2,728  
Less: current portion(53) (52) 
3,999  2,676  
Regulatory liabilities:
    Tax rule changes variance58  44  
    Retail settlement variance account 49  23  
    Pension cost differential31  31  
    Green energy expenditure variance27  31  
    Distribution rate riders23  42  
    Earnings sharing mechanism deferral22  21  
    External revenue variance5  6  
    Deferred income tax regulatory liability5  5  
    Other9  9  
Total regulatory liabilities229  212  
Less: current portion(27) (45) 
202  167  
Deferred Income Tax Regulatory Asset and Liability
On July 16, 2020, the Ontario Divisional Court rendered its decision on the Company's appeal of the OEB's DTA Decision. In connection with the ODC Decision, the Company has recorded a reversal of the previously recognized impairment charge of Hydro One Networks' distribution and transmission deferred income tax regulatory asset, including the cumulative amounts shared with ratepayers to-date by Hydro One Networks' distribution and transmission segments of $58 million and $118 million, respectively. This has resulted in the recognition of deferred income tax regulatory assets of $504 million and $673 million, respectively, and associated deferred income tax liability of $310 million. The Company has recorded an increase in net income of $867 million as deferred income tax recovery.
The recognition of the regulatory asset related to DTA amounts shared with ratepayers that arose from the ODC Decision has no impact on the Company's forecast effective tax rates, as this will be dependent on the timing of the OEB's final decision and related recovery of the regulatory asset.
See Note 1 - Description of the Business - Rate Setting and Note 29 - Subsequent Events for additional information.
Foregone Revenue Deferral
The foregone revenue deferral account is primarily made up of the difference between revenue earned by Hydro One Networks transmission, NRLP, B2M LP, and HOSSM under interim 2020 Uniform Transmission Rates (UTRs), and the revenues that would have been received under the approved UTRs based on OEB-approved 2020 rates revenue requirement and load forecast. This account currently captures the foregone revenue from January 1, 2020 to June 30, 2020. The foregone revenue deferral account is also made up of the difference between revenue earned based on distribution rates approved by the OEB in Hydro One Networks' 2018-2022 distribution rates application, effective May 1, 2018, and revenue earned under the interim rates until the approved 2018 and 2019 rates were implemented on July 1, 2019. This amount is being recovered from ratepayers over an 18-month period ending December 31, 2020.
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


COVID-19 Emergency Deferral
On March 25, 2020, the OEB issued accounting guidance for the establishment of three deferral accounts to track incremental costs and lost revenues related to the COVID-19 pandemic: (i) Billing and System Changes as a Result of the Emergency Order Regarding Time-of-Use Pricing, (ii) Lost Revenues Arising from the COVID-19 Emergency, and (iii) Other Incremental Costs, including costs relating to bad debt expenses. The OEB accounting guidance specified that incremental bad debt expense can be included in the Other Incremental Costs COVID-19 emergency deferral account and the Company has assessed that it is probable that this expense will be recovered in future rates; therefore, this has been recognized as a regulatory asset. The current balance in the regulatory deferral account represents the incremental bad debt expense as a result of the COVID-19 pandemic. Hydro One is also tracking certain incremental costs and lost revenues that have arisen due to the COVID-19 pandemic. These amounts have not been recognized as regulatory assets as the Company has not assessed these as probable for recovery in future rates as it waits for further direction from the OEB. The OEB has commenced a consultation on the COVID-19 emergency deferral accounts and intends to assess policy guidance with respect to the recoverability of amounts tracked in the deferral accounts, and set out the timing and process for disposition of the accounts.
CDM Variance
The CDM variance account tracks the impact of actual CDM and demand response programs on the actual load forecast compared to the estimated load forecast included in revenue requirement. As per the OEB's decision on Hydro One Networks' 2017 and 2018 transmission rates, and 2019 transmission rates, this account was maintained to record any variances for 2017, 2018, and 2019. A CDM variance amount for 2017 was calculated and proposed for disposition in the Hydro One Networks' transmission 2020-2022 rates application. In April 2020, the amount as at December 31, 2018, including accrued interest, was approved for disposition by the OEB and was recognized as a regulatory asset. The amount was approved to be recovered from ratepayers over a 3-year period ending December 31, 2022.
13. OTHER LONG-TERM ASSETS
As at (millions of dollars)
June 30,
2020		December 31, 2019
Right-of-Use (ROU) assets (Note 19)
66  71  
Derivative assets (Note 17)
—  3  
Other long-term assets7  6  
73  80  
14. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
As at (millions of dollars)
June 30,
2020		December 31, 2019
Accrued liabilities644  603  
Accounts payable149  184  
Accrued interest110  104  
Environmental liabilities35  30  
Regulatory liabilities (Note 12)
27  45  
Lease obligations (Note 19)
9  8  
Derivative liabilities (Note 17)
11  —  
985  974  
15. OTHER LONG-TERM LIABILITIES
As at (millions of dollars)
June 30,
2020		December 31, 2019
Post-retirement and post-employment benefit liability (Note 18)
1,789  1,705  
Pension benefit liability (Note 18)
1,113  1,125  
Environmental liabilities 97  111  
Lease obligations (Note 19)
61  66  
Due to related parties (Note 24)
29  40  
Derivative liabilities (Note 17)
20  —  
Asset retirement obligations 13  10  
Long-term accounts payable3  5  
Other long-term liabilities14  11  
3,139  3,073  
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


16. DEBT AND CREDIT AGREEMENTS
Short-Term Notes and Credit Facilities
Hydro One meets its short-term liquidity requirements in part through the issuance of commercial paper under its Commercial Paper Program which has a maximum authorized amount of $2,300 million. These short-term notes are denominated in Canadian dollars with varying maturities up to 365 days. The Commercial Paper Program is supported by the Company’s committed and unsecured revolving standby credit facilities totalling $2,300 million (Operating Credit Facilities). At June 30, 2020, no amounts have been drawn on the Operating Credit Facilities.
The Company may use the Operating Credit Facilities for working capital and general corporate purposes. If used, interest on the Operating Credit Facilities would apply based on Canadian benchmark rates. The obligation of each lender to make any credit extension under its credit facility is subject to various conditions including that no event of default has occurred or would result from such credit extension.
Long-Term Debt
The following table presents long-term debt outstanding at June 30, 2020 and December 31, 2019:
As at (millions of dollars)
June 30,
2020		December 31, 2019
Hydro One long-term debt (a)11,795  11,345  
HOSSM long-term debt (b)155  160  
11,950  11,505  
Add: Net unamortized debt premiums11  12  
Add: Unrealized mark-to-market loss1
5  1  
Less: Unamortized deferred debt issuance costs(45) (43) 
Total long-term debt11,921  11,475  
Less: Long-term debt payable within one year(808) (653) 
11,113  10,822  
1 The unrealized mark-to-market net loss of $5 million relates to $300 million Series 39 notes due 2021 (December 31, 2019 - $1 million also relates to $50 million of the Series 33 notes due 2020). The unrealized mark-to-market net loss is offset by a $5 million unrealized mark-to-market net gain (December 31, 2019 - $1 million) on the related fixed-to-floating interest-rate swap agreements, which are accounted for as fair value hedges.
(a) Hydro One long-term debt
At June 30, 2020, long-term debt of $11,795 million (December 31, 2019 - $11,345 million) was outstanding, the majority of which was issued under Hydro One’s Medium Term Note (MTN) Program. In April 2020, Hydro One filed a short form base shelf prospectus for its MTN Program, which has a maximum authorized principal amount of notes issuable of $4,000 million, expiring in May 2022. At June 30, 2020, $4,000 million remained available for issuance under this MTN Program prospectus.
During the six months ended June 30, 2020, Hydro One issued long-term debt totalling $1,100 million (2019 - $1,500 million) under its MTN Program prospectus that had expired in April 2020 as follows:
•$400 million Series 45 notes with a maturity date of February 28, 2025 and a coupon rate of 1.76%;
•$400 million Series 46 notes with a maturity date of February 28, 2030 and a coupon rate of 2.16%; and
•$300 million Series 47 notes with a maturity date of February 28, 2050 and a coupon rate of 2.71%.
During the three and six months ended June 30, 2020, $650 million long-term debt was repaid (2019 - $nil and $228 million, respectively) under the MTN Program.
(b) HOSSM long-term debt
At June 30, 2020, HOSSM long-term debt of $155 million (December 31, 2019 - $160 million), with a principal amount of $139 million (December 31, 2019 - $141 million) was outstanding. During the three and six months ended June 30, 2020 and 2019, no long-term debt was issued and $2 million (2019 - $1 million) of long-term debt was repaid.
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


Principal and Interest Payments
At June 30, 2020, principal repayments, interest payments, and related weighted-average interest rates were as follows:
Long-Term Debt
Principal Repayments		Interest
Payments		Weighted-Average
Interest Rate
(millions of dollars)(millions of dollars)(%)
Year 1803  487  2.1  
Year 2603  470  3.2  
Year 3133  451  6.1  
Year 4700  442  2.5  
Year 5750  425  2.3  
2,989  2,275  2.7  
Years 6-101,850  1,965  3.7  
Thereafter7,095  4,133  4.8  
11,934  8,373  4.1  
17. FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Non-Derivative Financial Assets and Liabilities
At June 30, 2020 and December 31, 2019, the Company’s carrying amounts of cash and cash equivalents, accounts receivable, due from related parties, bank indebtedness, short-term notes payable, accounts payable, and due to related parties are representative of fair value due to the short-term nature of these instruments.
Fair Value Measurements of Long-Term Debt
The fair values and carrying values of the Company’s long-term debt at June 30, 2020 and December 31, 2019 are as follows:
June 30, 2020December 31, 2019
As at (millions of dollars)
Carrying ValueFair ValueCarrying ValueFair Value
Long-term debt measured at fair value:
    $50 million of MTN Series 33 notes—  —  50  50  
    $300 million MTN Series 39 notes305  305  301  301  
Other notes and debentures11,616  14,475  11,124  13,121  
Long-term debt, including current portion11,921  14,780  11,475  13,472  
Fair Value Measurements of Derivative Instruments
Fair Value Hedges
At June 30, 2020, Hydro One had interest-rate swaps with a total notional amount of $300 million (December 31, 2019 - $350 million) that were used to convert fixed-rate debt to floating-rate debt. These swaps are classified as fair value hedges. Hydro One’s fair value hedge exposure was approximately 3% (December 31, 2019 - 3%) of its total long-term debt. At June 30, 2020, Hydro One had the following interest-rate swap designated as a fair value hedge:
•a $300 million fixed-to-floating interest-rate swap agreement to convert the $300 million MTN Series 39 notes maturing June 25, 2021 into three-month variable rate debt.
Cash Flow Hedges
At June 30, 2020, Hydro One had the following agreements designated as cash flow hedges:
•$800 million in 3-year pay-fixed, receive-floating interest-rate swap agreements intended to offset the variability of interest rates on the issuances of short-term commercial paper between January 9, 2020 and March 9, 2023; and
•$400 million of bond forward agreements intended to mitigate exposure to variability in interest rates on forecasted fixed-rate issuance under Hydro One's MTN Program, expected to occur by the end of 2020.
At June 30, 2020 and December 31, 2019, the Company had no derivative instruments classified as undesignated contracts.
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


Fair Value Hierarchy
The fair value hierarchy of financial assets and liabilities at June 30, 2020 and December 31, 2019 is as follows:

As at June 30, 2020 (millions of dollars)
Carrying
Value		Fair
Value
Level 1
Level 2
Level 3
Assets:
    Derivative instruments (Note 10)
Fair value hedges5  5  —  5  —  
5  5  —  5  —  
Liabilities:
    Long-term debt, including current portion
11,921  14,780  —  14,780  —  
    Derivative instruments (Notes 14,15)
Cash flow hedges, including current portion31  31  —  31  —  
11,952  14,811  —  14,811  —  

