Form 6-K HYDRO ONE INC For: Jun 30

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August 9, 2022 7:18 AM EDT

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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 2022

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




99.1						Unaudited interim consolidated financial statements of the Registrant as at and for the three and six months ended June 30, 2022 and 2021

99.2						Management’s Discussion and Analysis of the Registrant as at and for the three and six months ended June 30, 2022 and 2021

99.3						Certification of President and Chief Executive Officer

99.4						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 9, 2022

HYDRO ONE INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited)

For the three and six months ended June 30, 2022 and 2021


	Three months ended June 30		Six months ended June 30
(millions of Canadian dollars, except per share amounts)	2022	2021	2022	2021
Revenues
Distribution (includes related party revenues of $70 and $142 (2021 - $70 and $143) for the three and six months ended June 30, respectively) (Note 22)	1,314	1,263	2,831	2,617
Transmission (includes related party revenues of $514 and $1,030 (2021 - $443 and $886) for the three and six months ended June 30, respectively) (Note 22)	516	449	1,036	897
	1,830	1,712	3,867	3,514

Costs
Purchased power (includes related party costs of $413 and $1,198 (2021 - $393 and $1,036) for the three and six months ended June 30, respectively) (Note 22)	852	838	1,866	1,732
Operation, maintenance and administration (Note 22)	279	281	559	554
Depreciation, amortization and asset removal costs (Note 4)	255	223	490	444
	1,386	1,342	2,915	2,730

Income before financing charges and income tax expense	444	370	952	784
Financing charges (Note 5)	118	101	232	215

Income before income tax expense	326	269	720	569
Income tax expense (Note 6)	68	27	148	54
Net income	258	242	572	515

Other comprehensive income (Note 7)	5	3	12	6
Comprehensive income	263	245	584	521

Net income attributable to:
Noncontrolling interest	2	2	4	4
Common shareholder	256	240	568	511
	258	242	572	515

Comprehensive income attributable to:
Noncontrolling interest	2	2	4	4
Common shareholder	261	243	580	517
	263	245	584	521

Earnings per common share (Note 20)
Basic	$1,800	$1,687	$3,993	$3,593
Diluted	$1,800	$1,687	$3,993	$3,593

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


			1

HYDRO ONE INC.

CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS (unaudited)

At June 30, 2022 and December 31, 2021


As at (millions of Canadian dollars)	June 30, 2022	December 31, 2021
Assets
Current assets:
Cash and cash equivalents	—	499
Accounts receivable (Note 8)	680	697
Due from related parties (Note 22)	445	399
Other current assets (Note 9)	292	301
	1,417	1,896

Property, plant and equipment (Note 10)	24,353	23,748
Other long-term assets:
Regulatory assets (Note 11)	3,614	3,561
Deferred income tax assets	5	10
Intangible assets (net of accumulated amortization - $701; 2021 - $662)	587	567
Goodwill	373	373
Other assets (Note 12)	70	66
	4,649	4,577
Total assets	30,419	30,221

Liabilities
Current liabilities:
Bank indebtedness	28	—
Short-term notes payable (Note 15)	1,432	1,045
Long-term debt payable within one year (Notes 15, 16)	738	603
Accounts payable and other current liabilities (Note 13)	1,072	1,042
Due to related parties (Note 22)	111	255
	3,381	2,945

Long-term liabilities:
Long-term debt (Notes 15, 16)	11,856	12,593
Regulatory liabilities (Note 11)	378	362
Deferred income tax liabilities	558	367
Other long-term liabilities (Note 14)	2,730	2,694
	15,522	16,016
Total liabilities	18,903	18,961

Contingencies and Commitments (Notes 24, 25)
Subsequent Events (Note 27)

Noncontrolling interest subject to redemption	20	20

Equity
Common shares (Note 18)	2,957	2,957
Retained earnings	8,475	8,229
Accumulated other comprehensive loss	(2)	(14)
Hydro One shareholder’s equity	11,430	11,172

Noncontrolling interest	66	68
Total equity	11,496	11,240
	30,419	30,221

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


			2

HYDRO ONE INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)

For the six months ended June 30, 2022 and 2021


Six months ended June 30, 2022 (millions of Canadian dollars)	Common Shares	Retained Earnings	Accumulated Other Comprehensive Loss	Hydro One Shareholder’s Equity	Non- controlling Interest	Total Equity
January 1, 2022	2,957	8,229	(14)	11,172	68	11,240
Net income	—	568	—	568	3	571
Other comprehensive income (Note 7)	—	—	12	12	—	12
Distributions to noncontrolling interest	—	—	—	—	(5)	(5)
Dividends on common shares (Note 19)	—	(322)	—	(322)	—	(322)
June 30, 2022	2,957	8,475	(2)	11,430	66	11,496


Six months ended June 30, 2021 (millions of Canadian dollars)	Common Shares	Retained Earnings	Accumulated Other Comprehensive Loss	Hydro One Shareholder’s Equity	Non- controlling Interest	Total Equity
January 1, 2021	2,957	7,877	(30)	10,804	72	10,876
Net income	—	511	—	511	3	514
Other comprehensive income (Note 7)	—	—	6	6	—	6
Distributions to noncontrolling interest	—	—	—	—	(7)	(7)
Dividends on common shares (Note 19)	—	(306)	—	(306)	—	(306)
June 30, 2021	2,957	8,082	(24)	11,015	68	11,083

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


			3

HYDRO ONE INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

For the three and six months ended June 30, 2022 and 2021


	Three months ended June 30		Six months ended June 30
(millions of Canadian dollars)	2022	2021	2022	2021
Operating activities
Net income	258	242	572	515
Environmental expenditures	(11)	(9)	(19)	(17)
Adjustments for non-cash items:
Depreciation and amortization (Note 4)	211	194	420	390
Regulatory assets and liabilities	(8)	(8)	21	52
Deferred income tax expense	63	13	136	33
Other	3	3	19	36
Changes in non-cash balances related to operations (Note 23)	79	(34)	(124)	(95)
Net cash from operating activities	595	401	1,025	914

Financing activities

Long-term debt repaid	(1)	(302)	(601)	(802)
Short-term notes issued	1,470	1,330	2,860	2,145
Short-term notes repaid	(1,364)	(815)	(2,470)	(1,615)
Dividends paid (Note 19)	(165)	(157)	(322)	(306)
Distributions paid to noncontrolling interest	(2)	(2)	(6)	(4)

Change in bank indebtedness	16	—	28	—
Costs to obtain financing	(4)	(2)	(4)	(2)
Net cash from (used in) financing activities	(50)	52	(515)	(584)

Investing activities
Capital expenditures (Note 23)
Property, plant and equipment	(529)	(512)	(962)	(988)
Intangible assets	(27)	(34)	(53)	(71)
Capital contributions received	10	7	10	9
Other	1	9	(4)	9
Net cash used in investing activities	(545)	(530)	(1,009)	(1,041)

Net change in cash and cash equivalents	—	(77)	(499)	(711)
Cash and cash equivalents, beginning of period	—	78	499	712
Cash and cash equivalents, end of period	—	1	—	1

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


			4

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

For the three and six months ended June 30, 2022 and 2021

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, a limited partnership between Hydro One and the Saugeen Ojibway Nation, and an approximately 55% interest in Niagara Reinforcement Limited Partnership, a limited partnership between Hydro One and Six Nations of the Grand River Development Corporation and the Mississaugas of the Credit First Nation.

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).

Deferred Tax Asset (DTA)

On March 7, 2019, the Ontario Energy Board (OEB) issued its reconsideration decision (DTA Decision) with respect to Hydro One's rate-setting treatment of the benefits of the DTA resulting from the transition from the payments in lieu of tax regime to tax payments under the federal and provincial tax regimes. On July 16, 2020, the Ontario Divisional Court rendered its decision on the Company's appeal of the OEB's DTA Decision. On April 8, 2021, the OEB rendered its decision and order regarding the recovery of the DTA amounts allocated to ratepayers for the 2017 to 2022 period (DTA Implementation Decision). See Note 11 - Regulatory Assets and Liabilities for additional details.

Hydro One Remote Communities

On November 3, 2021, Hydro One Remote Communities filed an application with the OEB seeking approval for a 2.2% increase to 2021 base rates, effective May 1, 2022. The application was subsequently updated to request a 3.3% increase to 2021 base rates to reflect the OEB’s annually updated inflation parameters for electricity distributors for 2022. On March 24, 2022, the OEB approved the application for rates and other charges which became effective on May 1, 2022.

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 (US) Generally Accepted Accounting Principles (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, 2021, 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 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, 2021.


			5

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

3. NEW ACCOUNTING PRONOUNCEMENTS

The following tables present Accounting Standard Updates (ASUs) issued by the Financial Accounting Standards Board that are applicable to Hydro One:

Recently Adopted Accounting Guidance

Guidance

Date issued

Description

Effective date

Impact on Hydro One

ASU 2020-06

August 2020

The update addresses the complexity associated with applying US GAAP for certain financial instruments with characteristics of liabilities and equity. The amendments reduce the number of accounting models for convertible debt instruments and convertible preferred stock.

January 1, 2022

No impact upon adoption

ASU
2021-05

July 2021

The amendments are intended to align lease classification requirements for lessors under Topic 842 with Topic 840's practice.

January 1, 2022

No impact upon adoption

ASU 2021-10

November 2021

The update addresses diversity on the recognition, measurement, presentation and disclosure of government assistance received by business entities.

January 1, 2022

No impact upon adoption

Recently Issued Accounting Guidance Not Yet Adopted

Guidance

Date issued

Description

Effective date

Anticipated Impact on Hydro One

ASU
2021-08

October 2021

The amendments address how to determine whether a contractual obligation represents a liability to be recognized by the acquirer in a business combination.