As at December 31, 2019 (millions of dollars)
Carrying
Value		Fair
Value
Level 1
Level 2
Level 3
Assets:
    Derivative instruments (Note 13)
Fair value hedges 1  1  —  1  —  
Cash flow hedges2  2  —  2  —  
3  3  —  3  —  
Liabilities:
    Long-term debt, including current portion
11,475  13,472  —  13,472  —  
11,475  13,472  —  13,472  —  
The fair value of the hedged portion of the long-term debt is primarily based on the present value of future cash flows using a swap yield curve to determine the assumption for interest rates. The fair value of the unhedged portion of the long-term debt is based on unadjusted period-end market prices for the same or similar debt of the same remaining maturities.
There were no transfers between any of the fair value levels during the six months ended June 30, 2020 and the year ended December 31, 2019.
Risk Management
Exposure to market risk, credit risk and liquidity risk arises in the normal course of the Company’s business.
Market Risk
Market risk refers primarily to the risk of loss which results from changes in costs, foreign exchange rates and interest rates. The Company is exposed to fluctuations in interest rates, as its regulated return on equity is derived using a formulaic approach that takes anticipated interest rates into account. The Company is not currently exposed to material commodity price risk or material foreign exchange risk.
The Company uses a combination of fixed and variable-rate debt to manage the mix of its debt portfolio. The Company also uses derivative financial instruments to manage interest-rate risk. The Company may utilize interest-rate swaps designated as fair value hedges as a means to manage its interest rate exposure to achieve a lower cost of debt. The Company may also utilize interest-rate derivative instruments, such as cash flow hedges, to manage its exposure to short-term interest rates or to lock in interest-rate levels on forecasted financing.
A hypothetical 100 basis points increase in interest rates associated with variable-rate debt would not have resulted in a significant decrease in Hydro One’s net income for the three and six months ended June 30, 2020 and 2019.
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the consolidated statements of operations and comprehensive income. The net unrealized loss (gain) on the hedged debt and the related interest-rate swaps for the three and six months ended June 30, 2020 and 2019 were not material.
For derivative instruments that are designated and qualify as cash flow hedges, the unrealized gain or loss, net of tax, on the derivative instrument is recorded as other comprehensive income (OCI) and is reclassified to results of operations in the same period during which the hedged transaction affects results of operations. The unrealized loss, net of tax, on the cash flow hedges for the six months ended June 30, 2020 recorded in OCI was $25 million (2019 - $nil), resulting in an accumulated other comprehensive loss of $23 million related to cash flow hedges at June 30, 2020 (December 31, 2019 - accumulated OCI of $2
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


million). $1 million was reclassified to financing charges during the six months ended June 30, 2020 (2019 - $nil). The Company estimates that the amount of accumulated other comprehensive loss, net of tax, related to cash flow hedges to be reclassified to results of operations in the next 12 months is $8 million. Actual amounts reclassified to results of operations depend on the interest rate risk in effect until the derivative contracts mature. For all forecasted transactions, the maximum term over which the Company is hedging exposures to the variability of cash flows is approximately three years.
Credit Risk
Financial assets create a risk that a counterparty will fail to discharge an obligation, causing a financial loss. At June 30, 2020 and December 31, 2019, there were no significant concentrations of credit risk with respect to any class of financial assets. The Company’s revenue is earned from a broad base of customers. As a result, Hydro One did not earn a material amount of revenue from any single customer. At June 30, 2020 and December 31, 2019, there was no material accounts receivable balance due from any single customer.
At June 30, 2020, the Company’s allowance for doubtful accounts was $40 million (December 31, 2019 - $22 million). The allowance for doubtful accounts reflects the Company's current lifetime expected credit losses for all accounts receivable balances, which are based on historical overdue balances, customer payments and write-offs. At June 30, 2020, approximately 6% (December 31, 2019 - 5%) of the Company’s net accounts receivable were outstanding for more than 60 days. Please see Note 9 - Accounts Receivable for additions to allowance for doubtful accounts related to the impact of the COVID-19 pandemic.
Hydro One manages its counterparty credit risk through various techniques including (i) entering into transactions with highly rated counterparties, (ii) limiting total exposure levels with individual counterparties, (iii) entering into master agreements which enable net settlement and the contractual right of offset, and (iv) monitoring the financial condition of counterparties. The Company monitors current credit exposure to counterparties on both an individual and an aggregate basis. The Company’s credit risk for accounts receivable is limited to the carrying amounts on the consolidated balance sheets.
Derivative financial instruments result in exposure to credit risk since there is a risk of counterparty default. The maximum credit exposure of derivative contracts, before collateral, is represented by the fair value of contracts at the reporting date. At June 30, 2020 and December 31, 2019, the counterparty credit risk exposure on the fair value of these interest-rate swap contracts was not material. At June 30, 2020, Hydro One’s credit exposure for all derivative instruments, and applicable payables and receivables, was with four financial institutions with investment grade credit ratings as counterparties.
Liquidity Risk
Liquidity risk refers to the Company’s ability to meet its financial obligations as they come due. Hydro One meets its short-term operating liquidity requirements using cash and cash equivalents on hand, funds from operations, the issuance of commercial paper, and the Operating Credit Facilities. The short-term liquidity under the commercial paper program, the Operating Credit Facilities, and anticipated levels of funds from operations are expected to be sufficient to fund the Company’s operating requirements. The Company's currently available liquidity is also expected to be sufficient to address any reasonably foreseeable impacts that the COVID-19 pandemic may have on the Company’s cash requirements.
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


18. PENSION AND POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
The following table provides the components of the net periodic benefit costs for the three and six months ended June 30, 2020 and 2019:

Pension Benefits		Post-Retirement and
Post-Employment Benefits
Three months ended June 30 (millions of dollars)
2020201920202019
Current service cost54  36  17  14  
Interest cost71  75  14  15  
Expected return on plan assets, net of expenses1
(113) (115) —  —  
Prior service cost amortization1  —  1  —  
Amortization of actuarial losses24  14  1  —  
Net periodic benefit costs37  10  33  29  
Charged to results of operations2,3
6  6  23  11  
Pension BenefitsPost-Retirement and
Post-Employment Benefits
Six months ended June 30 (millions of dollars)
2020201920202019
Current service cost108  73  35  28  
Interest cost142  151  29  30  
Expected return on plan assets, net of expenses1
(226) (231) —  —  
Prior service cost amortization1  —  1  —  
Amortization of actuarial losses48  28  2  1  
Net periodic benefit costs73  21  67  59  
Charged to results of operations2,3
12  13  36  22  
1 The expected long-term rate of return on pension plan assets for the year ending December 31, 2020 is 5.75% (2019 - 6.5%).
2 The Company accounts for pension costs consistent with their inclusion in OEB-approved rates. During the three and six months ended June 30, 2020, pension costs of $16 million (2019 - $14 million) and $34 million (2019 - $32 million), respectively, were attributed to labour, of which $6 million (2019 - $6 million) and $12 million (2019 - $13 million), respectively, was charged to operations, no amounts were recorded as regulatory assets (2019 - $4 million and $9 million, respectively), and $10 million (2019 - $4 million) and $22 million (2019 - $10 million), respectively, was capitalized as part of the cost of property, plant and equipment and intangible assets.
3 In the 2020-2022 transmission decision, the OEB approved the recovery of the non-service cost component of post-retirement and post-employment benefits as part of operation, maintenance and administration costs for the Company's transmission business. These costs were previously capitalized and recovered through rate base. As a result, during the six months ended June 30, 2020, other post-retirement and post-employment costs of $11 million attributed to labour were charged to operations.
Effective March 1, 2018, certain employees who provided customer service operations for Hydro One through Inergi LP were transferred to Hydro One Networks (Transferred Employees), and began accruing pension and other post-employment benefits in the Hydro One defined benefit pension plan (Pension Plan) and post-retirement and post-employment benefit plans, respectively. Pursuant to the arrangement, Inergi LP, Vertex Customer Management (Canada) Ltd. (Vertex) and Hydro One Networks agreed to transfer the defined benefit assets and related pension obligations (for current and former members) of the Inergi LP Customer Service Operations Pension Plan and the Vertex Customer Management (Canada) Limited Pension Plan to the Pension Plan. In addition, Inergi LP, Vertex and Hydro One Networks agreed to transfer the other post-employment benefit liability related to the Transferred Employees to Hydro One’s post-retirement and post-employment benefit plans. Regulatory approval for the pension transfer was received on November 27, 2019.
The transfer of the pension assets of $151 million and related pension obligations of $120 million was completed on March 2, 2020. The unfunded status of $31 million was recorded as a pension benefit liability with an offsetting regulatory asset. The transfer of the other post-employment benefit liability of $33 million was completed on April 1, 2020. The liability was recorded as a post-retirement and post-employment benefit liability with an offset to other comprehensive loss. In addition, as a part of the transfers, cash totaling $24 million was transferred to Hydro One and recorded as an asset with an offset to OCI. Both, the OCI resulting from the transfer of the cash asset and the other comprehensive loss resulting from the transfer of the other post-retirement benefit liability are being recognized in net income over the expected average remaining service lifetime (EARSL) of the Transferred Employees.
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


19. LEASES
Hydro One has operating lease contracts for buildings used in administrative and service-related functions. These leases have terms between three and seven years with renewal options of additional three- to five-year terms at prevailing market rates at the time of extension. All leases include a clause to enable upward revision of the rental charge on an annual basis or on renewal according to prevailing market conditions or pre-established rents. There are no restrictions placed upon Hydro One by entering into these leases. Renewal options are included in the lease term when their exercise is reasonably certain. Other information related to the Company's operating leases was as follows:
Three months ended June 30Six months ended June 30
(millions of dollars)
2020201920202019
Lease expense4  264
Lease payments made2  153
As atJune 30,
2020		December 31, 2019
Weighted-average remaining lease term1 (years)
78
Weighted-average discount rate 2.7 %2.7 %
1 Includes renewal options that are reasonably certain to be exercised.
At June 30, 2020, future minimum operating lease payments were as follows:
(millions of dollars)
Remainder of 20205  
202111  
202210  
20239  
20249  
Thereafter33  
Total undiscounted minimum lease payments1
77  
Less: discounting minimum lease payments to present value (7) 
Total discounted minimum lease payments70  
1 Excludes committed amounts of $8 million for leases that have not yet commenced.
At December 31, 2019, future minimum operating lease payments were as follows:
(millions of dollars)
202010  
202111  
202210  
20239  
20249  
Thereafter33  
Total undiscounted minimum lease payments1
82  
Less: discounting minimum lease payments to present value (9) 
Total discounted minimum lease payments73  
1 Excludes committed amounts of $6 million for leases that have not yet commenced.
Hydro One presents its ROU assets and lease obligations on the consolidated balance sheets as follows:
As at (millions of dollars)
June 30,
2020		December 31, 2019
Other long-term assets (Note 13)
66  71  
Accounts payable and other current liabilities (Note 14)
9  8  
Other long-term liabilities (Note 15)
61  66  
20. SHARE CAPITAL
Common Shares
The Company is authorized to issue an unlimited number of common shares. At June 30, 2020 and December 31, 2019, the Company had 142,239 common shares issued and outstanding. During the three and six months ended June 30, 2020, a return of stated capital in the amount of $154 million (2019 - $347 million) and $300 million was paid (2019 - $485 million), respectively. See Note 29 - Subsequent Events for a return of stated capital approved subsequent to June 30, 2020.
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


The amount and timing of any dividends payable by Hydro One is at the discretion of the Hydro One Board of Directors and is established on the basis of Hydro One’s results of operations, maintenance of its deemed regulatory capital structure, financial condition, cash requirements, the satisfaction of solvency tests imposed by corporate laws for the declaration and payment of dividends and other factors that the Board of Directors may consider relevant.
Preferred Shares
The Company is authorized to issue an unlimited number of preferred shares, issuable in series. At June 30, 2020 and December 31, 2019, two series of preferred shares were authorized for issuance: the Class A preferred shares and Class B preferred shares. On January 24, 2019, the Company redeemed 485,870 Class B preferred shares totalling $486 million. At June 30, 2020 and December 31, 2019, the Company had no Class B preferred shares and Class A preferred shares issued and outstanding.
21.  DIVIDENDS
During the three months ended June 30, 2020, no preferred share dividends (2019 - $nil) and no common share dividends (2019 - $nil) were declared and paid.
During the six months ended June 30, 2020, no preferred share dividends (2019 - $2 million) and no common share dividends (2019 - $1 million) were declared and paid.
22. EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share is calculated by dividing net income attributable to common shareholder of Hydro One by the weighted-average number of common shares outstanding. The weighted-average number of common shares outstanding during the three and six months ended June 30, 2020 and 2019 were 142,239. There were no dilutive securities during the three and six months ended June 30, 2020 or 2019.
23. STOCK-BASED COMPENSATION
Share Grant Plans
Hydro One Limited has two share grant plans (Share Grant Plans), one for the benefit of certain members of the Power Workers’ Union (the PWU Share Grant Plan) and one for the benefit of certain members of the Society of United Professionals (the Society Share Grant Plan). A summary of share grant activity under the Share Grant Plans during the three and six months ended June 30, 2020 and 2019 is presented below:  
Three months ended June 30Six months ended June 30
(number of share grants)2020201920202019
Share grants outstanding - beginning3,611,178  4,159,439  3,611,178  4,159,439  
Vested and issued1
(434,648) (455,694) (434,648) (455,694) 
Share grants outstanding - ending3,176,5303,703,7453,176,5303,703,745
1 During the three and six months ended June 30, 2020, Hydro One Limited issued from treasury 434,648 (2019 - 455,694) common shares to eligible employees in accordance with provisions of the PWU and the Society Share Grant Plans.
Directors' Deferred Share Unit (DSU) Plan
A summary of DSU awards activity under the Directors' DSU Plan during the three and six months ended June 30, 2020 and 2019 is presented below:
Three months ended June 30Six months ended June 30
(number of DSUs)
2020201920202019
DSUs outstanding - beginning58,479  35,205  52,620  46,697  
    Granted5,847  6,608  11,706  19,131  
    Settled—  —  —  (24,015) 
DSUs outstanding - ending64,326  41,813  64,326  41,813  
At June 30, 2020, a liability of $2 million (December 31, 2019 - $1 million) related to Directors' DSUs has been recorded at the closing price of Hydro One Limited common shares of $25.53 (December 31, 2019 - $25.08). This liability is included in long-term accounts payable and other liabilities on the consolidated balance sheets.
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


Management DSU Plan
A summary of DSU awards activity under the Management DSU Plan during the three and six months ended June 30, 2020 and 2019 is presented below:
Three months ended June 30Six months ended June 30
(number of DSUs)
2020201920202019
DSUs outstanding - beginning67,052  75,083  52,186  104,041  
    Granted688  548  20,965  23,935  
    Paid—  (23,134) (5,411) (75,479) 
DSUs outstanding - ending67,740  52,497  67,740  52,497  
At June 30, 2020, a liability of $2 million (December 31, 2019 - $1 million) related to Management DSUs has been recorded at the closing price of Hydro One Limited common shares of $25.53 (December 31, 2019 - $25.08). This liability is included in long-term accounts payable and other liabilities on the consolidated balance sheets.
Long-term Incentive Plan (LTIP)
Performance Share Units (PSU) and Restricted Share Units (RSU)
A summary of PSU and RSU awards activity under the LTIP during the three and six months ended June 30, 2020 and 2019 is presented below:
                               PSUs                             RSUs
Three months ended June 30 (number of units)
2020201920202019
Units outstanding - beginning117,167  475,430  143,908  387,610  
    Vested and issued(4,677) (516) (3,728) (780) 
    Forfeited(870) (6,214) (1,310) (4,750) 
    Settled—  (167,360) —  (41,350) 
Units outstanding - ending1
111,620  301,340  138,870  340,730  
                               PSUs                             RSUs
Six months ended June 30 (number of units)
2020201920202019
Units outstanding - beginning162,344  594,470  200,883  432,780  
    Vested and issued(49,477) (76,038) (3,728) (21,756) 
    Forfeited(1,247) (15,182) (1,875) (11,674) 
    Settled—  (201,910) (56,410) (58,620) 
Units outstanding - ending1
111,620  301,340  138,870  340,730  
1 Units outstanding at June 30, 2020 include 7,740 PSUs (2019 - 16,620) and 39,920 RSUs (2019 - 102,260) that may be settled in cash if certain conditions are met. At June 30, 2020, a liability of $1 million (2019 - $3 million) has been recorded with respect to these awards and is included in accounts payable and other current liabilities on the consolidated balance sheets.
No awards were granted during the three and six months ended June 30, 2020 and 2019. The compensation expense related to the PSU and RSU awards recognized by the Company during the three and six months ended June 30, 2020 was $nil and $1 million (2019 - $4 million and $9 million), respectively.
At June 30, 2020, $7 million (December 31, 2019 - $10 million) payable to Hydro One Limited relating to PSU and RSU awards was included in due to related parties on the consolidated balance sheets.
Stock Options
A summary of stock options activity during the three and six months ended June 30, 2020 and 2019 is presented below:
Three months ended June 30Six months ended June 30
(number of stock options)
2020201920202019
Stock options outstanding - beginning1
162,710  949,910  403,550  949,910  
    Exercised—  (129,780) (240,840) (129,780) 
Stock options outstanding - ending2
162,710  820,130  162,710  820,130  
1 All stock options outstanding as at January 1, 2020, were vested and exercisable (2019 - all stock options were non-vested).
2 All stock options outstanding as at June 30, 2020, were vested and exercisable (2019 - 243,840 stock options were non-vested).
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


24. RELATED PARTY TRANSACTIONS
Hydro One is owned by Hydro One Limited. The Province of Ontario is a shareholder of Hydro One Limited with approximately 47.3% ownership at June 30, 2020. The Independent Electricity System Operator (IESO), Ontario Power Generation Inc. (OPG), Ontario Electricity Financial Corporation (OEFC), the OEB, Hydro One Telecom Inc. (Hydro One Telecom) and 2587264 Ontario Inc. are related parties to Hydro One because they are controlled or significantly influenced by the Ministry of Energy or by Hydro One Limited. The following is a summary of the Company’s related party transactions during the three and six months ended June 30, 2020 and 2019:
(millions of dollars)
Three months ended June 30Six months ended June 30
Related PartyTransaction2020201920202019
IESOPower purchased364  259  1,140  809  
Revenues for transmission services452  370  847  783  
Amounts related to electricity rebates337  104  770  242  
Distribution revenues related to rural rate protection61  60  120  118  
Distribution revenues related to the supply of electricity to remote northern communities9  9  18  18  
Funding received related to CDM programs8  8  17  23  
OPGPower purchased1  2  3  5  
Revenues related to provision of services and supply of electricity2  1  4  3  
Costs related to the purchase of services—  1  1  1  
OEFCPower purchased from power contracts administered by the OEFC1  —  1  1  
OEBOEB fees2  2  4  4  
Hydro One LimitedReturn of stated capital154  347  300  485  
Dividends paid—  —  —  1  
Stock-based compensation costs3  1  5  8  
Cost recovery for services provided
2  4  4  7  
Hydro One TelecomServices received – costs expensed5  5  10  11  
Revenues for services provided—  —  1  1  
2587264 Ontario Inc.Preferred shares redeemed—  —  —  486  
Dividends paid—  —  —  2  
Sales to and purchases from related parties are based on the requirements of the OEB’s Affiliate Relationships Code. Outstanding balances at period end are interest-free and settled in cash. Invoices are issued monthly, and amounts are due and paid on a monthly basis.
25. CONSOLIDATED STATEMENTS OF CASH FLOWS
The changes in non-cash balances related to operations consist of the following:
Three months ended June 30Six months ended June 30
(millions of dollars)
2020201920202019
Accounts receivable (Note 9)1
114  34  106  24  
Due from related parties4  (85) 102  (96) 
Materials and supplies (Note 10)
1  1  1  —  
Prepaid expenses and other assets (Note 10)
5  —  (15) (23) 
Other long-term assets (Note 13)
(1) 1  (1) (1) 
Accounts payable (Note 14)2
(33) (6) (43) (39) 
Accrued liabilities (Note 14)
—  32  41  49  
Due to related parties3
(124) (17) (226) (104) 
Accrued interest (Note 14)
(30) (16) 6  8  
Long-term accounts payable and other long-term liabilities (Note 15)
(1) —  1  1  
Post-retirement and post-employment benefit liability (Note 15)4
28  6  47  17  
(37) (50) 19  (164) 
1 Adjusted for $nil and $14 million related to amounts with a regulatory asset offset (2019 - $3 million and $3 million related to capital contributions) for the three and six months ended June 30, respectively.
2 Adjusted for $5 million and $8 million related to capital investments (2019 - $3 million and $4 million) for the three and six months ended June 30, respectively.
3 Adjusted for $6 million and $4 million related to amounts with a regulatory asset offset (2019 - $6 million and $16 million) for the three and six months ended June 30, respectively.
4 Adjusted for $27 million and $37 million related to amounts with a regulatory asset offset (2019 - $9 million and $17 million) for the three and six months ended June 30, respectively.
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


Capital Expenditures
The following tables reconcile investments in property, plant and equipment and intangible assets and the amounts presented in the consolidated statements of cash flows for the three and six months ended June 30, 2020 and 2019. The reconciling items include net change in accruals and capitalized depreciation.
Three months ended June 30, 2020Six months ended June 30, 2020


(millions of dollars)
Property, Plant and EquipmentIntangible AssetsTotalProperty, Plant and Equipment
Intangible Assets

Total
Capital investments(401) (27) (428) (750) (49) (799) 
Reconciling items15  (2) 13  26  (2) 24  
Cash outflow for capital expenditures(386) (29) (415) (724) (51) (775) 
Three months ended June 30, 2019Six months ended June 30, 2019


(millions of dollars)
Property, Plant and Equipment
Intangible Assets

Total		Property, Plant and Equipment
Intangible Assets

Total
Capital investments(342) (26) (368) (630) (47) (677) 
Reconciling items3  2  5  13  (1) 12  
Cash outflow for capital expenditures(339) (24) (363) (617) (48) (665) 
Supplementary Information
Three months ended June 30Six months ended June 30
(millions of dollars)
2020201920202019
Net interest paid157  143  247  236  
Income taxes paid—  3  13  16  
26. CONTINGENCIES
Hydro One is involved in various lawsuits and claims in the normal course of business. In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
27.  COMMITMENTS
The following table presents a summary of Hydro One’s commitments under outsourcing and other agreements due in the next five years and thereafter:
As at June 30, 2020 (millions of dollars)
Year 1Year 2Year 3Year 4Year 5Thereafter
Outsourcing and other agreements103  6  3  3  1  13  
Long-term software/meter agreement17  1  2  1  2  —  
The following table presents a summary of Hydro One’s other commercial commitments by year of expiry in the next five years and thereafter:
As at June 30, 2020 (millions of dollars)
Year 1Year 2Year 3Year 4Year 5Thereafter
Operating Credit Facilities—  —  —  2,300  —  —  
Letters of credit1
179  —  —  —  —  —  
Guarantees2, 3
426  —  —  —  —  —  
1 Letters of credit consist of $171 million letters of credit related to retirement compensation arrangements, $4 million in letters of credit to satisfy debt service reserve requirements, a $1 million letter of credit provided to the IESO for prudential support, and $3 million in letters of credit for various operating purposes.
2 Guarantees consist of $325 million prudential support provided to the IESO by Hydro One on behalf of its subsidiaries.
3 Guarantees also include Hydro One's commitment to pay $101 million to the City of Peterborough for the purchase of business and distribution assets of Peterborough Distribution on August 1, 2020. Closing adjustments are currently not determinable and are expected to occur approximately 120 days after completion of the acquisition and have been guaranteed by Hydro One. See Note 4 - Business Combinations and Note 29 - Subsequent Events for additional information.
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


28. SEGMENTED REPORTING
Hydro One has three reportable segments:
•The Transmission Segment, which comprises the transmission of high voltage electricity across the province, interconnecting more than 70 local distribution companies and certain large directly connected industrial customers throughout the Ontario electricity grid;
•The Distribution Segment, which comprises the delivery of electricity to end customers and certain other municipal electricity distributors; and
•Other Segment, which includes certain corporate activities.
The designation of segments has been based on a combination of regulatory status and the nature of the services provided. Operating segments of the Company are determined based on information used by the chief operating decision-maker in deciding how to allocate resources and evaluate the performance of each of the segments. The Company evaluates segment performance based on income before financing charges and income tax expense from continuing operations (excluding certain allocated corporate governance costs).
Three months ended June 30, 2020 (millions of dollars)
TransmissionDistributionOtherConsolidated
Revenues459  1,201  —  1,660  
Purchased power—  808  —  808  
Operation, maintenance and administration118  142  1  261  
Depreciation and amortization109  102  —  211  
Income (loss) before financing charges and income tax expense232  149  (1) 380  
Capital investments251  177  —  428  

Three months ended June 30, 2019 (millions of dollars)
TransmissionDistributionOtherConsolidated
Revenues374  1,029  —  1,403  
Purchased power—  653  —  653  
Operation, maintenance and administration104  156  (3) 257  
Depreciation and amortization114  104  —  218  
Income before financing charges and income tax expense156  116  3  275  
Capital investments242  126  —  368  
Six months ended June 30, 2020 (millions of dollars)
TransmissionDistributionOtherConsolidated
Revenues859  2,640  —  3,499  
Purchased power—  1,815  —  1,815  
Operation, maintenance and administration223  291  3  517  
Depreciation and amortization221  200  —  421  
Income (loss) before financing charges and income tax expense415  334  (3) 746  
Capital investments487  312  —  799  

Six months ended June 30, 2019 (millions of dollars)
TransmissionDistributionOtherConsolidated
Revenues803  2,350  —  3,153  
Purchased power—  1,460  —  1,460  
Operation, maintenance and administration207  303  3  513  
Depreciation and amortization227  202  —  429  
Income (loss) before financing charges and income tax expense369  385  (3) 751  
Capital investments448  229  —  677  
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HYDRO ONE INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three and six months ended June 30, 2020 and 2019


Total Assets by Segment:
As at (millions of dollars)
June 30,
2020		December 31, 2019
Transmission15,240  14,917  
Distribution9,898  9,943  
Other2,795  2,057  
Total assets27,933  26,917  
Total Goodwill by Segment:
As at (millions of dollars)
June 30,
2020		December 31, 2019
Transmission 157  157  
Distribution168  168  
Total goodwill325  325  
All revenues, assets and costs, as the case may be, are earned, held or incurred in Canada.
29.  SUBSEQUENT EVENTS
Return of Stated Capital
On August 10, 2020, a return of stated capital of $154 million was approved.
Acquisition of Peterborough Distribution
On August 1, 2020, Hydro One completed the acquisition of the business and distribution assets of Peterborough Distribution for $105 million, which was comprised of a payment of $101 million and an initial down payment of $4 million in 2018. Based on the timing of the completion of this acquisition in relation to the date of issuance of the Consolidated Financial Statements, the closing adjustments to the purchase price, the initial allocation of the consideration paid and the determination of goodwill have not yet been completed. The final closing adjustments are expected to occur approximately 120 days after completion of the acquisition and have been guaranteed by Hydro One.
Deferred Tax Asset Decision
On July 16, 2020, the Ontario Divisional Court rendered its decision on the Company's appeal of the OEB's DTA Decision. In its decision, the Ontario Divisional Court set aside the OEB's DTA Decision. The Ontario Divisional Court found that the OEB’s DTA Decision was incorrect in law because the OEB had failed to apply the correct legal test. In its decision, the Ontario Divisional Court agreed with the submissions of Hydro One that the deferred tax asset should be allocated to shareholders in its entirety. However, the Ontario Divisional Court concluded that it does not have jurisdiction to substitute its own decision for that of the OEB and, with clear directions as to what the OEB’s decision must be, ordered that the matter be returned to the OEB.
The OEB did not file a notice for leave to appeal the ODC Decision to the Ontario Court of Appeal by the required deadline of July 31, 2020. As such, Hydro One believes it is probable that a final decision will be issued consistent with the specific guidance in the ODC Decision. As a result, the ODC Decision has been determined to be a Type I subsequent event that requires adjustment in the consolidated financial statements as at and for the three and six months ended June 30, 2020. See Note 12 - Regulatory Assets and Liabilities for financial impact of the adjustment.
Draft Rate Order Decision
On July 16, 2020, the OEB issued its final rate order for the 2020-2022 transmission rates, reducing the proposed capital expenditures by $400 million and approving a revenue requirement of $1,586 million, $1,657 million and $1,729 million for 2020, 2021 and 2022, respectively. On July 30, 2020, the OEB issued its decision for UTRs. The 2020 UTRs that were put in place on an interim basis on January 1, 2020 will continue for the remainder of 2020 in light of the COVID-19 pandemic. A future decision by the OEB will set the 2021 UTRs and determine the period over which the foregone revenue will be collected.
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 EX-99.2 3 a2020q2hoimda.htm EX-99.2 Document
HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three and six months ended June 30, 2020 and 2019