January 1, 2023

Under assessment

ASU 2022-02

March 2022

The amendments eliminate the troubled debt restructuring (TDR) accounting model for entities that have adopted Topic 326 Financial Instrument – Credit Losses and modifies the guidance on vintage disclosure requirements to require disclosure of current-period gross write-offs by year of origination.

January 1, 2023

Upon adoption, the Company will disclose the current period gross write-offs by year of origination relating to its accounts receivable

4. DEPRECIATION, AMORTIZATION AND ASSET REMOVAL COSTS



	Three months ended June 30		Six months ended June 30
(millions of dollars)	2022	2021	2022	2021
Depreciation of property, plant and equipment	181	167	362	336
Amortization of intangible assets	19	18	39	37
Amortization of regulatory assets	11	9	19	17
Depreciation and amortization	211	194	420	390
Asset removal costs	44	29	70	54
	255	223	490	444

5. FINANCING CHARGES



	Three months ended June 30		Six months ended June 30
(millions of dollars)	2022	2021	2022	2021
Interest on long-term debt	124	124	245	247
Interest on short-term notes	4	1	5	1
Realized loss on cash flow hedges (interest-rate swap agreements) (Notes 7, 16)	1	3	4	6
Interest on regulatory accounts	1	—	2	1
Other	4	2	7	3
Less: Interest capitalized on construction and development in progress	(16)	(16)	(31)	(29)
DTA carrying charges (Note 11)	1	(13)	1	(13)
Interest earned on cash and cash equivalents	(1)	—	(1)	(1)
	118	101	232	215


			6

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

6. INCOME TAXES

As a rate regulated utility company, the Company recovers income taxes from its ratepayers based on estimated current income tax expense in respect of its regulated business. The amounts of deferred income taxes related to regulated operations which are considered to be more likely-than-not to be recoverable from, or refundable to, ratepayers in future periods are recognized as deferred income tax regulatory assets or liabilities, with an offset to deferred income tax recovery or expense, respectively. The Company’s consolidated tax expense or recovery for the period includes all current and deferred income tax expenses for the period net of the regulated accounting offset to deferred income tax expense arising from temporary differences to be recovered from, or refunded to, customers in future rates. Thus, the Company’s income tax expense or recovery 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:


	Three months ended June 30		Six months ended June 30
(millions of dollars)	2022	2021	2022	2021
Income before income tax expense	326	269	720	569
Income tax expense at statutory rate of 26.5% (2021 - 26.5%)	87	71	191	151

Increase (decrease) resulting from:
Net temporary differences recoverable in future rates charged to customers:
Capital cost allowance in excess of depreciation and amortization	(24)	(21)	(52)	(46)
Impact of DTA Implementation Decision1	24	(8)	48	(20)

Overheads capitalized for accounting but deducted for tax purposes	(6)	(5)	(13)	(12)
Pension and post-retirement benefit contributions in excess of pension expense	(4)	(2)	(10)	(6)
Interest capitalized for accounting but deducted for tax purposes	(4)	(5)	(9)	(9)
Environmental expenditures	(4)	(2)	(7)	(4)
Other	—	(2)	—	(2)
Net temporary differences attributable to regulated business	(18)	(45)	(43)	(99)
Net permanent differences	(1)	1	—	2

Total income tax expense	68	27	148	54


Effective income tax rate			20.9		%	10.0		%	20.6		%	9.5		%

1 Pursuant to the DTA Implementation Decision, the 2021 impact represents the sharing of tax deductions from deferred tax asset (DTA Sharing) given to ratepayers, offset by the recovery of DTA amounts previously shared effective July 1, 2021. For 2022, the impact represents the recovery of DTA amounts previously shared from ratepayers. See Note 11 - Regulatory Assets and Liabilities.

7. OTHER COMPREHENSIVE INCOME


	Three months ended June 30		Six months ended June 30
(millions of dollars)	2022	2021	2022	2021
Gain on cash flow hedges (interest-rate swap agreements) (Notes 5, 16)1	4	3	10	6
Gain on transfer of other post-employment benefits (OPEB) (Note 17)	1	—	2	—

	5	3	12	6

1 Includes less than $1 million after-tax realized loss (2021 - $2 million), $1 million before-tax realized loss (2021 - $3 million), and includes $2 million after-tax realized loss (2021 - $4 million) and $4 million before-tax realized loss (2021 - $6 million) on cash flow hedges reclassified to financing charges for the three and six months ended June 30, 2022, respectively.

8. ACCOUNTS RECEIVABLE


As at (millions of dollars)	June 30, 2022	December 31, 2021
Accounts receivable - billed	362	344
Accounts receivable - unbilled	390	409
Accounts receivable, gross	752	753
Allowance for doubtful accounts	(72)	(56)
Accounts receivable, net	680	697


			7

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

The following table shows the movements in the allowance for doubtful accounts for the six months ended June 30, 2022 and the year ended December 31, 2021:


(millions of dollars)	Six months ended June 30, 2022		Year ended December 31, 2021
Allowance for doubtful accounts – beginning		(56)	(46)
Write-offs		10	15
Additions to allowance for doubtful accounts		(26)	(25)
Allowance for doubtful accounts – ending		(72)	(56)

9. OTHER CURRENT ASSETS


As at (millions of dollars)	June 30, 2022	December 31, 2021
Regulatory assets (Note 11)	198	226
Prepaid expenses and other assets	65	53
Materials and supplies	23	22
Derivative assets (Note 16)	6	—
	292	301

10. PROPERTY, PLANT AND EQUIPMENT


As at (millions of dollars)	June 30, 2022	December 31, 2021
Property, plant and equipment	35,428	34,723
Less: accumulated depreciation	(12,884)	(12,557)
	22,544	22,166
Construction in progress	1,624	1,402
Future use land, components and spares	185	180
	24,353	23,748


			8

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

11. 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, 2022	December 31, 2021
Regulatory assets:
Deferred income tax regulatory asset	2,633	2,509
Pension benefit regulatory asset	701	713
Deferred tax asset sharing	139	204
Post-retirement and post-employment benefits - non-service cost	134	125
Environmental	110	122
Stock-based compensation	32	38
Foregone revenue deferral	12	25
Debt premium	5	7
Conservation and Demand Management variance	4	8
Other	42	36
Total regulatory assets	3,812	3,787
Less: current portion	(198)	(226)
	3,614	3,561

Regulatory liabilities:
Tax rule changes variance	92	86
Retail settlement variance account	67	58
External revenue variance	51	52
Earnings sharing mechanism deferral	42	42
Asset removal costs cumulative variance	40	36
Post-retirement and post-employment benefits	33	33
Pension cost differential	30	30
Green energy expenditure variance	9	13
Deferred income tax regulatory liability	4	4
Other	17	18
Total regulatory liabilities	385	372
Less: current portion	(7)	(10)
	378	362

Deferred Tax Asset Sharing

At June 30, 2022, Hydro One has a net regulatory asset of $139 million representing the cumulative DTA amounts shared with ratepayers since 2017 to 2021, net of the amount recovered from ratepayers since July 1, 2021 pursuant to the DTA Implementation Decision. The net regulatory asset of $139 million (December 31, 2021 - $204 million) consists of $49 million (December 31, 2021 - $72 million) and $90 million (December 31, 2021 - $132 million) for Hydro One Networks’ distribution and transmission segments, respectively. The balance of this regulatory account will continue to decrease as amounts are recovered over the next 12 months.

12. OTHER LONG-TERM ASSETS


As at (millions of dollars)	June 30, 2022	December 31, 2021
Right-of-Use assets	56	53
Other long-term assets	14	13
	70	66


			9

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

13. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES


As at (millions of dollars)	June 30, 2022	December 31, 2021
Accrued liabilities	685	606
Accounts payable	216	249
Accrued interest	110	123
Environmental liabilities	43	34
Lease obligations	11	12
Regulatory liabilities (Note 11)	7	10
Derivative liabilities (Note 16)	—	8
	1,072	1,042

14. OTHER LONG-TERM LIABILITIES


As at (millions of dollars)	June 30, 2022	December 31, 2021
Post-retirement and post-employment benefit liability (Note 17)	1,834	1,784
Pension benefit liability (Note 17)	701	713
Environmental liabilities	81	88
Lease obligations	46	44
Due to related parties (Note 22)	24	29
Asset retirement obligations	14	14

Long-term accounts payable	3	3
Other long-term liabilities	27	19
	2,730	2,694

15. 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 revolving standby credit facilities totaling $2,300 million (Operating Credit Facilities). In January 2022, Hydro One successfully amended its Operating Credit Facilities to incorporate environmental, social and governance targets. On June 1, 2022, the maturity date for the Operating Credit Facilities was extended from 2026 to 2027. At June 30, 2022, 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.


			10

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

Long-Term Debt

The following table presents long-term debt outstanding at June 30, 2022 and December 31, 2021:


As at (millions of dollars)	June 30, 2022	December 31, 2021
Hydro One long-term debt (a)	12,495	13,095
HOSSM long-term debt (b)	138	142
	12,633	13,237
Add: Net unamortized debt premiums	8	9

Less: Unamortized deferred debt issuance costs	(47)	(50)
Total long-term debt	12,594	13,196

Less: Long-term debt payable within one year	(738)	(603)
	11,856	12,593

(a) Hydro One long-term debt

At June 30, 2022, long-term debt of $12,495 million (December 31, 2021 - $13,095 million) was outstanding, the majority of which was issued under Hydro One’s Medium Term Note (MTN) Program. In June 2022, Hydro One filed a short form base shelf prospectus in connection with its MTN Program, which has a maximum authorized principal amount of notes issuable of $4,000 million, and expires in July 2024. At June 30, 2022, $4,000 million remained available for issuance under the MTN Program prospectus. During the three and six months ended June 30, 2022 and 2021, no long-term debt was issued and long-term debt of $nil (2021 - $300 million) and $600 million (2021 - $800 million) was repaid, respectively, under the MTN Program.