The following Management’s Discussion and Analysis (MD&A) of the financial condition and results of operations should be read together with the condensed interim unaudited consolidated financial statements and accompanying notes thereto (Consolidated Financial Statements) of Hydro One Inc. (Hydro One or the Company) for the three and six months ended June 30, 2020, as well as the Company’s audited consolidated financial statements and MD&A for the year ended December 31, 2019. The Consolidated Financial Statements have been prepared in accordance with United States (US) Generally Accepted Accounting Principles (GAAP). All financial information in this MD&A is presented in Canadian dollars, unless otherwise indicated.
The Company has prepared this MD&A in accordance with National Instrument 51-102 - Continuous Disclosure Obligations of the Canadian Securities Administrators. Under the US/Canada Multijurisdictional Disclosure System, the Company is permitted to prepare this MD&A in accordance with the disclosure requirements of Canadian securities laws and regulations, which can vary from those of the US. This MD&A provides information as at and for the three and six months ended June 30, 2020, based on information available to management as of August 10, 2020.
CONSOLIDATED FINANCIAL HIGHLIGHTS AND STATISTICS
Three months ended June 30Six months ended June 30
(millions of dollars, except as otherwise noted)
20202019Change20202019Change
Revenues1,660  1,403  18.3 %3,499  3,153  11.0 %
Purchased power808  653  23.7 %1,815  1,460  24.3 %
Revenues, net of purchased power1
852  750  13.6 %1,684  1,693  (0.5 %)
Operation, maintenance and administration (OM&A) costs
261  257  1.6 %517  513  0.8 %
Depreciation, amortization and asset removal costs211  218  (3.2 %)421  429  (1.9 %)
Financing charges119  116  2.6 %238  226  5.3 %
Income tax expense (recovery)(849) (5) 16,880 %(834) 34  (2,553 %)
Net income to common shareholder of Hydro One1,108  162  584.0 %1,338  486  175.3 %
Basic earnings per common share (EPS)
$7,790  $1,139  583.9 %$9,407  $3,417  175.3 %
Diluted EPS
$7,790  $1,139  583.9 %$9,407  $3,417  175.3 %
Net cash from operating activities359  285  26.0 %899  542  65.9 %
Funds from operations (FFO)1
396  333  18.9 %878  698  25.8 %
Capital investments428  368  16.3 %799  677  18.0 %
Assets placed in-service165  275  (40.0 %)389  417  (6.7 %)
Transmission: Average monthly Ontario 60-minute peak demand (MW)
19,097  18,226  4.8 %19,172  19,494  (1.7 %)
Distribution: Electricity distributed to Hydro One customers (GWh)
6,213  6,073  2.3 %13,697  13,811  (0.8 %)

As at		June 30,
2020		December 31, 2019
Debt to capitalization ratio2
54.6 %56.7 %
1 See section “Non-GAAP Measures” for description and reconciliation of FFO and revenues, net of purchased power.
2 Debt to capitalization ratio is a non-GAAP measure and has been calculated as total debt (including total long-term debt and short-term borrowings, net of cash and cash equivalents) divided by total debt plus total shareholder's equity, including preferred shares but excluding any amounts related to noncontrolling interest. Management believes that the debt to capitalization ratio is helpful as a measure of the proportion of debt in the Company's capital structure.
OVERVIEW
The Company's transmission business consists of the transmission system operated by its subsidiaries, Hydro One Networks Inc. (Hydro One Networks) and Hydro One Sault Ste. Marie LP (HOSSM), as well as an approximately 66% interest in B2M Limited Partnership (B2M LP), a limited partnership between Hydro One and the Saugeen Ojibway Nation (SON), and an approximately 55% interest in Niagara Reinforcement Limited Partnership (NRLP), a limited partnership between Hydro One and Six Nations of the Grand River Development Corporation and the Mississaugas of the Credit First Nation (collectively, the First Nations Partners). Hydro One’s distribution business consists of the distribution system operated by its subsidiaries, Hydro One Networks and Hydro One Remote Communities Inc. (Hydro One Remote Communities). The other segment consists of certain corporate activities, and is not rate-regulated.
For the six months ended June 30, 2020 and 2019, Hydro One’s segments accounted for the Company’s total revenues, net of purchased power, as follows:
Six months ended June 3020202019
Transmission51 %47 %
Distribution49 %53 %
Other— %— %
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

As at June 30, 2020 and December 31, 2019, Hydro One’s segments accounted for the Company’s total assets as follows:

As at		June 30,
2020		December 31, 2019
Transmission55 %56 %
Distribution35 %37 %
Other10 %7 %
RESULTS OF OPERATIONS
Net Income
Net income attributable to common shareholder for the quarter ended June 30, 2020 of $1,108 million is an increase of $946 million or 584.0% from the prior year. Significant influences on net income included:
• higher revenues, net of purchased power, primarily resulting from:
•higher transmission revenues primarily due to higher peak demand driven by favourable weather;
•recognition of the 2020 transmission decision received in the second quarter, including approved rates retroactive to January 1, 2020, the recovery of certain other post-employment benefit (OPEB) cost components through OM&A that were previously capitalized and recovered through rate base, and the recognition of Conservation and Demand Management (CDM) revenues;
•higher revenues resulting from higher 2020 distribution rates; and
•revenue related to NRLP assets placed in-service in the third quarter of 2019.
•slightly higher OM&A costs, which include COVID-19 related costs as noted below, primarily resulting from:
•additional OPEB costs that are recognized in OM&A following the 2020-2022 Ontario Energy Board (OEB) transmission decision and recovered in rates, therefore net income neutral; partially offset by
•lower corporate support costs.
•higher income tax recovery primarily attributable to the following:
•income tax recovery following the July 2020 decision of the Ontario Divisional Court (ODC Decision); and
•higher net tax deductions primarily related to tax depreciation (CCA) in excess of depreciation; partially offset by
•higher income before taxes.
Net income attributable to common shareholder for six months ended June 30, 2020 of $1,338 million is an increase of $852 million or 175.3% from the prior year. Year-to-date results were impacted by similar factors to those noted above, as well as the 2018 catch-up income recognized in the first quarter of 2019 following the OEB decision.
Also included in the Company's results for the second quarter and six months ended June 30, 2020 are costs associated with the temporary stand-down of the Company's work force and the purchase of additional facility related and cleaning supplies as a result of the COVID-19 pandemic. These costs have largely been offset in the second quarter by the timing of work program expenditures which were deferred in April and May in response to the COVID-19 pandemic. For additional disclosure related to the impact of COVID-19 on the Company's operations for the second quarter and six months ended June 30, 2020, please see section "Other Developments - COVID-19".
Revenues
Three months ended June 30Six months ended June 30
(millions of dollars, except as otherwise noted)
20202019Change20202019Change
Transmission459  374  22.7 %859  803  7.0 %
Distribution1,201  1,029  16.7 %2,640  2,350  12.3 %
Total revenues1,660  1,403  18.3 %3,499  3,153  11.0 %
Transmission459  374  22.7 %859  803  7.0 %
Distribution, net of purchased power1
393  376  4.5 %825  890  (7.3 %)
Total revenues, net of purchased power1
852  750  13.6 %1,684  1,693  (0.5 %)
Transmission: Average monthly Ontario 60-minute peak demand (MW)
19,097  18,226  4.8 %19,172  19,494  (1.7 %)
Distribution: Electricity distributed to Hydro One customers (GWh)
6,213  6,073  2.3 %13,697  13,811  (0.8 %)
1 See section “Non-GAAP Measures” for description and reconciliation of distribution revenues, net of purchased power, and revenues, net of purchased power.
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

Transmission Revenues
Transmission revenues increased by 22.7% during the quarter ended June 30, 2020, primarily due to:
•higher transmission revenues primarily due to higher peak demand driven by favourable weather;
•recognition of the 2020 transmission decision received in the second quarter, including approved rates retroactive to January 1, 2020, the recovery of certain OPEB cost components through OM&A that were previously capitalized and recovered through rate base, and the recognition of CDM revenues; and
•revenue related to NRLP assets placed in-service in the third quarter of 2019.
The 7.0% increase in transmission revenues during the six months ended June 30, 2020, was the result of similar factors as noted above.
Distribution Revenues, Net of Purchased Power
Distribution revenues, net of purchased power, increased by 4.5% during the quarter ended June 30, 2020 primarily due to higher revenues resulting from higher 2020 distribution rates.
The 7.3% decrease in distribution revenues, net of purchased power, during the six months ended June 30, 2020 was primarily due to the 2018 catch-up revenues recognized in the first quarter of 2019 following the OEB decision, partially offset by similar factors to those noted above.
OM&A Costs
Three months ended June 30Six months ended June 30
(millions of dollars)
20202019Change20202019Change
Transmission118  104  13.5 %223  207  7.7 %
Distribution142  156  (9.0 %)291  303  (4.0 %)
Other1  (3) (133.3 %)3  3  — %
261  257  1.6 %517  513  0.8 %
Transmission OM&A Costs
The 13.5% increase in transmission OM&A costs for the quarter ended June 30, 2020 was primarily due to:
•costs related to COVID-19, primarily consisting of labour-related costs and direct expenses, including purchases of additional facility-related and cleaning supplies; and
•additional OPEB costs that are recognized in OM&A following the 2020 OEB transmission decision and recovered in rates, therefore net income neutral; partially offset by
•lower spending on station maintenance work.
The 7.7% increase in transmission OM&A costs for the six months ended June 30, 2020 was primarily due to similar factors as noted above.
Distribution OM&A Costs
The 9.0% decrease in distribution OM&A costs for the quarter ended June 30, 2020 was primarily due to:
•lower work program expenditures as the Company prioritized essential and high priority work and temporarily deferred other work; and
•lower corporate support costs; partially offset by
•costs related to COVID-19, primarily consisting of labour-related costs and direct expenses, including purchases of additional facility-related and cleaning supplies.
The 4.0% decrease in distribution OM&A costs for the six months ended June 30, 2020 was primarily due to similar factors as noted above.
Financing Charges
The increase of $3 million or 2.6% in financing charges for the quarter ended June 30, 2020 was primarily due to higher interest expense on long-term debt as a result of increased debt levels largely driven by the debt issuances completed in the first quarter of 2020.
The $12 million or 5.3% increase in financing charges for the six months ended June 30, 2020 was primarily due to higher interest expense on long-term debt as a result of increased debt levels largely driven by the debt issuances completed in the second quarter of 2019 and first quarter of 2020.
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

Income Tax Expense
Income tax recovery was $849 million and $834 million for the three and six months ended June 30, 2020, respectively, compared to an income tax recovery of $5 million and income tax expense of $34 million in the comparable periods last year.
As prescribed by the regulators, the Company recovers income taxes and is required to accrue its tax expense based on the tax liability determined without accounting for temporary differences recoverable from or refundable to customers in the future.
The increase in income tax recovery for the three months ended June 30, 2020 was primarily attributable to:
•income tax recovery following the July 2020 ODC Decision; and
•higher net tax deductions primarily related to CCA in excess of depreciation; partially offset by
•higher income before taxes.
The increase in income tax recovery for the six months ended June 30, 2020 was primarily attributable to:
•income tax recovery following the July 2020 ODC Decision;
•higher tax deductions primarily related to CCA in excess of depreciation; and
•lower income before taxes; partially offset by
•lower incremental tax deductions from deferred tax asset sharing in the current year mainly due to the 2018 catch-up adjustment made in the first quarter of 2019.
The Company realized an effective tax rate for the three and six months ended June 30, 2020 of approximately (325.3)% and (164.2)%, respectively, compared to approximately (3.1)% and 6.5% realized in the same periods last year.
QUARTERLY RESULTS OF OPERATIONS
Quarter ended (millions of dollars, except EPS and ratio)
Jun 30, 2020Mar 31, 2020Dec 31, 2019Sep 30, 2019Jun 30, 2019Mar 31, 2019Dec 31, 2018Sep 30, 2018
Revenues1,660  1,839  1,705  1,584  1,403  1,750  1,480  1,598  
Purchased power808  1,007  914  737  653  807  741  733  
Revenues, net of purchased power1
852  832  791  847  750  943  739  865  
Net income (loss) to common shareholder1,108  230  216  248  162  324  (685) 231  
Basic and diluted EPS$7,790  $1,617  $1,519  $1,744  $1,139  $2,278  ($4,816) $1,624  
Earnings coverage ratio2
2.8  2.6  2.9  2.7  2.7  2.9  2.8  3.0  
1 See section “Non-GAAP Measures” for description of revenues, net of purchased power.
2 Earnings coverage ratio is a non-GAAP measure that has been presented for the twelve months ended as of each date indicated above and has been calculated as net income before financing charges and income taxes attributable to shareholder of Hydro One, divided by the sum of financing charges, capitalized interest, and preferred dividends.
Variations in revenues and net income over the quarters are primarily due to the impact of seasonal weather conditions on customer demand and market pricing, as well as timing of regulatory decisions.
CAPITAL INVESTMENTS
The Company makes capital investments to maintain the safety, reliability and integrity of its transmission and distribution system assets and to provide for the ongoing growth and modernization required to meet the expanding and evolving needs of its customers and the electricity market. This is achieved through a combination of sustaining capital investments, which are required to support the continued operation of Hydro One’s existing assets, and development capital investments, which involve both additions to existing assets and large-scale projects such as new transmission lines and transmission stations.
Assets Placed In-Service
The following table presents Hydro One’s assets placed in-service during the three and six months ended June 30, 2020 and 2019:
Three months ended June 30Six months ended June 30
(millions of dollars)
20202019Change20202019Change
Transmission58  161  (64.0 %)187  215  (13.0 %)
Distribution107  114  (6.1 %)202  202  — %
Total assets placed in-service165  275  (40.0 %)389  417  (6.7 %)
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

Transmission Assets Placed In-Service
Transmission assets placed in-service decreased by $103 million or 64.0% in the second quarter of 2020 compared to the second quarter of 2019 primarily due to:
•higher volume of assets placed in-service during the second quarter of 2019 (station sustainment investments at Enfield transmission station, Hanmer transmission station, Palmerston transmission station, and National Research Council transmission station);
•lower volume of overhead lines and component replacements in 2020; and
•substantial completion of the development project at Brant transmission station in the second quarter of 2019.
Schedule changes and delays on some station refurbishments, equipment replacements and wood pole replacements as a result of COVID-19 have delayed transmission in-service additions to later in the year. The Company will continue to make efforts to recover the work plan in the latter part of 2020 with the anticipation of full recovery of work plan in 2021.
Transmission assets placed in-service decreased by $28 million or 13.0% in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to similar factors as noted above, partially offset by assets placed in-service in the first quarter of 2020 (High-Voltage Underground Cable replacement in Toronto, Elgin transmission station refurbishment, and Kapuskasing Area Reinforcement Line Upgrade).
Distribution Assets Placed In-Service
Distribution assets placed in-service decreased by $7 million or 6.1% in the second quarter of 2020 compared to the second quarter of 2019 primarily due to the following:
•lower volume of distribution station refurbishment work, work on lines sustainment initiatives, and PCB transformer replacements;
•lower spend on wood pole replacements; and
•higher volume of assets placed in-service for the information technology projects in the prior year, partially offset by
•higher volume of emergency power and storm restoration work.
Distribution assets placed in-service during the six months ended June 30, 2020 were comparable to the prior year. Impacts noted above were offset by higher volume of new customer connections in the current year.
Capital Investments
The following table presents Hydro One’s capital investments during the three and six months ended June 30, 2020 and 2019:
Three months ended June 30Six months ended June 30
(millions of dollars)
20202019Change20202019Change
Transmission
    Sustaining176  208  (15.4 %)353  382  (7.6 %)
    Development53  30  76.7 %100  49  104.1 %
    Other22  4  450.0 %34  17  100.0 %
251  242  3.7 %487  448  8.7 %
Distribution
    Sustaining78  64  21.9 %144  110  30.9 %
    Development79  53  49.1 %139  97  43.3 %
    Other20  9  122.2 %29  22  31.8 %
177  126  40.5 %312  229  36.2 %
Total capital investments428  368  16.3 %799  677  18.0 %
Transmission Capital Investments
Transmission capital investments increased by $9 million or 3.7% in the second quarter of 2020 compared to the second quarter of 2019. Principal impacts on the levels of capital investments included:
•higher investments in multi-year development projects, including the new Lakeshore switching station project and the East-West Tie Station Expansion project;
•investment in the new Ontario grid control centre in the City of Orillia;
•lower volume of overhead line refurbishments and replacements; and
•volume of station refurbishments and replacements.
Transmission capital investments increased by $39 million or 8.7% in the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to similar factors as noted above.
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

Distribution Capital Investments
Distribution capital investments increased by $51 million or 40.5% in the second quarter of 2020 compared to the second quarter of 2019. Principal impacts on the levels of capital investments included:
•higher investments in system capability reinforcement projects due to investments in distribution system connections and in distribution modernization initiatives;
•higher volume of storm-related asset replacements and emergency power restoration work;
•investment in the new Ontario grid control centre in the City of Orillia;
•higher volume of new customer connections; and
•investment in the new Woodstock Operation Center.
Distribution capital investments increased by $83 million or 36.2% in the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to similar factors as noted above, as well as investment in the Customer Contact Centre Technology Modernization project, and higher spend of wood pole replacements.
Major Transmission Capital Investment Projects
The following table summarizes the status of significant transmission projects as at June 30, 2020:

Project Name
Location
Type		Anticipated
In-Service Date		Estimated
Cost		Capital Cost
To Date
(year)               (millions of dollars)
Development Projects:
   Wataynikaneyap Power LP Line
Connection		Pickle Lake
Northwestern Ontario		New stations and
transmission connection		2021242
   East-West Tie Station ExpansionNorthern OntarioNew transmission connection
and station expansion
20221
157105
   Waasigan Transmission LineThunder Bay-Atikokan-Dryden
Northwestern Ontario		New transmission line2024
692
5
   Leamington Area Transmission
     Reinforcement3
Leamington
Southwestern Ontario		New transmission line
and stations
20263
5253
16  
Sustainment Projects:
   Richview Transmission Station
Circuit Breaker Replacement		Toronto
Southwestern Ontario		Station sustainment2021115113
   Bruce A Transmission StationTiverton
Southwestern Ontario
Station sustainment2021146139
   Beck #2 Transmission Station
Circuit Breaker Replacement		Niagara area
Southwestern Ontario		Station sustainment202313582
   Bruce B Switching Station
Circuit Breaker Replacement		Tiverton
Southwestern Ontario
Station sustainment202414614
   Lennox Transmission Station
Circuit Breaker Replacement		Napanee
Southeastern Ontario		Station sustainment202615286
   Middleport Transmission Station
Circuit Breaker Replacement		Middleport
Southwestern Ontario
Station sustainment202511656
1 The majority of the East-West Tie Station Expansion project is expected to be placed in-service in 2021, enabling the connection and energization of the new East-West Tie transmission line. Additional work to complete the upgrades is expected to be placed in-service in 2022.
2 The costs of the Waasigan Transmission Line project relate to the development phase.
3 The Leamington Area Transmission Reinforcement project consists of the construction of a new double-circuit line between Chatham and Leamington and associated transmission stations and connections. The project is currently in the development stage and as such the estimated cost is subject to change. The anticipated in-service dates for the line and stations are between 2022 and 2026.
Future Capital Investments
The Company estimates future capital investments based on management’s expectations of the amount of capital expenditures that will be required to provide transmission and distribution services that are efficient, reliable, and provide value for customers, consistent with the OEB’s Renewed Regulatory Framework. As a result of the COVID-19 pandemic, the Company prioritized essential and high priority work and temporarily deferred other projects earlier in the quarter to ensure the safety of its field staff. See section "Other Developments - COVID-19" for additional information about the impacts of COVID-19 on Hydro One's operations during the first half of 2020.
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

The 2020 through 2022 transmission capital investment estimates differ from the prior year disclosures, reflecting the OEB's decision on Hydro One Networks' 2020-2022 rate application. See section "Regulation" for further details on the OEB's decision. The 2020 through 2024 distribution capital investments estimates have also been updated to include capital investments for the Peterborough distribution business that was acquired by Hydro One on August 1, 2020. See section "Other Developments - Acquisition of Peterborough Distribution" for further details on the acquisition. The projections and the timing of the transmission and distribution expenditures in 2023 and 2024 are subject to approval by the OEB.
The following table summarizes Hydro One’s annual projected capital investments for 2020 to 2024, by business segment:
 (millions of dollars)20202021202220232024
Transmission1,112  1,181  1,139  1,382  1,380  
Distribution692  674  637  739  756  
Total capital investments1
1,804  1,855  1,776  2,121  2,136  
1 Total capital investments for years 2020-2021 include $143 million related to a new Ontario grid control centre with an anticipated in-service date of 2021.
The following table summarizes Hydro One’s annual projected capital investments for 2020 to 2024, by category:
(millions of dollars)20202021202220232024
Sustainment1,150  1,208  1,266  1,548  1,554  
Development425  461  362  439  459  
Other1
229  186  148  134  123  
Total capital investments2
1,804  1,855  1,776  2,121  2,136  
1 “Other” capital expenditures consist of special projects, such as those relating to IT.
2 Total capital investments for years 2020-2021 include $143 million related to a new Ontario grid control centre with an anticipated in-service date of 2021.
SUMMARY OF SOURCES AND USES OF CASH
Hydro One’s primary sources of cash flows are funds generated from operations, capital market debt issuances and bank credit facilities that are used to satisfy Hydro One’s capital resource requirements, including the Company’s capital expenditures, servicing and repayment of debt, and dividend payments.
Three months ended June 30Six months ended June 30
(millions of dollars)
2020201920202019
Cash provided by operating activities359  285  899  542  
Cash provided by (used in) financing activities(954) 61  (127) (370) 
Cash used in investing activities(417) (360) (779) (664) 
Decrease in cash and cash equivalents(1,012) (14) (7) (492) 
Cash provided by operating activities
Cash from operating activities for the second quarter of 2020 increased by $74 million compared to the second quarter of 2019. The increase was impacted by various factors, including the following:
•higher earnings in the second quarter of 2020; and
•lower non-energy receivables, partially offset by
•changes in regulatory accounts; and
•higher rebates from Independent Electricity System Operator (IESO) in the prior year related to embedded generation energy purchases.
Cash from operating activities increased by $357 million during the six months ended June 30, 2020 compared to the same period in 2019. The increase was impacted by various factors, including the following:
•changes in regulatory accounts;
•lower non-energy receivables; and
•higher payments received from the IESO during 2020 associated with unbilled Fair Hydro Plan credits as a result of a change in the settlement process with the IESO effective February 2020.
Cash provided by (used in) financing activities
Sources of cash
•The Company issued $1,100 million of long-term debt in the six months ended June 30, 2020, all in the first quarter of 2020, compared to $1,500 million long-term debt issued in the second quarter of 2019.
•The Company received proceeds of $860 million and $2,145 million from the issuance of short-term notes in the three and six months ended June 30, 2020, respectively, compared to $482 million and $2,422 million received in the same periods last year.
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

Uses of cash
•The Company repaid $1,013 million and $2,428 million of short-term notes in the three and six months ended June 30, 2020, respectively, compared to $1,564 million and $3,076 million repaid in the same periods last year.
•The Company redeemed all of its preferred shares totalling $486 million in the first quarter of 2019, compared to no preferred shares redeemed in the three and six months ended June 30, 2020.
•The Company repaid $652 million of long-term debt in the six months ended June 30, 2020, all in the second quarter of 2020, compared to $1 million and $229 million of long-term debt repaid in the three and six months ended June 30, 2019, respectively.
•In the three and six months ended June 30, 2020, the Company made returns of stated capital totalling $154 million and $300 million, respectively, compared to returns of stated capital of $347 million and $485 million made in the same periods last year.
•Dividends paid in the six months ended June 30, 2019 were $3 million all in the first quarter of 2019, compared to no dividends paid in the six months ended June 30, 2020.
Cash used in investing activities
Capital expenditures were $52 million and $110 million higher in the second quarter of 2020 and year-to-date 2020, respectively. Please see section "Capital Investments" for comparability of capital investments made by the Company during the three and six months ended June 30, 2020 compared to prior year.
LIQUIDITY AND FINANCING STRATEGY
Short-term liquidity is provided through FFO, Hydro One Inc.’s commercial paper program, and the Company’s consolidated bank credit facilities. Under the commercial paper program, Hydro One is authorized to issue up to $2,300 million in short-term notes with a term to maturity of up to 365 days.
At June 30, 2020, Hydro One had $860 million in commercial paper borrowings outstanding, compared to $1,143 million outstanding at December 31, 2019. The interest rates on the commercial paper borrowings outstanding at June 30, 2020 ranged from 0.24% to 1.00%. In addition, the Company has revolving bank credit facilities (Operating Credit Facilities) with total availability of $2,300 million. At June 30, 2020 and December 31, 2019, no amounts were drawn on the Operating Credit Facilities. The Company may use the Operating Credit Facilities for working capital and general corporate purposes. The short-term liquidity under the commercial paper program, the Operating Credit Facilities, and anticipated levels of FFO are expected to be sufficient to fund the Company’s operating requirements. The Company's currently available liquidity is also expected to be sufficient to address any reasonably foreseeable impacts that the COVID-19 pandemic may have on the Company’s cash requirements. See section "Other Developments - COVID-19" for additional information of the impact of COVID-19 on the Company's operations.
At June 30, 2020, the Company had long-term debt outstanding in the principal amount of $11,934 million, which included $11,795 million of long-term debt issued by Hydro One and long-term debt in the principal amount of $139 million issued by HOSSM. The majority of long-term debt issued by Hydro One has been issued under its Medium Term Note (MTN) Program. The long-term debt consists of notes and debentures that mature between 2021 and 2064, and at June 30, 2020, had a weighted-average term to maturity of approximately 15.8 years and a weighted-average coupon rate of 4.1%. In April 2020, Hydro One Inc. filed a short form base shelf prospectus for its MTN Program, which has a maximum authorized principal amount of notes issuable of $4,000 million, expiring in May 2022. At June 30, 2020, $4,000 million remained available for issuance under this MTN Program prospectus.
Compliance
At June 30, 2020, the Company was in compliance with all financial covenants and limitations associated with the outstanding borrowings and credit facilities.
OTHER OBLIGATIONS
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