(b) HOSSM long-term debt

At June 30, 2022, HOSSM long-term debt of $138 million (December 31, 2021 - $142 million) with a principal amount of $133 million (December 31, 2021 - $134 million) was outstanding. During the three and six months ended June 30, 2022 and 2021, no long-term debt was issued and $1 million (2021 - $2 million) of long-term debt was repaid.

Principal and Interest Payments

At June 30, 2022, future principal repayments, interest payments, and related weighted-average interest rates were as follows:


	Long-Term Debt Principal Repayments	Interest Payments	Weighted-Average Interest Rate
	(millions of dollars)	(millions of dollars)	(%)
Year 1	733	491	1.7
Year 2	700	479	2.5
Year 3	750	461	2.3
Year 4	500	443	2.8
Year 5	—	430	—
	2,683	2,304	2.3
Years 6-10	2,700	2,011	3.9
Thereafter	7,245	3,825	4.5
	12,628	8,140	3.9

16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Non-Derivative Financial Assets and Liabilities

At June 30, 2022 and December 31, 2021, the Company’s carrying amounts of cash and cash equivalents, accounts receivable, due from related parties, 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, 2022 and December 31, 2021 are as follows:

June 30, 2022

December 31, 2021

As at (millions of dollars)

Carrying Value

Fair Value

Carrying Value

Fair Value

Long-term debt, including current portion

12,594

11,924

13,196

15,162


			11

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

Fair Value Measurements of Derivative Instruments

Fair Value Hedges

At June 30, 2022 and December 31, 2021, Hydro One had no fair value hedges.

Cash Flow Hedges

At June 30, 2022 and December 31, 2021, Hydro One had a total of $800 million in pay-fixed, receive-floating interest-rate swap agreements designated as cash flow hedges. These cash flow hedges are intended to offset the variability of interest rates on the issuances of short-term commercial paper between January 9, 2020 and March 9, 2023.

At June 30, 2022 and December 31, 2021, the Company had no derivative instruments classified as undesignated contracts.

Fair Value Hierarchy

The fair value hierarchy of financial assets and liabilities at June 30, 2022 and December 31, 2021 is as follows:


As at June 30, 2022 (millions of dollars)	Carrying Value	Fair Value	Level 1	Level 2	Level 3
Assets:
Derivative instruments (Note 9)

Cash flow hedges, including current portion	6	6	—	6	—


Liabilities:
Long-term debt, including current portion	12,594	11,924	—	11,924	—


As at December 31, 2021 (millions of dollars)	Carrying Value	Fair Value	Level 1	Level 2	Level 3
Liabilities:
Long-term debt, including current portion	13,196	15,162	—	15,162	—
Derivative instruments (Note 13)
Cash flow hedges, including current portion	8	8	—	8	—
	13,204	15,170	—	15,170	—

The fair value of the long-term debt is based on unadjusted period-end market prices for the same or similar debt of the same remaining maturities.

There were no transfers between any of the fair value levels during the six months ended June 30, 2022 or the year ended December 31, 2021.

Risk Management

Exposure to market risk, credit risk and liquidity risk arises in the normal course of the Company’s business.

Market Risk

Market risk refers primarily to the risk of loss which results from changes in values, foreign exchange rates and interest rates. The Company is exposed to 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, 2022 and 2021.

For derivative instruments that are designated and qualify as cash flow hedges, the unrealized gain or loss, after tax, on the derivative instrument is recorded as other comprehensive income (OCI) or other comprehensive loss (OCL) and is reclassified to results of operations in the same period during which the hedged transaction affects results of operations. During the three months ended June 30, 2022, a $4 million after-tax unrealized gain (2021 - $1 million), $5 million before-tax (2021 - $1 million), was recorded in OCI, and less than $1 million after-tax realized loss (2021 - $2 million), $1 million before-tax (2021 - $3 million), was reclassified to financing charges. During the six months ended June 30, 2022, a $8 million after-tax unrealized gain (2021 - $2 million), $11 million before-tax (2021 - $3 million), was recorded in OCI, and a $2 million after-tax realized loss (2021- $4 million), $4 million before-tax (2021 - $6 million), was reclassified to financing charges. This resulted in accumulated other


			12

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

comprehensive income (AOCI) of $4 million related to cash flow hedges at June 30, 2022 (December 31, 2021 - accumulated other comprehensive loss (AOCL)- $6 million). The Company estimates that the amount of AOCI, after tax, related to cash flow hedges to be reclassified to results of operations in the next 12 months is $4 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, at June 30, 2022, the maximum term over which the Company is hedging exposures to the variability of cash flows is less than one year.

The Pension Plan manages market risk by diversifying investments in accordance with the Pension Plan’s Statement of Investment Policies and Procedures. Interest rate risk arises from the possibility that changes in interest rates will affect the fair value of the Pension Plan’s financial instruments. In addition, changes in interest rates can also impact discount rates which impact the valuation of the pension and post-retirement and post-employment liabilities. Currency risk is the risk that the value of the Pension Plan’s financial instruments will fluctuate due to changes in foreign currencies relative to the Canadian dollar. Other price risk is the risk that the value of the Pension Plan’s investments in equity securities will fluctuate as a result of changes in market prices, other than those arising from interest rate risk or currency risk. All three factors may contribute to changes in values of the Pension Plan investments. See Note 17 - Pension and Post-Retirement and Post-Employment Benefits for further details.

Credit Risk

Financial assets create a risk that a counterparty will fail to discharge an obligation, causing a financial loss. At June 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, there was no material accounts receivable balance due from any single customer.

At June 30, 2022, the Company’s allowance for doubtful accounts was $72 million (December 31, 2021 - $56 million). The allowance for doubtful accounts reflects the Company's current lifetime expected credit losses (CECL) for all accounts receivable balances, which are based on historical overdue balances, customer payments and write-offs. At June 30, 2022, approximately 4% (December 31, 2021 - 5%) of the Company’s net accounts receivable were outstanding for more than 60 days.

Hydro One manages its counterparty credit risk through various techniques including (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 in an asset position at the reporting date. At June 30, 2022 and December 31, 2021, the counterparty credit risk exposure on the fair value of these interest-rate swap contracts was not material. At June 30, 2022, Hydro One’s credit exposure for all derivative instruments, and applicable payables and receivables, was with two financial institutions with investment grade credit ratings as counterparties.

The Pension Plan manages its counterparty credit risk with respect to bonds by investing in investment-grade corporate and government bonds and with respect to derivative instruments by transacting only with highly rated financial institutions and by ensuring that exposure is diversified across 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.

In June 2022, Hydro One filed a short form base shelf prospectus in connection with its MTN Program, which has a maximum authorized principal amount of notes issuable of $4,000 million, and expires in July 2024. At June 30, 2022, $4,000 million remained available for issuance under the MTN Program prospectus.

The Pension Plan’s short-term liquidity is provided through cash and cash equivalents, contributions, investment income and proceeds from investment transactions. In the event that investments must be sold quickly to meet current obligations, the majority of the Pension Plan’s assets are invested in securities that are traded in an active market and can be readily disposed of as liquidity needs arise.


			13

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

17. 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, 2022 and 2021:


	Pension Benefits		Post-Retirement and Post-Employment Benefits
Three months ended June 30 (millions of dollars)	2022	2021	2022	2021
Current service cost	54	60	16	17
Interest cost	71	64	15	13
Expected return on plan assets, net of expenses1	(127)	(108)	—	—
Prior service cost amortization	—	1	2	2
Amortization of actuarial losses	15	31	—	1
Net periodic benefit costs	13	48	33	33

Charged to results of operations2,3	8	7	22	19


	Pension Benefits		Post-Retirement and Post-Employment Benefits
Six months ended June 30 (millions of dollars)	2022	2021	2022	2021
Current service cost	108	120	32	33
Interest cost	142	128	30	25
Expected return on plan assets, net of expenses1	(254)	(216)	—	—
Prior service cost amortization	1	2	7	3
Amortization of actuarial losses	30	62	1	2
Net periodic benefit costs	27	96	70	63

Charged to results of operations2,3	15	13	40	36

1 The expected long-term rate of return on pension plan assets for the year ending December 31, 2022 is 6.00% (2021 - 5.40%).

2 The Company accounts for pension costs consistent with their inclusion in OEB-approved rates. During the three and six months ended June 30, 2022, pension costs of $20 million (2021 - $19 million) and $38 million (2021 - $36 million), respectively, were attributed to labour, of which $8 million (2021 - $7 million) and $15 million (2021 - $13 million), respectively was charged to operations, and $12 million (2021 - $12 million) and $23 million (2021 - $23 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 confirmed 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. Prior to the decision, these costs were tracked in a regulatory asset. As a result, during the six months ended June 30, 2022, additional other post-retirement and post-employment costs of $9 million (2021 - $8 million) attributed to labour were charged to operations.

Future Transfers from Other Plans

Hydro One and Inergi LP agreed to transfer the employment of certain Inergi LP employees (Transferred Employees) to Hydro One Networks. Employees related to the Information Technology Operations, Finance and Accounting, Payroll, Source to Pay, Settlements and certain Shared Services functions transferred over a period ending January 1, 2022. The Transferred Employees who are participants in the Inergi LP Pension Plan (Inergi Plan) became participants in the Hydro One Pension Plan upon transfer to Hydro One Networks. Subject to all necessary regulatory approvals, the assets and liabilities of the Inergi Plan will transfer to the Plan. The values of assets and liabilities of the Inergi Plan to be transferred to the Plan will be determined at the date of transfer, which is expected to occur sometime in 2023. Inergi and Hydro One Networks also agreed to transfer OPEB liabilities related to the Transferred Employees to Hydro One’s post-retirement and post-employment benefit plans.

On March 1, 2021, Transferred Employees associated with information technology operations (ITO Employees) transferred to Hydro One Networks, and the transfer of the OPEB liability of $28 million related to the ITO Employees was completed. The liability was recorded as a post-retirement and post-employment benefit liability with an offset to OCL, and cash totaling $27 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 OCL 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 ITO Employees.

On November 1, 2021, Transferred Employees associated with source to pay operations (S2P Employees) transferred to Hydro One Networks, and the transfer of the OPEB liability of $6 million related to the S2P Employees was completed. The liability was recorded as a post-retirement and post-employment benefit liability with an offset to OCL, and cash totaling $6 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 OCL resulting from the transfer of the other post-retirement benefit liability are being recognized in net income over the EARSL of the S2P Employees.

The transfer of Finance and Accounting, Payroll and certain Shared Services functions occurred on January 1, 2022 and the transfer of the OPEB liability of $9 million related to these Employees was completed in the first quarter. The liability was


			14

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

recorded as a post-retirement and post-employment benefit liability with an offset to OCL, and cash totaling $10 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 OCL resulting from the transfer of the other post-retirement benefit liability are being recognized in net income over the EARSL of the Finance and Accounting, Payroll and certain Shared Services employees.

18. SHARE CAPITAL

Common Shares

The Company is authorized to issue an unlimited number of common shares. At June 30, 2022 and December 31, 2021, the Company had 142,239 common shares issued and outstanding.

Preferred Shares

The Company is authorized to issue an unlimited number of preferred shares, issuable in series. At June 30, 2022 and December 31, 2021, the Company had no preferred shares issued and outstanding.

19. DIVIDENDS

During the three months ended June 30, 2022, common share dividends in the amount of $165 million (2021 - $157 million) were declared and paid.

During the six months ended June 30, 2022, common share dividends in the amount of $322 million (2021 - $306 million) were declared and paid. See Note 27 - Subsequent Events for dividends declared subsequent to June 30, 2022.

20. 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, 2022 and 2021 were 142,239. There were no dilutive securities during the three and six months ended June 30, 2022 and 2021.

21. STOCK-BASED COMPENSATION

Share Grant Plans

Hydro One Limited has two share grant plans (Share Grant Plans), one for the benefit of certain members of the Power Workers’ Union (the PWU Share Grant Plan) and one for the benefit of certain members of the Society of United Professionals (the Society Share Grant Plan). A summary of share grant activity under the Share Grant Plans during the three and six months ended June 30, 2022 and 2021 is presented below:


	Three months ended June 30		Six months ended June 30
(number of share grants)	2022	2021	2022	2021
Share grants outstanding - beginning	2,616,351	3,100,165	2,616,351	3,100,165
Vested and issued1	(381,926)	(410,221)	(381,926)	(410,221)
Share grants outstanding - ending	2,234,425	2,689,944	2,234,425	2,689,944

1 During the three and six months ended June 30, 2022, Hydro One Limited issued 381,926 (2021 - 410,221) common shares from treasury to eligible employees in accordance with provisions of the PWU and the Society Share Grant Plans.


			15

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

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, 2022 and 2021 is presented below:


	Three months ended June 30		Six months ended June 30
(number of DSUs)	2022	2021	2022	2021
DSUs outstanding - beginning	85,973	70,589	80,813	65,240
Granted	5,026	5,273	10,186	10,622
Paid	—	(5,315)	—	(5,315)
DSUs outstanding - ending	90,999	70,547	90,999	70,547

At June 30, 2022, a liability of $3 million (December 31, 2021 - $3 million) related to Directors' DSUs has been recorded at the closing price of Hydro One Limited common shares of $34.61 (December 31, 2021 - $32.91). This liability is included in other long-term liabilities on the consolidated balance sheets.

Management DSU Plan

A summary of DSU awards activity under the Management DSU Plan during the three and six months ended June 30, 2022 and 2021 is presented below:


	Three months ended June 30		Six months ended June 30
(number of DSUs)	2022	2021	2022	2021
DSUs outstanding - beginning	124,849	87,956	90,240	61,880
Granted	1,017	765	35,626	26,841

DSUs outstanding - ending	125,866	88,721	125,866	88,721

At June 30, 2022, a liability of $4 million (December 31, 2021 - $3 million) related to Management DSUs has been recorded at the closing price of Hydro One Limited common shares of $34.61 (December 31, 2021 - $32.91). This liability is included in other long-term liabilities on the consolidated balance sheets.

Long-term Incentive Plan (LTIP)

Performance Share Units (PSU) and Restricted Share Units (RSU)

There was no activity during the three months ended June 30, 2022 and 2021. A summary of PSU and RSU awards activity under the LTIP during the six months ended June 30, 2022 and 2021 is presented below:


	PSUs		RSUs
Six months ended June 30 (number of units)	2022	2021	2022	2021
Units outstanding - beginning	—	106,070	—	133,620
Vested and issued	—	(106,070)	—	(98,860)

Settled	—	—	—	(34,760)
Units outstanding - ending	—	—	—	—

No awards were granted during the three and six months ended June 30, 2022 and 2021. The compensation expense related to the PSU and RSU awards recognized by the Company during the three and six months ended June 30, 2022 was $nil (2021 - $nil and less than $1 million).

Society RSU Plan

A summary of RSU awards activity under the Society RSU Plan during the three and six months ended June 30, 2022 and 2021 is presented below:


	Three months ended June 30		Six months ended June 30
(number of RSUs)	2022	2021	2022	2021
RSUs outstanding - beginning	35,029	—	68,005	—
Granted	—	—	1,638	—
Vested and issued	—	—	(32,841)	—
Settled	—	—	(1,106)	—
Forfeited	—	—	(667)	—
RSUs outstanding - ending	35,029	—	35,029	—


			16

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

Stock Options

A summary of stock options activity during the three and six months ended June 30, 2022 and 2021 is presented below:


	Three months ended June 30		Six months ended June 30
(number of stock options)	2022	2021	2022	2021
Stock options outstanding - beginning	—	108,710	—	108,710
Stock options outstanding - ending	—	108,710	—	108,710

22. RELATED PARTY TRANSACTIONS

Hydro One is owned by Hydro One Limited. The Province is a shareholder of Hydro One Limited with approximately 47.2% ownership at June 30, 2022. The Independent Electricity System Operator (IESO), Ontario Power Generation Inc. (OPG), Ontario Electricity Financial Corporation (OEFC), the OEB, Acronym Solutions Inc. (Acronym Solutions) and Hydro One Broadband Solutions Inc. (HOBSI) 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, 2022 and 2021:


(millions of dollars)		Three months ended June 30		Six months ended June 30
Related Party	Transaction	2022	2021	2022	2021
IESO	Power purchased	408	392	1,186	1,031
	Revenues for transmission services	512	443	1,028	885
	Amounts related to electricity rebates	243	242	544	548
	Distribution revenues related to rural rate protection	60	60	121	122
	Distribution revenues related to supply of electricity to remote northern communities	9	9	18	18

OPG	Power purchased	5	1	11	5
	Revenues related to provision of services and supply of electricity	2	1	4	3
	Capital contribution received from OPG	—	—	2	2
	Costs related to the purchase of services	1	1	1	1
OEFC	Power purchased from power contracts administered by the OEFC	—	—	1	—
OEB	OEB fees	3	2	5	4

Hydro One Limited	Dividends paid	165	157	322	306
	Stock-based compensation costs	2	1	3	3
	Cost recovery for services provided	2	1	4	3
Acronym Solutions	Services received – costs expensed	4	5	11	11
	Revenues for services provided	1	—	1	1
HOBSI	Reduction in capital contribution from HOBSI	2	—	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 from external related parties are interest-free and settled in cash. Invoices are issued monthly, and amounts are due and paid on a monthly basis.


			17

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

23. CONSOLIDATED STATEMENTS OF CASH FLOWS

The changes in non-cash balances related to operations consist of the following:


	Three months ended June 30		Six months ended June 30
(millions of dollars)	2022	2021	2022	2021
Accounts receivable	70	(1)	13	(1)
Due from related parties	(11)	10	(48)	38
Materials and supplies (Note 9)	—	1	(1)	1
Prepaid expenses and other assets (Note 9)	—	(1)	(12)	(6)
Other long-term assets (Note 12)	(1)	1	(2)	1
Accounts payable	(10)	(22)	(51)	(40)
Accrued liabilities (Note 13)	123	1	93	80
Due to related parties	(94)	(20)	(143)	(201)
Accrued interest (Note 13)	(20)	(21)	(13)	(2)
Long-term accounts payable and other long-term liabilities (Note 14)	3	—	8	(2)
Post-retirement and post-employment benefit liability	19	18	32	37
	79	(34)	(124)	(95)

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, 2022 and 2021. The reconciling items include net change in accruals and capitalized depreciation.


	Three months ended June 30, 2022			Six months ended June 30, 2022
(millions of dollars)	Property, Plant and Equipment	Intangible Assets	Total	Property, Plant and Equipment	Intangible Assets	Total
Capital investments	(572)	(33)	(605)	(989)	(60)	(1,049)
Reconciling items	43	6	49	27	7	34
Cash outflow for capital expenditures	(529)	(27)	(556)	(962)	(53)	(1,015)


	Three months ended June 30, 2021			Six months ended June 30, 2021
(millions of dollars)	Property, Plant and Equipment	Intangible Assets	Total	Property, Plant and Equipment	Intangible Assets	Total
Capital investments	(516)	(33)	(549)	(1,006)	(67)	(1,073)
Reconciling items	4	(1)	3	18	(4)	14
Cash outflow for capital expenditures	(512)	(34)	(546)	(988)	(71)	(1,059)

Supplementary Information


	Three months ended June 30		Six months ended June 30
(millions of dollars)	2022	2021	2022	2021
Net interest paid	144	145	261	251
Income taxes paid	8	7	22	13

24. 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.