Summary of Contractual Obligations and Other Commercial Commitments
The following table presents a summary of Hydro One’s debt and other major contractual obligations and commercial commitments:

As at June 30, 2020 (millions of dollars)

Total
Less than
1 year

   1-3 years
   
3-5 years
More than
5 years
Contractual obligations (due by year)
Long-term debt - principal repayments11,934  803  736  1,450  8,945  
Long-term debt - interest payments8,373  487  921  867  6,098  
Short-term notes payable860  860  —  —  —  
Pension contributions1
289  65  128  96  —  
Environmental and asset retirement obligations160  35  57  33  35  
Outsourcing and other agreements129  103  9  4  13  
Lease obligations86  12  22  20  32  
Long-term software/meter agreement23  17  3  3  —  
Total contractual obligations21,854  2,382  1,876  2,473  15,123  
Other commercial commitments (by year of expiry)
Operating Credit Facilities2,300  —  —  2,300  —  
Letters of credit2
179  179  —  —  —  
Guarantees3,4
426  426  —  —  —  
Total other commercial commitments2,905  605  —  2,300  —  
1 Contributions to the Hydro One Pension Fund are generally made one month in arrears. Company and employee contributions to the pension plan are based on actuarial reports, including valuations performed at least every three years, and actual or projected levels of pensionable earnings, as applicable. The most recent actuarial valuation was performed effective December 31, 2018 and filed on September 30, 2019.
2 Letters of credit consist $171 million in letters of credit related to retirement compensation arrangements, $4 million in letters of credit to satisfy debt service reserve requirements, a $1 million letter of credit provided to the IESO for prudential support, and $3 million in letters of credit for various operating purposes.
3 Guarantees consist of $325 million prudential support provided to the IESO by Hydro One on behalf of its subsidiaries.
4 Guarantees also include Hydro One's commitment to pay $101 million to the City of Peterborough for the purchase of business and distribution assets of Peterborough Distribution Inc. (Peterborough Distribution) on August 1, 2020. Closing adjustments are currently not determinable and are expected to occur approximately 120 days after completion of the acquisition and have been guaranteed by Hydro One. See section "Other Developments - Peterborough Distribution Acquisition" for additional information.
SHARE CAPITAL
Hydro One is authorized to issue an unlimited number of common shares. The amount and timing of any dividends payable by Hydro One is at the discretion of the Hydro One Board of Directors (Board) and is established on the basis of Hydro One’s results of operations, maintenance of its deemed regulatory capital structure, financial condition, cash requirements, the satisfaction of solvency tests imposed by corporate laws for the declaration and payment of dividends and other factors that the Board may consider relevant. At August 10, 2020, Hydro One had 142,239 issued and outstanding common shares.
The Company is authorized to issue an unlimited number of preferred shares, issuable in series. The Company has two series of preferred shares authorized for issuance: the Class A preferred shares and Class B preferred shares. On January 24, 2019, the Company redeemed 485,870 Class B preferred shares totalling $486 million. At August 10, 2020, the Company had no Class A or Class B preferred shares issued and outstanding.
REGULATION
The OEB approves both the revenue requirements and the rates charged by Hydro One’s regulated transmission and distribution businesses. The rates are designed to permit the Company’s transmission and distribution businesses to recover the allowed costs and to earn a formula-based annual rate of return on its deemed 40% equity level invested in the regulated businesses. This is done by applying a specified equity risk premium to forecasted interest rates on long-term bonds. In addition, the OEB approves rate riders to allow for the recovery or disposition of specific regulatory deferral and variance accounts over specified time frames.
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

The following table summarizes the status of Hydro One’s major regulatory proceedings with the OEB:
ApplicationYearsTypeStatus
Electricity Rates
Hydro One Networks2020-2022Transmission – CustomOEB decision received
Hydro One Networks2018-2022Distribution – CustomOEB decision received
B2M LP2020-2024Transmission – Revenue CapOEB decision received
HOSSM2017-2026Transmission – Revenue CapOEB decision received
NRLP2020-2024Transmission – Revenue CapOEB decision received
Mergers Acquisitions Amalgamations and Divestitures (MAAD)
Peterborough Distributionn/aAcquisitionOEB decision received
Orillia Powern/aAcquisitionOEB decision received
The following table summarizes the key elements and status of Hydro One’s electricity rate applications:

Application


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


Rate Application Status


 Rate Order Status
Transmission
Hydro One Networks2020
 8.52% (A)
$12,360 million (A)
Approved in April 2020
Approved in July 20201
2021
 8.52% (A)
$12,927 million (A)
Approved in April 2020
To be filed in 2020
2022
 8.52% (A)
$13,641 million (A)
Approved in April 2020
To be filed in 2021
B2M LP2020-2024
 8.52% (A)
$490 million (A)
Approved in January 2020
Approved in February 2020
HOSSM2017-2026
 9.19% (A)
$218 million (A)
Approved in October 2016
Approved in December 20192
NRLP2020-2024
 8.52% (A)
$120 million (A)
Approved in April 2020Approved in June 2020
Distribution
Hydro One Networks2020
 9.00% (A)
$8,175 million (A)
Approved in March 2019Approved in December 2019
2021
 9.00% (A)
$8,517 million (A)
Approved in March 2019
To be filed in 2020
2022
 9.00% (A)
$8,813 million (A)
Approved in March 2019
To be filed in 2021
1 On July 16, 2020, the OEB issued its final rate order for the 2020-2022 transmission rates.
2 In October 2016, the OEB approved the 2017-2026 revenue requirements. In December 2019, the OEB issued a decision on HOSSM’s request for transmission revenue requirement for 2020.
Electricity Rates Applications
Hydro One Networks - Transmission
Deferred Tax Asset
On September 28, 2017, the OEB issued its decision and order on Hydro One Networks' 2017 and 2018 transmission revenue requirements (Original Decision), with 2017 rates effective January 1, 2017.
In its Original Decision, the OEB concluded that the net deferred tax asset resulting from Hydro One's transition from the payments in lieu of tax regime under the Electricity Act, 1998 (Ontario) to tax payments under the federal and provincial tax regime should not accrue entirely to Hydro One shareholders and that a portion should be shared with ratepayers. On November 9, 2017, the OEB issued a decision and order that calculated the portion of the tax savings that should be shared with ratepayers. The OEB's calculation would result in an impairment of a portion of both Hydro One Networks' transmission and distribution deferred income tax regulatory asset. In October 2017, the Company filed a motion to review and vary (Motion) the Original Decision and filed an appeal with the Ontario Divisional Court (Appeal). In both cases, the Company's position was that the OEB made errors of fact and law in its determination of allocation of the tax savings between the shareholders and ratepayers. On December 19, 2017, the OEB granted a hearing of the merits of the Motion which was held on February 12, 2018. On August 31, 2018, the OEB granted the Motion and returned the portion of the Original Decision relating to the deferred tax asset to an OEB panel for reconsideration.
On March 7, 2019, the OEB issued its reconsideration decision (DTA Decision) and concluded that their Original Decision was reasonable and should be upheld. Also, on March 7, 2019, the OEB issued its decision for Hydro One Networks’ 2018-2022 distribution rates, in which it directed the Company to apply the Original Decision to Hydro One Networks’ distribution rates. As a result, as at December 31, 2018, the Company recognized an impairment charge of Hydro One Networks' distribution deferred income tax regulatory asset of $474 million and Hydro One Networks' transmission deferred income tax regulatory asset of $558 million, an increase in deferred income tax regulatory liability of $81 million, and a decrease in the foregone revenue deferral regulatory asset of $68 million. After recognition of the related $314 million deferred tax asset, the Company recorded an
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

$867 million one-time decrease in net income as a reversal of revenues of $68 million, and charge to deferred tax expense of $799 million, which is expected to result in an annual decrease to FFO in the range of $50 million to $60 million in the near term, and this range will decline over time.
Notwithstanding the recognition of the effects of the DTA Decision in the 2018 financial statements, on April 5, 2019, the Company filed an appeal with the Ontario Divisional Court with respect to the OEB's DTA Decision. The appeal was heard on November 21, 2019. On March 31, 2020, an additional submission was filed to make submissions regarding the Supreme Court of Canada’s December 2019 decision in the Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 case. That decision substantially revises administrative law principles.
On July 16, 2020, the Ontario Divisional Court rendered its decision on the Company's appeal of the OEB's DTA Decision. In its decision, the Ontario Divisional Court set aside the OEB's DTA Decision. The Ontario Divisional Court found that the OEB’s DTA Decision was incorrect in law because the OEB had failed to apply the correct legal test. In its decision, the Ontario Divisional Court agreed with the submissions of Hydro One that the deferred tax asset should be allocated to shareholders in its entirety. However, the Ontario Divisional Court concluded that it does not have jurisdiction to substitute its own decision for that of the OEB and, with clear directions as to what the OEB’s decision must be, ordered that the matter be returned to the OEB.
The OEB did not file a notice for leave to appeal the ODC Decision to the Ontario Court of Appeal by the required deadline of July 31, 2020. As such, Hydro One believes it is probable that a final decision will be issued consistent with the specific guidance in the ODC Decision. As a result, the ODC Decision has been determined to be a subsequent event that requires adjustment in the consolidated financial statements as at and for the three and six months ended June 30, 2020.
The Company has recorded a reversal of the previously recognized impairment charge of Hydro One Networks' distribution and transmission deferred income tax regulatory asset, including the cumulative amounts shared with ratepayers to-date by Hydro One Networks' distribution and transmission segments of $58 million and $118 million, respectively. This has resulted in the recognition of deferred income tax regulatory assets of $504 million and $673 million, respectively, and associated deferred income tax liability of $310 million. The Company has recorded an increase in net income of $867 million as deferred income tax recovery.
The recognition of the regulatory asset related to DTA amounts shared with ratepayers that arose from the ODC Decision has no impact on the Company's forecast effective tax rates, as this will be dependent on the timing of the OEB's final decision and related recovery of the regulatory asset.
2020-2022 Transmission Rates
On March 21, 2019, Hydro One Networks filed a three-year Custom Incentive Rate application with the OEB for 2020-2022 transmission rates. On June 19, 2019, Hydro One filed updates to the application reflecting recent financial results and other adjustments. The hearing began on October 21, 2019, and concluded on November 4, 2019. On December 10, 2019, the OEB approved Hydro One Networks' 2019 transmission revenue requirement and charges as interim effective January 1, 2020 until the new transmission revenue requirement and charges are approved by the OEB. On April 23, 2020, the OEB rendered its decision on the 2020-2022 transmission rate application (2020-2022 Transmission Decision).
On July 16, 2020, the OEB issued its final rate order reducing the proposed capital expenditures by $400 million and approving a revenue requirement of $1,586 million, $1,657 million and $1,729 million for 2020, 2021 and 2022, respectively. On July 30, 2020, the OEB issued its decision for Uniform Transmission Rates (UTRs).The 2020 UTRs that were put in place on an interim basis on January 1, 2020 will continue for the remainder of 2020 in light of the COVID-19 pandemic. A future decision by the OEB will set the 2021 UTRs and determine the period over which the foregone revenue will be collected.
Hydro One Networks - Distribution
On March 31, 2017, Hydro One Networks filed a custom application with the OEB for 2018-2022 distribution rates under the OEB’s incentive-based regulatory framework (2018-2022 Distribution Application), which was subsequently updated on June 7 and December 21, 2017. The application reflects the level of capital investments required to minimize degradation in overall system asset condition, to meet regulatory requirements, and to maintain current reliability levels.
On March 7, 2019, the OEB rendered its decision on the 2018-2022 Distribution Application (2018-2022 Distribution Decision). In accordance with the 2018-2022 Distribution Decision, as well as the DTA Decision as noted above in “Hydro One Networks - Transmission”, the Company filed its draft rate order reflecting updated revenue requirements of $1,459 million for 2018, $1,498 million for 2019, $1,532 million for 2020, $1,578 million for 2021, and $1,624 million for 2022. On June 11, 2019, the OEB approved the rate order confirming these updated revenue requirements, which include impacts of both the 2018-2022 Distribution Decision and the DTA Decision.
Hydro One Remote Communities
On November 15, 2019, Hydro One Remote Communities filed an application with the OEB seeking approval for a 2% increase to 2019 base rates. On April 16, 2020, the OEB approved the requested increase for new rates effective May 1, 2020, while the
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