			18

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021

25. 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, 2022 (millions of dollars)	Year 1	Year 2	Year 3	Year 4	Year 5	Thereafter
Outsourcing and other agreements	87	35	3	2	3	14
Long-term software/meter agreement	8	11	7	3	3	2

Outsourcing and Other Agreements

In February 2021, Hydro One entered into a three-year agreement for information technology services with Capgemini Canada Inc., which expires on February 29, 2024, and includes an option to extend for two additional one-year terms at Hydro One’s discretion. This agreement resulted in commitments of $143 million over the initial three-year term of the agreement.

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, 2022 (millions of dollars)	Year 1	Year 2	Year 3	Year 4	Year 5	Thereafter
Operating Credit Facilities	—	—	—	2,300	—	—
Letters of credit1	169	—	—	—	—	—
Guarantees2	475	—	—	—	—	—

1 Letters of credit consist of $160 million letters of credit related to retirement compensation arrangements, a $2 million letter of credit provided to the IESO for prudential support, $4 million in letters of credit to satisfy debt service reserve requirements, and $3 million in letters of credit for various operating purposes.

2 Guarantees consist of $475 million prudential support provided to the IESO by Hydro One on behalf of its subsidiaries.

26. SEGMENTED REPORTING

Hydro One has three reportable segments:

•The Transmission Segment, which comprises the transmission of high voltage electricity across the province, interconnecting 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 Other Segment includes a portion of the DTA which arose from the revaluation of the tax bases of Hydro One’s assets to fair market value when the Company transitioned from the provincial payments in lieu of tax regime to the federal tax regime at the time of Hydro One’s initial public offering in 2015. This DTA is not required to be shared with ratepayers, the Company considers it not to be part of the regulated transmission and distribution segment assets, and it is included in the other segment.

The designation of segments has been based on a combination of regulatory status and the nature of the services provided. Operating segments of the Company are determined based on information used by the chief operating decision-maker in deciding how to allocate resources and evaluate the 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, 2022 (millions of dollars)	Transmission	Distribution	Other	Consolidated
Revenues	516	1,314	—	1,830
Purchased power	—	852	—	852
Operation, maintenance and administration	106	168	5	279
Depreciation, amortization and asset removal costs	128	127	—	255
Income (loss) before financing charges and income tax expense	282	167	(5)	444

Capital investments	311	294	—	605


			19

HYDRO ONE INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

For the three and six months ended June 30, 2022 and 2021


Three months ended June 30, 2021 (millions of dollars)	Transmission	Distribution	Other	Consolidated
Revenues	449	1,263	—	1,712
Purchased power	—	838	—	838
Operation, maintenance and administration	104	179	(2)	281
Depreciation, amortization and asset removal costs	118	105	—	223
Income before financing charges and income tax expense	227	141	2	370

Capital investments	365	184	—	549


Six months ended June 30, 2022 (millions of dollars)	Transmission	Distribution	Other	Consolidated
Revenues	1,036	2,831	—	3,867
Purchased power	—	1,866	—	1,866
Operation, maintenance and administration	206	345	8	559
Depreciation, amortization and asset removal costs	254	236	—	490
Income (loss) before financing charges and income tax expense	576	384	(8)	952

Capital investments	588	461	—	1,049


Six months ended June 30, 2021 (millions of dollars)	Transmission	Distribution	Other	Consolidated
Revenues	897	2,617	—	3,514
Purchased power	—	1,732	—	1,732
Operation, maintenance and administration	206	347	1	554
Depreciation, amortization and asset removal costs	239	205	—	444
Income (loss) before financing charges and income tax expense	452	333	(1)	784

Capital investments	713	360	—	1,073

Total Assets by Segment:


As at (millions of dollars)	June 30, 2022	December 31, 2021
Transmission	18,443	18,109
Distribution	11,772	11,475
Other	204	637
Total assets	30,419	30,221

Total Goodwill by Segment:


As at (millions of dollars)	June 30, 2022	December 31, 2021
Transmission	157	157
Distribution	216	216
Total goodwill	373	373

All revenues, assets and costs, as the case may be, are earned, held or incurred in Canada.

27. SUBSEQUENT EVENTS

Dividends

On August 8, 2022, common share dividends of $165 million were declared.


			20

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

For the three and six months ended June 30, 2022 and 2021

The following Management’s Discussion and Analysis (MD&A) of the financial condition and results of operations should be read together with the unaudited condensed interim consolidated financial statements and accompanying notes thereto (Consolidated Financial Statements) of Hydro One Inc. (Hydro One or the Company) for the three and six months ended June 30, 2022, as well as the Company’s audited consolidated financial statements and MD&A for the year ended December 31, 2021. 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, 2022, based on information available to management as of August 8, 2022.

CONSOLIDATED FINANCIAL HIGHLIGHTS AND STATISTICS


	Three months ended June 30				Six months ended June 30
(millions of dollars, except as otherwise noted)	2022	2021	Change		2022	2021	Change
Revenues	1,830	1,712	6.9	%	3,867	3,514	10.0	%
Purchased power	852	838	1.7	%	1,866	1,732	7.7	%
Revenues, net of purchased power1	978	874	11.9	%	2,001	1,782	12.3	%
Operation, maintenance and administration (OM&A) costs	279	281	(0.7	%)	559	554	0.9	%
Depreciation, amortization and asset removal costs	255	223	14.3	%	490	444	10.4	%
Financing charges	118	101	16.8	%	232	215	7.9	%
Income tax expense	68	27	151.9	%	148	54	174.1	%
Net income to common shareholder of Hydro One	256	240	6.7	%	568	511	11.2	%

Basic earnings per common share (EPS)	$1,800	$1,687	6.7	%	$3,993	$3,593	11.1	%
Diluted EPS	$1,800	$1,687	6.7	%	$3,993	$3,593	11.1	%

Net cash from operating activities	595	401	48.4	%	1,025	914	12.1	%
Funds from operations (FFO)1	514	433	18.7	%	1,143	1,005	13.7	%

Capital investments	605	549	10.2	%	1,049	1,073	(2.2	%)
Assets placed in-service	546	297	83.8	%	771	451	71.0	%

Transmission: Average monthly Ontario 60-minute peak demand (MW)	20,167	19,448	3.7	%	20,422	19,693	3.7	%
Distribution: Electricity distributed to Hydro One customers (GWh)	6,754	6,750	0.1	%	15,649	14,906	5.0	%


As at	June 30, 2022		December 31, 2021
Debt to capitalization ratio2	55.1	%	55.2	%

1 The Company prepares and presents its financial statements in accordance with US GAAP. The Company also utilizes non-GAAP financial measures to assess its business and measure overall underlying business performance. FFO and Revenues, net of purchased power are non-GAAP financial measures. Non-GAAP financial measures do not have a standardized meaning under GAAP, which is used to prepare the Company’s financial statements and might not be comparable to similar financial measures presented by other entities. See section “Non-GAAP Financial Measures” for a discussion of these non-GAAP financial measures and a reconciliation of such measures to the most directly comparable GAAP measure.

2 Debt to capitalization ratio is a non-GAAP ratio. Non-GAAP ratios do not have a standardized meaning under GAAP, which is used to prepare the Company’s financial statements and might not be comparable to similar financial measures presented by other entities. See section “Non-GAAP Financial Measures” for a discussion of this non-GAAP ratio and its component elements.

OVERVIEW

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).


			1

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

The other segment consists of certain corporate activities, and is not rate-regulated.

For the six months ended June 30, 2022 and 2021, Hydro One’s segments accounted for the Company’s total revenues, net of purchased power1, as follows:


Six months ended June 30	2022		2021
Transmission	52	%	50	%
Distribution	48	%	50	%
Other	—	%	—	%

At June 30, 2022 and December 31, 2021, Hydro One’s segments accounted for the Company’s total assets as follows:


As at	June 30, 2022		December 31, 2021
Transmission	60	%	60	%
Distribution	39	%	38	%
Other	1	%	2	%

RESULTS OF OPERATIONS

Net Income

Net income attributable to the common shareholder for the quarter ended June 30, 2022 of $256 million is an increase of $16 million, or 6.7%, from the prior year. Significant influences on net income attributable to common shareholder of Hydro One included:

•higher revenues, net of purchased power,1 resulting from:

•an increase in transmission revenues due to Ontario Energy Board (OEB)-approved 2022 transmission rates and higher peak demand; and

•an increase in distribution revenues, net of purchased power,1 mainly due to OEB-approved 2022 distribution rates.

•lower OM&A costs as lower corporate support costs and lower work program expenditures were partially offset by a higher allowance for doubtful accounts.

•higher depreciation, amortization and asset removal costs due to growth in capital assets as the Company continues to place new assets in-service, consistent with its ongoing capital investment program, as well as higher asset removal costs primarily resulting from storm restoration efforts.

•higher financing charges attributable to the recognition of carrying charges associated with the recovery of deferred tax asset (DTA) amounts previously shared with ratepayers (DTA Recovery Amounts) pursuant to the OEB's decision in April 2021 (DTA Implementation Decision) in the second quarter of 2021.

•higher income tax expense primarily attributable to:

•higher pre-tax earnings adjusted for the DTA Implementation Decision; largely offset by

•higher deductible timing differences compared to the prior year.

Revenue was also positively impacted by the DTA Implementation Decision. In its DTA Implementation Decision, the OEB approved recovery of the DTA amounts allocated to ratepayers and included in customer rates for the 2017 to 2021 period plus carrying charges over a two-year recovery period commencing on July 1, 2021. In addition, the DTA Implementation Decision required that Hydro One adjust the transmission revenue requirement and base distribution rates effective January 1, 2022 to eliminate any further tax savings flowing to customers. These impacts are offset by a higher tax expense and are therefore net income neutral in the period. See section "Regulation" for additional details.

Net income attributable to the common shareholder for the six months ended June 30, 2022 of $568 million is an increase of $57 million, or 11.2%, from the prior year. Year-to-date results were impacted by similar factors as noted above.

1 Revenues, net of purchased power, is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”.


			2

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

Revenues


	Three months ended June 30				Six months ended June 30
(millions of dollars, except as otherwise noted)	2022	2021	Change		2022	2021	Change
Transmission	516	449	14.9	%	1,036	897	15.5	%
Distribution	1,314	1,263	4.0	%	2,831	2,617	8.2	%
Total revenues	1,830	1,712	6.9	%	3,867	3,514	10.0	%

Transmission	516	449	14.9	%	1,036	897	15.5	%
Distribution revenues, net of purchased power1	462	425	8.7	%	965	885	9.0	%
Total revenues, net of purchased power1	978	874	11.9	%	2,001	1,782	12.3	%

Transmission: Average monthly Ontario 60-minute peak demand (MW)	20,167	19,448	3.7	%	20,422	19,693	3.7	%
Distribution: Electricity distributed to Hydro One customers (GWh)	6,754	6,750	0.1	%	15,649	14,906	5.0	%

1 Revenues, net of purchased power, is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”.

Transmission Revenues

Transmission revenues increased by 14.9% during the quarter ended June 30, 2022, primarily due to the following:

•recovery of DTA amounts previously shared with ratepayers and the adjustment to transmission revenue requirement effective January 1, 2022 to cease sharing of DTA amounts going forward, pursuant to the DTA Implementation Decision;

•higher peak demand; and

•higher revenues resulting from OEB-approved 2022 rates.

Transmission revenues increased by 15.5% during the six months ended June 30, 2022, primarily due to similar factors as noted above.

Distribution Revenues, Net of Purchased Power2

Distribution revenues, net of purchased power,2 increased by 8.7% during the quarter ended June 30, 2022, primarily due to the following:

•higher revenues resulting from OEB-approved 2022 rates; and

•recovery of DTA amounts previously shared with ratepayers and the adjustment to base distribution rates effective January 1, 2022 to cease sharing of DTA amounts going forward, pursuant to the DTA Implementation Decision.

Distribution revenues, net of purchased power,2 increased by 9.0% during the six months ended June 30, 2022, primarily due to similar factors as noted above.

OM&A Costs


	Three months ended June 30				Six months ended June 30
(millions of dollars)	2022	2021	Change		2022	2021	Change
Transmission	106	104	1.9	%	206	206	—	%
Distribution	168	179	(6.1	%)	345	347	(0.6	%)
Other	5	(2)	350.0	%	8	1	700.0	%
	279	281	(0.7	%)	559	554	0.9	%

Transmission OM&A Costs

Transmission OM&A costs during the three and six months ended June 30, 2022 remained in-line with the same period in the prior year.

Distribution OM&A Costs

Distribution OM&A costs decreased by 6.1% for the quarter ended June 30, 2022, primarily due to:

•lower corporate support costs resulting from higher capital expenditures in the current period; and

•integration costs incurred in the prior year; partially offset by

•a higher allowance for doubtful accounts; and

•higher work program expenditures including increased forecast environmental expenses, partially offset by lower vegetation management costs.

Distribution OM&A costs during the six months ended June 30, 2022, remained in-line with the same period in the prior year largely due to similar factors noted above.

2 Revenues, net of purchased power, is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”


			3

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

Depreciation, Amortization and Asset Removal Costs

Depreciation, amortization and asset removal costs increased by $32 million and $46 million for the three and six months ended June 30, 2022, respectively, primarily due to growth in capital assets as the Company continues to place new assets in-service, consistent with its ongoing capital investment program, as well as higher asset removal costs primarily resulting from storm-related asset replacements.

Financing Charges

Financing charges increased by $17 million and $17 million for the three and six months ended June 30, 2022, respectively, primarily due to:

•the recognition of carrying charges associated with the DTA Recovery Amounts pursuant to the DTA Implementation Decision in the second quarter of 2021; and

•higher weighted-average interest rates on short-term notes.

Income Tax Expense

Income tax expense was $68 million and $148 million for the three and six months ended June 30, 2022, respectively, compared to $27 million and $54 million in the comparable periods last year. The $41 million and $94 million increase in income tax expense for the three and six months ended June 30, 2022, respectively, was primarily attributable to:

•tax expense relating to the DTA Implementation Decision which is offset by a corresponding increase in revenue and is net income neutral; as well as

•higher pre-tax earnings adjusted for the DTA Implementation Decision; partially offset by

•higher deductible timing differences compared to the prior year.

The Company realized an effective tax rate (ETR) of approximately 20.9% and 20.6% for the three and six months ended June 30, 2022, respectively, compared to approximately 10.0% and 9.5% realized in the same periods last year. The increase in each respective period was primarily attributable to the impacts of the DTA Implementation Decision.

QUARTERLY RESULTS OF OPERATIONS


Quarter ended (millions of dollars, except EPS and ratio)	Jun 30, 2022			Mar 31, 2022		Dec 31, 2021		Sep 30, 2021		Jun 30, 2021	Mar 31, 2021	Dec 31, 2020	Sep 30, 2020
Revenues		1,830		2,037		1,768		1,903		1,712	1,802	1,857	1,894
Purchased power		852		1,014		914		933		838	894	1,046	993
Revenues, net of purchased power1		978		1,023		854		970		874	908	811	901
Net income to common shareholder		256		312		159		302		240	271	164	290

Basic and diluted EPS		$	1,800	$	2,193	$	1,118	$	2,123	$1,687	$1,905	$1,153	$2,039

Earnings coverage ratio2		3.3		3.3		3.1		3.1		3.0	3.0	2.9	2.9

1 Revenues, net of purchased power is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”.

2 Earnings coverage ratio is a non-GAAP ratio. Non-GAAP ratios do not have a standardized meaning under GAAP, which is used to prepare the Company’s financial statements and might not be comparable to similar financial measures presented by other entities. See section “Non-GAAP Financial Measures” for a discussion of this non-GAAP ratio and its component elements.

Variations in revenues and net income over the quarters are primarily due to the impact of seasonal weather conditions on customer demand and market pricing, as well as timing of regulatory decisions.


			4

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

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 additions to both existing assets and large-scale projects such as new transmission lines and transmission stations.

Assets Placed In-Service

The following table presents Hydro One’s assets placed in-service during the three and six months ended June 30, 2022 and 2021:


	Three months ended June 30				Six months ended June 30
(millions of dollars)	2022	2021	Change		2022	2021	Change
Transmission	295	147	100.7	%	415	195	112.8	%
Distribution	251	150	67.3	%	356	256	39.1	%
Total assets placed in-service	546	297	83.8	%	771	451	71.0	%

Transmission Assets Placed In-Service

Transmission assets placed in-service increased by $148 million, or 100.7%, in the second quarter of 2022, primarily due to the following:

•the new Lakeshore transmission station; and

•higher spend on transmission line refurbishments and replacements; partially offset by

•timing of assets placed in-service for station refurbishments and replacements; and

•lower volume of wood pole replacements.

Transmission assets placed in-service increased by $220 million, or 112.8%, in the six months ended June 30, 2022 primarily due to similar factors as noted above and investment placed in-service for the East-West Tie connection project.

Distribution Assets Placed In-Service

Distribution assets placed in-service increased by $101 million, or 67.3%, in the second quarter of 2022, primarily due to the following:

•higher volume of storm related asset replacements following the storm in May 2022; partially offset by

•timing of assets placed in-service for system capability reinforcement projects; and

•lower volume of wood pole replacements.

Distribution assets placed in-service increased by $100 million, or 39.1%, in the six months ended June 30, 2022, primarily due to similar factors as noted above.


			5

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

Capital Investments

The following table presents Hydro One’s capital investments during the three and six months ended June 30, 2022 and 2021:


	Three months ended June 30				Six months ended June 30
(millions of dollars)	2022	2021	Change		2022	2021	Change
Transmission
Sustaining	239	248	(3.6	%)	445	492	(9.6	%)
Development	53	84	(36.9	%)	98	156	(37.2	%)
Other	19	33	(42.4	%)	45	65	(30.8	%)
	311	365	(14.8	%)	588	713	(17.5	%)
Distribution
Sustaining	184	79	132.9	%	251	156	60.9	%
Development	89	73	21.9	%	172	140	22.9	%
Other	21	32	(34.4	%)	38	64	(40.6	%)
	294	184	59.8	%	461	360	28.1	%
Total capital investments	605	549	10.2	%	1,049	1,073	(2.2	%)

Transmission Capital Investments

Transmission capital investments decreased by $54 million, or 14.8%, in the second quarter of 2022 compared to the second quarter of 2021. Principal impacts on the levels of capital investments included:

•investments in the new Ontario grid control centre in the City of Orillia and the new Lakeshore transmission station in the prior year;

•lower volume of station refurbishments and replacements; and

•lower volume of work on customer connections; partially offset by

•higher volume of transmission lines refurbishments and replacements; and

•higher spend on spare transformer purchases.

Transmission capital investments decreased by $125 million, or 17.5%, in the in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to similar factors as noted above as well as lower volume of wood pole replacements.

Distribution Capital Investments

Distribution capital investments increased by $110 million, or 59.8%, in the second quarter of 2022 compared to the second quarter of 2021. Principal impacts on the levels of capital investments included:

•higher spend on storm related asset replacements following the storm in May 2022; and

•higher spend on system capability reinforcement projects; partially offset by

•investment in the new Ontario grid control centre in the City of Orillia in the prior year; and

•lower volume of wood pole replacements.

Distribution capital investments increased by $101 million, or 28.1%, in the in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to similar factors as noted above as well as higher volume of work on customer connections partially offset by lower spend on information technology (IT) initiatives.