implementation of these rates will be deferred to November 1, 2020 due to COVID-19. The deferred implementation has no impact on net income as this deferred income is expected to be recovered in customer rates in the future.
Hydro One Remote Communities is fully financed by debt and is operated as a break-even entity with no ROE.
NRLP
On October 25, 2019, NRLP filed its revenue cap incentive rate application for 2020-2024. On December 19, 2019, the OEB approved NRLP’s proposed 2020 revenue requirement of $9 million on an interim basis effective January 1, 2020.
On February 12, 2020, all parties reached a full settlement agreement on all issues, accepting the 2020 base costs and the 2019 incurred costs as presented. The settlement included a 50% reduction to the inflation component and a 0.6% capital adjustment factor to account for a lowering rate base value. On March 6, 2020, the settlement agreement was filed for the OEB's approval, and on April 9, 2020, the OEB approved the settlement agreement.
HOSSM
HOSSM is under a 10-year deferred rebasing period for years 2017-2026, as approved in the OEB MAAD decision dated October 13, 2016. In July 2018, HOSSM filed a 2019 application to allow for inflationary increase (revenue cap escalator index) to its previously approved revenue requirement. The revenue cap escalator index is designed to add inflationary increases to the revenue requirement on an annual basis. On June 20, 2019, the OEB approved the revenue cap escalator index at 1.1% (net) which was applied to HOSSM's base revenue requirement for 2019, effective February 1, 2019, and also approved the 2019-2026 revenue cap framework.
On December 17, 2019, the OEB issued a decision on HOSSM’s request for transmission revenue requirement for 2020. The OEB approved a 1.5% revenue cap increase effective January 1, 2020.
B2M LP
On July 31, 2019, B2M LP filed a transmission rate application for 2020-2024. A settlement agreement was reached on December 9, 2019. The settlement accepted all of B2M LP’s cost submissions, including additional reliability reporting and a capital adjustment (reduction) factor of 0.6% to account for the decreasing rate base value. On January 16, 2020, the OEB approved the settlement agreement, including a 2020 base revenue requirement of $33 million (updated for lower ROE and interest rates), and a revenue cap escalator index for 2021 to 2024.
MAAD Applications
Peterborough Distribution MAAD Application
On April 30, 2020, the OEB issued its decision approving Hydro One’s application to acquire the business and distribution assets of Peterborough Distribution, from the City of Peterborough. See section “Other Developments” for additional information.
Orillia Power MAAD Application
On April 30, 2020, the OEB issued its decision approving Hydro One’s application to acquire Orillia Power Distribution Corporation from the City of Orillia. The transaction is expected to close in the third quarter of 2020.
OTHER DEVELOPMENTS
COVID-19
Throughout the COVID-19 pandemic, the Company's decisions and actions have been guided by two priorities: to protect Hydro One's employees and to maintain the safe and reliable supply of electricity to Hydro One's customers. While Hydro One continues to operate under its business continuity plan and has almost all office and administrative staff working remotely, the Company has implemented enhanced safety measures for all field staff.
In conjunction with evolving federal, provincial and local government protocols and guidance, the Company has continued to adapt its operating procedures to ensure continued employee, customer and public safety. These enhanced safety measures included personal protective equipment, social distancing and enhanced hygiene practices.
On April 27, 2020, the Premier of Ontario released a framework for re-opening businesses, services, and public spaces in Ontario through gradual stages, and on June 12, 2020, certain regions of Ontario were permitted to begin a gradual and staged approach to re-opening the Ontario economy.
Following the guidance of the Province of Ontario (Province) and public health experts in April, Hydro One developed its own pandemic recovery plan, which consists of a similar gradual and staged approach to returning its employees to work that has allowed for the gradual ramp-up of work crews. After focusing on high priority and essential work earlier in the quarter, the Company has returned almost all of its field crews to work after taking a measured approach to advancing the work on deferred capital and operating work programs, where it is safe to do so.
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

As part of the Company's continued commitment to customers, Hydro One has extended a number of the customer relief measures implemented at the outset of the pandemic to assist customers impacted by COVID-19. These measures included (i) the Pandemic Relief Fund, (ii) financial assistance and increased payment flexibility, (iii) extending the Winter Relief program, and (iv) the temporary suspension of late fees.
In addition to the above impact on the Company's operations, the COVID-19 pandemic had the following impact on Hydro One’s financial results for the three and six months ended June 30, 2020:
•While electricity consumption and demand can be impacted by numerous variables, it is difficult to determine the exact impact that the COVID-19 pandemic has had on peak demand and customer consumption over this period with any level of precision.
•The temporary deferral of operating and capital work during the period resulted in the recognition of costs associated with the stand-down and stranded labour costs of the Company's casual workforce.
•The pandemic has resulted in the prolonged temporary closures of businesses across Ontario, and therefore impacted employment rates locally. As a result, the Company has recorded an incremental allowance for doubtful accounts as of June 30, 2020. While there have been no significant permanent losses incurred to date, management does believe that there remains increased risk associated with the ultimate collection of billed energy consumption. In accordance with OEB accounting guidance noted below, the Company has recorded a regulatory asset for the recovery of these costs in the future.
•Lost revenues associated with the ongoing customer relief efforts noted above are immaterial.
•The COVID-19 pandemic resulted in no significant impacts on the Company's critical accounting estimates and judgments.
The Company continues to track incremental costs and lost revenues related to the COVID-19 pandemic in accordance with OEB guidance issued on March 25, 2020. These accounts track (i) Billing and System Changes as a result of the Emergency Order Regarding TOU Pricing, (ii) Lost Revenues Arising from the COVID-19 Emergency, and (iii) Other Incremental Costs, including costs relating to bad debt expenses. As of June 30, 2020, the Company is tracking approximately $46 million in these accounts, including $14 million related to incremental bad debts. The Company has held several discussions with the OEB, industry peers and governmental agencies, and while amounts recorded in each of these accounts will be subject to a prudency review by the OEB, the Company believes that costs relating to bad debt expenses will be recovered from ratepayers at some point in the future and as such have been recorded as a regulatory asset.
In May 2020, the OEB commenced a consultation on the COVID-19 emergency deferral accounts to assist in its development of new accounting guidance related to the accounts, and intends to outline the timing and process for their disposition. This consultation process has been delayed at the direction of the OEB, and further steps for the consultation will be determined and provided in due course.
Looking ahead, it is very difficult to determine or estimate the exact impacts of COVID-19 on Hydro One's operations as they will be largely dependent on the duration of the pandemic and severity of the measures implemented to combat this virus. Electricity consumption and demand can be impacted by numerous variables, including weather, changing economic conditions and conservation efforts making it difficult to estimate the impact of COVID-19 with any level of precision. Hydro One has continued to take the necessary steps to mitigate the impact of COVID-19 on the Company's operations.
The COVID-19 pandemic subjects the Company to additional risks and uncertainties. Please see section “Risk Management and Risk Factors - Infectious Disease Risk” for a discussion of the potential impacts of a pandemic such as COVID-19 on Hydro One.
Collective Agreements
The current collective agreement with the Power Workers' Union (PWU) (for classifications other than Customer Service Operations (CSO)) expired on March 31, 2020. The collective agreement with the PWU for CSO was set to expire on September 30, 2019; however, it was extended to allow for bargaining at the same time as the non-CSO agreement. On July 17, 2020, Hydro One and the PWU reached tentative deals for both collective agreements; ratification results are expected in September and October 2020 for the CSO and non-CSO agreements, respectively.
The construction building trade unions have collective agreements with the Electrical Power Systems Construction Association (EPSCA). EPSCA is an employers’ association of which Hydro One is a member. A number of the EPSCA construction collective agreements, which bind Hydro One, expired on April 30, 2020. Ratified five-year renewal collective agreements, covering May 1, 2020 to April 30, 2025, have been reached with fifteen out of the eighteen building trades. EPSCA is currently negotiating with the Teamsters and is in the process of scheduling negotiating dates with the Labourers Transmission and the Labourers Generation.
NRLP
On January 31, 2020, the Mississaugas of the Credit First Nation purchased an additional 19.9% equity interest in NRLP. Following this transaction, Hydro One's interest in NRLP was reduced to 55%, with the Six Nations of the Grand River Development Corporation and the Mississaugas of the Credit First Nation owning 25% and 20%, respectively, of the equity interest in NRLP.
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

Building Transit Faster Act
On February 18, 2020, the Ministry of Transportation introduced Bill 171, to enact the Building Transit Faster Act, 2020 (Transit Act), relating to four priority projects in the Toronto area. The Transit Act was passed on July 8, 2020. The Transit Act poses commitments on utilities, including Hydro One, to relocate infrastructure to allow the timely construction of the transit projects. Metrolinx, the builder of the transit projects, and Hydro One must work together on a notice that agrees to the timing of when the relocation work must be completed. If Hydro One is non-compliant, Metrolinx can file an application with the Ontario Superior Court of Justice, where a judge can either order Hydro One to comply or authorize Metrolinx to carry out the work, or impose a monetary penalty on Hydro One. On July 8, 2020, the Ontario Energy Board Act, 1998 (OEB Act) was accordingly amended to prohibit a utility from recovering the monetary penalty in rates.
Peterborough Distribution Acquisition
In July 2018, Hydro One reached an agreement to acquire the business and distribution assets of Peterborough Distribution, an electricity distribution company located in east central Ontario, from the City of Peterborough, for a cash purchase price of approximately $105 million, plus the funding or assumption of agreed upon liabilities, subject to final closing adjustments. On April 30, 2020, the OEB issued its decision approving Hydro One’s application for the acquisition. The Peterborough Distribution acquisition transaction was completed on August 1, 2020, for $105 million, which was comprised of a payment of $101 million and an initial down payment of $4 million in 2018. The final closing adjustments are expected to occur approximately 120 days after completion of the acquisition and have been guaranteed by Hydro One.
Board of Directors
On July 28, 2020, Hydro One announced that Stacey Mowbray has been appointed to its Board of Directors.
Sustainability Report
The Hydro One Limited 2019 Sustainability Report, when filed, will be available on the Company’s website at www.hydroone.com/sustainability.
NON-GAAP MEASURES
FFO, revenues, net of purchased power, and distribution revenues, net of purchased power are not recognized measures under US GAAP and do not have a standardized meaning prescribed by US GAAP. They are therefore unlikely to be directly comparable to similar measures presented by other companies. They should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under US GAAP.
FFO
FFO is defined as net cash from operating activities, adjusted for (i) changes in non-cash balances related to operations, (ii) dividends paid on preferred shares, and (iii) distributions to noncontrolling interest. Management believes that FFO is helpful as a supplemental measure of the Company’s operating cash flows as it excludes timing-related fluctuations in non-cash operating working capital and cash flows not attributable to common shareholders. As such, FFO provides a consistent measure of the cash generating performance of the Company’s assets.
Three months ended June 30Six months ended June 30
(millions of dollars)
2020201920202019
Net cash from operating activities359  285  899  542  
Changes in non-cash balances related to operations37  50  (19) 164  
Preferred share dividends—  —  —  (2) 
Distributions to noncontrolling interest—  (2) (2) (6) 
FFO396  333  878  698  
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