			6

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

Major Transmission Capital Investment Projects

The following table summarizes the status of significant transmission projects at June 30, 2022:

Project Name

Location

Type

Anticipated
In-Service Date

Estimated
Cost

Capital Cost
To Date

(year)

(millions of dollars)

Development Projects:

Lakeshore Transmission Station1

Lakeshore
Southwestern Ontario

New transmission station

2022

174

152

Wataynikaneyap Power LP Line
Connection

Pickle Lake
Northwestern Ontario

New stations and
transmission connection

2022

East-West Tie Station Expansion2

Northern Ontario

New transmission connection
and station expansion

2023

181

180

Barrie Area Transmission
Upgrade

Barrie-Innisfil
Southern Ontario

Upgraded transmission line
and stations

2023

125

Waasigan Transmission Line3

Thunder Bay-Atikokan-Dryden
Northwestern Ontario

New transmission line

2024

Chatham to Lakeshore
Transmission Line1

Southwestern Ontario

New transmission line and
station expansion

2025

268

St. Clair
Transmission Line4

Southwestern Ontario

New transmission line and
station expansion

2025

Longwood to Lakeshore
Transmission Line5

Southwestern Ontario

New transmission line and
station expansion

TBD

Second Longwood to Lakeshore
Transmission Line5

Southwestern Ontario

New transmission line and
station expansion

TBD

Lakeshore to Windsor

Transmission Line5

Southwestern Ontario

New transmission line and
station expansion

TBD

Sustainment Projects:

Beck #2 Transmission Station
Circuit Breaker Replacement

Niagara area
Southwestern Ontario

Station sustainment

2023

135

108

Cherrywood Transmission Station
Circuit Breaker Replacement

Pickering
Central Ontario

Station sustainment

2023

115

Bruce B Switching Station
Circuit Breaker Replacement

Tiverton
Southwestern Ontario

Station sustainment

2024

185

154

Middleport Transmission Station
Circuit Breaker Replacement

Middleport
Southwestern Ontario

Station sustainment

2025

113

105

Lennox Transmission Station
Circuit Breaker Replacement

Napanee
Southeastern Ontario

Station sustainment

2026

152

109

Esplanade x Terauley
Underground Cable Replacement

Toronto
Southwestern Ontario

Line sustainment

2026

117

1 The Lakeshore Transmission Station and Chatham to Lakeshore Transmission Line projects were previously included as part of the Leamington Area Transmission Reinforcement Project. The Chatham to Lakeshore Transmission Line project includes the line and associated facilities and is further discussed in section “Other Developments - Supporting Critical Infrastructure in Southwestern Ontario”.

2 Due to a revised timeline of project activities, the East-West Tie Station Expansion project is being placed in-service in phases, with the first phase placed in-service in 2021. Hydro One expects that a significant portion of the project will be placed in-service in 2022, with final project in-service expected in 2023.

3 The estimated cost of the Waasigan Transmission Line relates to the development phase of the project and the anticipated in-service date reflects the anticipated completion date of the development phase only. On May 4, 2022, Hydro One entered into an agreement with First Nations communities that provides them the opportunity to acquire 50% ownership in the project. Completion of the line remains subject to stakeholder consultation and regulatory approvals.

4 The estimated cost of the St. Clair Transmission Line relates to the development phase of the project and the anticipated in-service date reflects the anticipated completion date of the development phase only. Completion of the line remains subject to stakeholder consultation and regulatory approvals.

5 The scope and timing of these Southwestern Ontario transmission reinforcements are currently under review.


			7

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

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.

The 2022 to 2027 capital estimates differ from prior disclosures, reflecting the refined estimates of the Chatham by Lakeshore Line filed with the OEB on May 9, 2022 through a leave-to-construct application (see section "Other Developments - Supporting Critical Infrastructure in Southwestern Ontario" for further details) as well as an updated regional and system growth outlook which includes capital expenditures associated with restoration efforts of the storm in May 2022. The projections and timing of transmission and distribution expenditures included in Hydro One's rate application for years 2023 to 2027 are subject to approval of the OEB.

The following tables summarize Hydro One’s annual projected capital investments for 2022 to 2027 by business segment and by category:


By business segment: (millions of dollars)	2022	2023	2024	2025	2026	2027
Transmission1	1,188	1,678	1,663	1,649	1,644	1,549
Distribution	833	1,079	1,103	1,197	1,145	1,141
Total capital investments3	2,021	2,757	2,766	2,846	2,789	2,690


By category: (millions of dollars)	2022	2023	2024	2025	2026	2027
Sustainment	1,308	1,842	1,892	1,922	1,926	1,893
Development1	550	644	646	694	625	585
Other2	163	271	228	230	238	212
Total capital investments3	2,021	2,757	2,766	2,846	2,789	2,690

1 Figures include investments in certain development projects of Hydro One Networks not included in the investment plan filed in support of the Joint Rate Application (JRAP).

2 "Other" capital expenditures include investments in fleet, real estate, IT, and operations technology and related functions.

3 On March 29, 2021, the Independent Electricity System Operator (IESO) requested Hydro One initiate work to develop and construct a new transmission line between Chatham and Lambton (the St Clair Line) to support agricultural growth in Southwestern Ontario. On March 31, 2022, the Minister of Energy directed the OEB to amend Hydro One Networks' transmission licence to require it to develop and seek approvals for this and three other priority transmission lines to meet growing demand in Southwestern Ontario (see section “Other Developments”). The future capital investments presented do not include capital expenditures of the three additional lines, as Hydro One is currently evaluating the scope and timing of this work.

SUMMARY OF SOURCES AND USES OF CASH

Hydro One’s primary sources of cash flows are funds generated from operations, capital market debt issuances and bank credit facilities that are used to satisfy Hydro One’s capital resource requirements, including the Company’s capital expenditures, servicing and repayment of debt, and dividend payments.


	Three months ended June 30		Six months ended June 30
(millions of dollars)	2022	2021	2022	2021
Cash provided by operating activities	595	401	1,025	914
Cash provided by (used in) financing activities	(50)	52	(515)	(584)
Cash used in investing activities	(545)	(530)	(1,009)	(1,041)
Decrease in cash and cash equivalents	—	(77)	(499)	(711)


			8

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

Cash provided by operating activities

Cash from operating activities increased by $194 million for the second quarter of 2022 compared to the second quarter of 2021. The increase was impacted by various factors, including the following:

•increase in net working capital deficiency primarily attributable to higher accrued liabilities mainly related to the May storm, lower accounts receivable balances, and higher payables to embedded generators, partially offset by lower cost of power payable to the IESO and higher receivables from the IESO associated with rebates for green energy purchases.

•higher pre-tax earnings; and

•the impacts of the DTA Implementation Decision recognized in the quarter.

Cash from operating activities increased by $111 million for the six months ended June 30, 2022 compared to the same period in 2021. The increase was impacted by various factors, including the following:

•higher pre-tax earnings; and

•the impacts of the DTA Implementation Decision recognized in the first six months of the year; partially offset by

•changes to certain regulatory accounts; and

•decrease in net working capital deficiency primarily attributable to higher receivables from the IESO associated with provincial funding programs, partially offset by higher cost of power payable to the IESO due to a higher Global Adjustment rate.

Cash provided by (used in) financing activities

Cash provided by financing activities decreased by $102 million and cash used in financing activities decreased by $69 million for the three and six months ended June 30, 2022 respectively, compared to 2021. This was impacted by various factors, including the following:

Sources of cash

•the Company received proceeds of $1,470 million and $2,860 million from the issuance of short-term notes in the three and six months ended June 30, 2022, respectively, compared to $1,330 million and $2,145 million received in the same periods last year.

Uses of cash

•the Company repaid $1,364 million and $2,470 million of short-term notes in the three and six months ended June 30, 2022, respectively, compared to $815 million and $1,615 million repaid in the same periods last year.

•the Company repaid $1 million and $601 million of long-term debt in the three and six months ended June 30, 2022, respectively, compared to $302 million and $802 million repaid in the same periods last year.

•common share dividends paid in the three and six months ended June 30, 2022 were $165 million and $322 million, respectively, compared to dividends of $157 million and $306 million, paid in the same periods last year.

Cash used in investing activities

Cash used in investing activities increased by $15 million and decreased by $32 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in the prior year as a result of higher capital investments in the current quarter and lower capital investments in the year-to-date period. See section "Capital Investments" for comparability of capital investments made by the Company during the three and six months ended June 30, 2022 compared to the same periods last year.

LIQUIDITY AND FINANCING STRATEGY

Short-term liquidity is provided through FFO,3 Hydro One’s commercial paper program, and the Company’s consolidated bank credit facilities. Under the commercial paper program, Hydro One is authorized to issue up to $2,300 million in short-term notes with a term to maturity of up to 365 days.

At June 30, 2022, Hydro One had $1,432 million in commercial paper borrowings outstanding, compared to $1,045 million outstanding at December 31, 2021. The Company also has revolving bank credit facilities (Operating Credit Facilities) with a total available balance of $2,300 million at June 30, 2022. In January 2022, Hydro One successfully amended its Operating Credit Facilities to incorporate environmental, social and governance targets. The facilities now include a pricing adjustment which can increase or decrease Hydro One’s cost of funding based on its performance on certain Sustainability Performance Measures, which are related to Hydro One's sustainability goals. On June 1, 2022, the maturity date for the Operating Credit Facilities was extended from 2026 to 2027. No amounts were drawn on the Operating Credit Facilities at June 30, 2022 or December 31, 2021. The Company may use the Operating Credit Facilities for working capital and general corporate purposes. The short-term

3 FFO is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”.


			9

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

liquidity under the commercial paper program, the Operating Credit Facilities, available cash on hand and anticipated levels of FFO3 are expected to be sufficient to fund the Company’s operating requirements.

At June 30, 2022, the Company had long-term debt outstanding in the principal amount of $12,628 million, which included $12,495 million of long-term debt issued by Hydro One and long-term debt in the principal amount of $133 million issued by HOSSM. The majority of long-term debt issued by Hydro One has been issued under its Medium Term Note (MTN) Program, as further described below. The Company's total long-term debt consists of notes and debentures that mature between 2023 and 2064, and at June 30, 2022, had a weighted-average term to maturity of approximately 15.3 years (December 31, 2021 - 15.1 years) and a weighted-average coupon rate of 3.9% (December 31, 2021 - 3.9%).