Revenues, Net of Purchased Power
Revenues, net of purchased power is defined as revenues less the cost of purchased power. Management believes that revenue, net of purchased power is helpful as a measure of net revenues for the distribution segment, as purchased power is fully recovered through revenues.
Quarter ended (millions of dollars)
Jun 30, 2020Mar 31, 2020Dec 31, 2019Sep 30, 2019Jun 30, 2019Mar 31, 2019Dec 31, 2018Sep 30, 2018
Revenues1,660  1,839  1,705  1,584  1,403  1,750  1,480  1,598  
Less: Purchased power808  1,007  914  737  653  807  741  733  
Revenues, net of purchased power852  832  791  847  750  943  739  865  
Quarter ended (millions of dollars)
Jun 30, 2020Mar 31, 2020Dec 31, 2019Sep 30, 2019Jun 30, 2019Mar 31, 2019Dec 31, 2018Sep 30, 2018
Distribution revenues1,201  1,439  1,298  1,140  1,029  1,321  1,138  1,103  
Less: Purchased power808  1,007  914  737  653  807  741  733  
Distribution revenues, net of purchased power393  432  384  403  376  514  397  370  
RELATED PARTY TRANSACTIONS
Hydro One is owned by Hydro One Limited. The Province is a shareholder of Hydro One Limited with approximately 47.3% ownership at June 30, 2020. The IESO, Ontario Power Generation Inc. (OPG), Ontario Electricity Financial Corporation (OEFC), the OEB, Hydro One Telecom Inc. (Hydro One Telecom), and 2587264 Ontario Inc. are related parties to Hydro One because they are controlled or significantly influenced by the Ministry of Energy or by Hydro One Limited. The following is a summary of the Company’s related party transactions during the three and six months ended June 30, 2020 and 2019:
(millions of dollars)
Three months ended June 30Six months ended June 30
Related PartyTransaction2020201920202019
IESOPower purchased364  259  1,140  809  
Revenues for transmission services452  370  847  783  
Amounts related to electricity rebates337  104  770  242  
Distribution revenues related to rural rate protection61  60  120  118  
Distribution revenues related to the supply of electricity to remote northern communities9  9  18  18  
Funding received related to CDM programs8  8  17  23  
OPGPower purchased1  2  3  5  
Revenues related to provision of services and supply of electricity2  1  4  3  
Costs related to the purchase of services—  1  1  1  
OEFCPower purchased from power contracts administered by the OEFC1  —  1  1  
OEBOEB fees2  2  4  4  
Hydro One LimitedReturn of stated capital154  347  300  485  
Dividends paid—  —  —  1  
Stock-based compensation costs3  1  5  8  
Cost recovery for services provided
2  4  4  7  
Hydro One TelecomServices received – costs expensed5  5  10  11  
Revenues for services provided—  —  1  1  
2587264 Ontario Inc.Preferred shares redeemed—  —  —  486  
Dividends paid—  —  —  2  
RISK MANAGEMENT AND RISK FACTORS
Hydro One is subject to numerous risks and uncertainties. Critical to Hydro One’s success is the identification, management, and to the extent possible, mitigation of these risks. Hydro One’s Chief Risk Officer has accountability for the Company’s Enterprise Risk Management (ERM) program, which assists decision-makers throughout the organization with the management of key business risks, including new and emerging risks and opportunities.
A discussion of the material risks relating to Hydro One and its business that the Company believes would be the most likely to influence an investor’s decision to purchase Hydro One’s securities can be found under the heading “Risk Management and Risk Factors” in the 2019 MD&A. In addition to those risks, the Company is subject to the following additional risk:
Infectious Disease Risk
An outbreak of infectious disease, in the form of an epidemic, a pandemic (such as COVID-19), or a similar public health threat, could materially adversely impact the Company. The extent of any such adverse impact on the Company is uncertain, and may depend on the length and severity of any such infectious disease outbreak, any resultant government regulations, guidelines and actions, and any related adverse changes in general economic and market conditions. Such an outbreak, the resultant
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

government regulations, guidelines and actions, and related adverse changes in general economic and market conditions could impact, in particular: the Company’s operations and workforce, including its ability to complete planned operating and capital work programs within scope and budget; certain financial obligations of the Company, including pension contributions and other post-retirement benefits, as a result of changes in prevailing market conditions; the Company’s expected revenues; reductions in overall electricity consumption and load, both short term and long term; overdue accounts and bad debt increases as a result of changes in the ability of the Company’s customers to pay; liquidity and the Company’s ability to raise capital; the timing of increased rates; the Company’s ability to recover incremental costs and lost revenues linked to the outbreak; the Company’s ability to file regulatory filings on a timely basis; timing of regulatory decisions and the impacts those decisions may have on the Company or its ability to implement them; and customer and stakeholder needs and expectations.
The Company also faces risks and costs associated with implementation of business continuity plans and modified work conditions, including the risks and costs associated with maintaining or reducing its workforce, making the required resources available to its workforce to enable them to continue essential work, including remotely where possible, and to keep its workforce healthy, as well as risks and costs associated with recovery of normal operations. Furthermore, the Company is dependent on third party providers for certain activities, and relies on a strong international supply chain, which may also be adversely impacted, and which, in turn, could materially adversely impact the Company.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over financial reporting as defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings. Internal control, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and due to its inherent limitations, may not prevent or detect all misrepresentations.
There were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2020, that materially affected, or are reasonably likely to materially affect, the Company’s disclosure controls and procedures and internal control over financial reporting.
NEW ACCOUNTING PRONOUNCEMENTS
The following tables present Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) that are applicable to Hydro One:
Recently Adopted Accounting Guidance
GuidanceDate issued
Description
Effective dateImpact on Hydro One
ASU
2017-04		January 2017
The amendment removes the second step of the current two-step goodwill impairment test to simplify the process of testing goodwill.
January 1, 2020No impact upon adoption
ASU
2018-13		August 2018
Disclosure requirements on fair value measurements in Accounting Standard Codification (ASC) 820 are modified to improve the effectiveness of disclosures in financial statement notes.
January 1, 2020No impact upon adoption
ASU
2019-01		March 2019
This amendment carries forward the exemption previously provided under ASC 840 relating to the determination of the fair value of underlying assets by lessors that are not manufacturers or dealers. It also provides for clarification on cash-flow presentation of sales-type and financing leases and clarifies that transition disclosures under Topic 250 are not applicable in the adoption of ASC 842.
January 1, 2020No impact upon adoption
FORWARD-LOOKING STATEMENTS AND INFORMATION
The Company’s oral and written public communications, including this document, often contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the Company’s business and the industry, regulatory and economic environments in which it operates, and include beliefs and assumptions made by the management of the Company. Such statements include, but are not limited to, statements regarding: the Company’s transmission and distribution rate applications, including resulting decisions, rates, recovery and expected impacts and timing; expectations about the Company’s liquidity and capital resources and operational requirements, including as result of COVID-19; the Operating Credit Facilities; expectations regarding the Company’s financing activities; the Company’s maturing debt; the Company’s derivative instruments; the Company’s ongoing and planned projects, initiatives and expected capital investments, including expected results, costs and completion dates; the potential impact of delays resulting from COVID-19 on the Company’s transmission in-service additions initially planned for 2020; the potential impact of COVID-19 on the Company’s business and operations, including its impact on peak demand and electricity consumption, capital programs, supply chains, costs, allowance for doubtful
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

accounts, foregone revenues, deferral accounts and the likelihood of recovery of certain costs in future rates; the Company’s priorities in its response to COVID-19; contractual obligations and other commercial commitments; expected impacts relating to the deferred tax asset and the OEB’s treatment thereof, including expected adjustments to the Company’s recognition of deferred tax regulatory assets, deferred tax liabilities and net income results; collective agreements and expected ratification dates thereof; the pension plan, future pension contributions, valuations and expected impacts; the anticipated impacts of the accelerated CCA on Hydro One; non-GAAP measures; risks relating to infectious disease outbreak, such as COVID-19; internal control over financial reporting and disclosure; the MTN Program; and the Company’s acquisitions and mergers, including Orillia Power and closing adjustments payable by Hydro One in connection with its acquisition of Peterborough Distribution. Words such as “expect”, “anticipate”, “intend”, “attempt”, “may”, “plan”, “will”, “would”, “believe”, “seek”, “estimate”, “goal”, “aim”, “target”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve assumptions and risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed, implied or forecasted in such forward-looking statements. Hydro One does not intend, and it disclaims any obligation, to update any forward-looking statements, except as required by law.
These forward-looking statements are based on a variety of factors and assumptions including, but not limited to, the following: the scope of the COVID-19 pandemic and duration thereof as well as the effect and severity of corporate and other mitigation measures on the Company’s operations, supply chain or employees; no unforeseen changes in the legislative and operating framework for Ontario’s electricity market or for Hydro One specifically; favourable decisions from the OEB and other regulatory bodies concerning outstanding and future rate and other applications; no unexpected delays in obtaining the required approvals; no unforeseen changes in rate orders or rate setting methodologies for the Company’s distribution and transmission businesses; continued use of US GAAP; a stable regulatory environment; no unfavourable changes in environmental regulation; no significant changes to the Company's current credit ratings; no unforeseen impacts of new accounting pronouncements; no changes to expectations regarding electricity consumption; no unforeseen changes to economic and market conditions; recoverability of costs and expenses related to the COVID-19 pandemic, including the costs of customer defaults resulting from the pandemic; completion of operating and capital projects that have been deferred; and no significant event occurring outside the ordinary course of business. These assumptions are based on information currently available to the Company, including information obtained from third-party sources. Actual results may differ materially from those predicted by such forward-looking statements. While Hydro One does not know what impact any of these differences may have, the Company’s business, results of operations, financial condition and credit stability may be materially adversely affected. Factors that could cause actual results or outcomes to differ materially from the results expressed or implied by forward-looking statements include, among other things:
•a significant expansion in length or severity of the COVID-19 pandemic restricting or prohibiting the Company’s operations or significantly impacting the Company’s supply chain or workforce;
•severity of mitigation measures related to the COVID-19 pandemic;
•delays in completion of and increases in costs of operating and capital projects;
•regulatory risks and risks relating to Hydro One’s revenues, including risks relating to rate orders and the rate-setting models for transmission and distribution, actual performance against forecasts and capital expenditures, the regulatory treatment of the deferred tax asset, the recoverability of total compensation costs or denials of applications;
•risks associated with the Province’s share ownership of Hydro One's parent corporation and other relationships with the Province, including potential conflicts of interest that may arise between Hydro One, the Province and related parties, risks associated with the Province’s exercise of further legislative and regulatory powers in the implementation of the Hydro One Accountability Act, risks relating to the ability of the Company to attract and retain qualified executive talent or the risk of a credit rating downgrade and its impact on the Company’s funding and liquidity;
•risks relating to the location of the Company’s assets on Reserve lands and the risk that Hydro One may incur significant costs associated with transferring assets located on Reserves;
•the risk that the Company may be unable to comply with regulatory and legislative requirements or that the Company may incur additional costs for compliance that are not recoverable through rates;
•the risk of exposure of the Company’s facilities to the effects of severe weather conditions, natural disasters, man-made events or other unexpected occurrences for which the Company is uninsured or for which the Company could be subject to claims for damage;
•the risk of non-compliance with environmental regulations and inability to recover environmental expenditures in rate applications and the risk that assumptions that form the basis of the Company’s recorded environmental liabilities and related regulatory assets may change;
•risks associated with information system security and maintaining complex information technology (IT) and operational technology (OT) system infrastructure, including system failures or risks of cyber-attacks or unauthorized access to corporate IT and OT systems;
•the risk of labour disputes and inability to negotiate or renew appropriate collective agreements on acceptable terms consistent with the Company’s rate decisions;
•risks related to the Company’s work force demographic and its potential inability to attract and retain qualified personnel;
•the risk that the Company is not able to arrange sufficient cost-effective financing to repay maturing debt and to fund capital expenditures;
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HYDRO ONE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
For the three and six months ended June 30, 2020 and 2019

•risks associated with fluctuations in interest rates and failure to manage exposure to credit and financial instrument risk;
•risks associated with economic uncertainty and financial market volatility;
•the risk that the Company may not be able to execute plans for capital projects necessary to maintain the performance of the Company’s assets or to carry out projects in a timely manner or the risk of increased competition for the development of large transmission projects or legislative changes affecting the selection of transmitters;
•risks associated with public opposition to or delays or denials of the requisite approvals and accommodations for the Company’s planned projects;
•the risk of failure to mitigate significant health and safety risks;
•the risk of not being able to recover the Company’s pension expenditures in future rates and uncertainty regarding the future regulatory treatment of pension, other post-employment benefits and post-retirement benefits costs;
•the potential that Hydro One may incur significant expenses to replace functions currently outsourced if agreements are terminated or expire before a new service provider is selected;
•the impact of the ownership by the Province of lands underlying the Company’s transmission system;
•the risk associated with legal proceedings that could be costly, time-consuming or divert the attention of management and key personnel from the Company’s business operations;
•the impact if the Company does not have valid occupational rights on third-party owned or controlled lands and the risks associated with occupational rights of the Company that may be subject to expiry;
•risks relating to adverse reputational events or political actions;
•risks relating to acquisitions, including the failure to realize anticipated benefits of such transaction at all, or within the time periods anticipated, and unexpected costs incurred in relation thereto;
•the inability to prepare financial statements using US GAAP; and
•the risk related to the impact of new accounting pronouncements.
Hydro One cautions the reader that the above list of factors is not exhaustive. Some of these and other factors are discussed in more detail in the section entitled “Risk Management and Risk Factors” in this MD&A and in the section entitled “Risk Management and Risk Factors” in the 2019 MD&A.
In addition, Hydro One cautions the reader that information provided in this MD&A regarding the Company’s outlook on certain matters, including potential future investments, is provided in order to give context to the nature of some of the Company’s future plans and may not be appropriate for other purposes.
Additional information about Hydro One, including the Company’s Annual Information Form, is available on SEDAR at www.sedar.com, the US Securities and Exchange Commission’s EDGAR website at www.sec.gov/edgar.shtml, and the Company’s website at www.HydroOne.com/Investors.
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 EX-99.3 4 a2020q2hoi-ceocert.htm EX-99.3 Document

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

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hydro One Inc. (the “issuer”) for the interim period ended June 30, 2020.
2.No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4.Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5.Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a)designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i)material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii)information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b)designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.


5.1Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
5.2N/A
5.3N/A
6.Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2020 and ended on June 30, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
 
Date:   August 11, 2020
 /s/ Mark Poweska
 President and Chief Executive Officer

 EX-99.4 5 a2020q2hoi-cfocert.htm EX-99.4 Document

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

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hydro One Inc. (the “issuer”) for the interim period ended June 30, 2020.
2.No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4.Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5.Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a)designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i)material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii)information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b)designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.


5.1Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
5.2N/A
5.3N/A
6.Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2020 and ended on June 30, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
 
Date:   August 11, 2020
 /s/ Christopher Lopez
 Chief Financial Officer


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