Compliance

At June 30, 2022, 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.

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, 2022 (millions of dollars)	Total	Less than 1 year	1-3 years	3-5 years	More than 5 years
Contractual obligations (due by year)
Long-term debt - principal repayments	12,628	733	1,450	500	9,945
Long-term debt - interest payments	8,140	491	940	873	5,836
Short-term notes payable	1,432	1,432	—	—	—
Pension contributions	614	107	220	228	59
Environmental and asset retirement obligations	148	43	42	24	39
Outsourcing and other agreements	144	87	38	5	14
Lease obligations	61	13	20	18	10
Long-term software/meter agreement	34	8	18	6	2
Total contractual obligations	23,201	2,914	2,728	1,654	15,905

Other commercial commitments (by year of expiry)
Operating Credit Facilities	2,300	—	—	2,300	—
Letters of credit1	169	169	—	—	—
Guarantees2	475	475	—	—	—
Total other commercial commitments	2,944	644	—	2,300	—

2 Guarantees consist of $475 million prudential support provided to the IESO by Hydro One on behalf of its subsidiaries.

SHARE CAPITAL

Hydro One is authorized to issue an unlimited number of common shares. The amount and timing of any dividends payable by Hydro One is at the discretion of the Hydro One Board 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 8, 2022, 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. At August 8, 2022, the Company had no preferred shares issued and outstanding.


			10

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

REGULATION

Electricity Rates - Joint Rate Application

In March 2018, the OEB issued a letter (OEB Letter) requesting Hydro One file a single application for distribution rates and transmission revenue requirement for the period from 2023 to 2027. The OEB Letter had indicated that Hydro One Remote Communities should be included in the single application, however, this requirement was later removed by the OEB.

On August 5, 2021, Hydro One Networks filed a custom JRAP for 2023-2027. The JRAP includes a proposed investment plan supporting the transmission and distribution revenue requirements. On March 31, 2022, Hydro One Networks filed updated evidence reflecting the impacts of updated inflation assumptions on the proposed investment plan as well as updated load forecasts. A decision is anticipated in the first quarter of 2023. The following table summarizes the key elements of Hydro One Networks' updated JRAP evidence filed with the OEB:

Hydro One Networks - Transmission

Hydro One Networks - Distribution

Year

Rate Base
(Forecast)

Revenue

Requirement1

Rate Base
(Forecast)

Revenue

Requirement1

2023

$14,612 million

$1,849 million

$9,395 million

$1,669 million

2024

$15,517 million

$1,968 million

$10,031 million

$1,753 million

2025

$16,585 million

$2,063 million

$10,764 million

$1,832 million

2026

$17,603 million

$2,182 million

$11,478 million

$1,935 million

2027

$18,534 million

$2,267 million

$12,105 million

$2,025 million

1 Revenue requirement for 2023 to 2027 represents filing estimates utilizing the OEB's 2021 Allowed ROE of 8.34%. The ROE is calculated based on the Cost of Capital Parameters released by the OEB on November 9, 2020. ROE will be finalized towards the end of 2022.

Deferred Tax Asset

On March 7, 2019, the OEB issued its reconsideration decision (DTA Decision) with respect to Hydro One's rate-setting treatment of the benefits of the DTA resulting from the transition from the payments in lieu of tax regime to tax payments under the federal and provincial tax regimes. On April 5, 2019, the Company filed an appeal with the Ontario Divisional Court (ODC) with respect to the DTA Decision.

On July 16, 2020, the ODC rendered its decision (ODC Decision) in which it agreed with the submissions of Hydro One that the DTA should be allocated to shareholders in its entirety.

On April 8, 2021, the OEB rendered its DTA Implementation Decision regarding the recovery of the DTA amounts allocated to ratepayers for the 2017 to 2022 period. In its DTA Implementation Decision, the OEB approved recovery of the DTA amounts allocated to ratepayers and included in customer rates for the 2017 to 2021 period, plus carrying charges, over a two-year recovery period commencing on July 1, 2021. The recovery of the previously shared DTA amounts plus carrying charges is expected to result in FFO4 of approximately $135 million and $65 million in 2022 and 2023, respectively. In addition, the DTA Implementation Decision required that Hydro One adjust the transmission revenue requirement and the base distribution rates beginning January 1, 2022 to eliminate any further tax savings flowing to customers. This is expected to result in additional FFO4 of approximately $50 million in 2022, but will decline over time. The DTA Implementation Decision is also expected to result in an ETR of approximately 14% to 22% over the next five years, with the most significant impacts expected over the recovery period.

Hydro One Remote Communities

4 FFO is a non-GAAP financial measure. See section “Non-GAAP Financial Measures”.


			11

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

OTHER DEVELOPMENTS

Collective Agreements

The prior collective agreement with the Canadian Union of Skilled Workers (CUSW) expired on April 30, 2022. In March 2022, Hydro One and the CUSW commenced collective bargaining with the official exchange of bargaining agendas. The agreement was ratified by the CUSW membership in May. The term of the agreement is for four years ending on April 30, 2026.

In addition, Hydro One’s collective agreement with the Power Workers’ Union for Customer Service Operations expires on September 30, 2022. Planning for collective bargaining to renew this agreement is currently underway.

Supporting Broadband and Infrastructure Expansion Act, 2021

On March 4, 2021, the Province introduced Bill 257 (Supporting Broadband and Infrastructure Expansion Act, 2021) to create a new act entitled the Building Broadband Faster Act, 2021 that is aimed at supporting the timely deployment of broadband infrastructure within unserved and underserved rural Ontario communities. Bill 257 received Royal Assent on April 12, 2021. Bill 257 amends the Ontario Energy Board Act, 1998 (OEB Act) to provide the Province with regulation-making authority regarding the development of, access to, or use of electricity infrastructure for non-electricity purposes, including to reduce or fix the annual rental charge that telecommunications service providers must pay to attach their wireline broadband telecommunications attachments to utility poles, establish performance standards and timelines for how utilities must respond to attachment requests and require utilities to consider joint use of poles during planning processes. The Building Broadband Faster Act (BBFA) Guideline and regulations informing the legislative changes were published on November 30, 2021. The regulation regarding electricity infrastructure and designated broadband projects under the OEB Act came into force on April 21, 2022. The Company continues to be engaged with the Province on implementing an appropriate regulatory framework to support the published BBFA Guideline and regulations, including arrangements to sustain the Company’s revenues and recovery of reasonable associated costs. On December 16, 2021, the OEB issued a decision and order that lowered the annual wireline attachment rate for telecommunications carriers from $44.50 per attacher per pole to $34.76 per attacher per pole. On March 7, 2022, the Province introduced Bill 93 (Getting Ontario Connected Act, 2022). Bill 93 received Royal Assent on April 14, 2022. Bill 93 amends the BBFA to ensure that organizations that own underground utility infrastructure near a designated high-speed internet project provide timely access to their infrastructure data, which would allow internet service providers to quickly start work on laying down underground high-speed internet infrastructure. On July 7, 2022, the OEB established a deferral account for rate-regulated distributors to record incremental costs associated with carrying out activities pertaining to designated broadband projects. The Company will continue to assess the impact as more details become available.

Supporting Critical Transmission Infrastructure in Southwestern Ontario

On March 31, 2022, the Minister of Energy directed the OEB to amend Hydro One Networks' licence to require it to develop and seek approvals for four priority transmission line projects to meet growing electricity demand in Southwestern Ontario: the St. Clair Line (a 230kV line from Lambton Transformer Station (TS) to Chatham Switching Station (SS)); two 500 kV lines from Longwood TS to Lakeshore TS; and a 230kV line connecting the Windsor area to the Lakeshore TS.

On May 9, 2022, Hydro One filed a leave-to-construct application seeking OEB approval for the Chatham to Lakeshore Transmission Line project in Southwestern Ontario. In December 2020, the Minister of Energy issued a directive to the OEB to amend Hydro One Networks’ transmission licence to include a requirement that Hydro One proceed to develop and seek all necessary approvals for the project. The cost of this project is estimated at $268 million (see section "Major Transmission Capital Investment Projects").

Sustainability Report

The Hydro One Limited 2021 Sustainability Report entitled "Energizing life for people & communities" is available on the Company’s website at www.hydroone.com/sustainability.

The 2021 Sustainability Report discloses the Company’s environmental, social and governance performance and provides a better understanding of how Hydro One manages the opportunities and challenges associated with its business. The report also includes disclosure relating to the Company’s current efforts in its priority areas of People, Planet and Community.

HYDRO ONE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

Directors and Executive Officers

Effective June 8, 2022, Jessica McDonald was no longer a director of the Board. On June 8, 2022, Mark Podlasly was elected to the Board.

On June 21, 2022, Mark Poweska, former President and Chief Executive Officer, resigned as a director and officer of Hydro One. On the same date, Hydro One announced the appointment of William (Bill) Sheffield as Interim President and Chief Executive Officer.


			12

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

NON-GAAP FINANCIAL MEASURES

Hydro One uses a number of financial measures to assess its performance. The Company presents FFO or “funds from operations” to reflect a measure of the Company’s cash flow; and revenues, net of purchased power to reflect revenues net of the cost of purchased power. FFO and revenues, net of purchased power are non-GAAP financial measures which do not have a standardized meaning prescribed by GAAP and might not be comparable to similar measures presented by other entities. They should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under GAAP.

Hydro One also uses financial ratios that are non-GAAP ratios such as debt to capitalization ratio and earnings coverage ratio. Non-GAAP ratios do not have a standardized meaning prescribed by GAAP and might not be comparable to similar measures presented by other entities. They should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under GAAP.

Funds From Operations

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, management believes that FFO provides a consistent measure of the cash generating performance of the Company’s assets.

The following table provides a reconciliation of GAAP (reported) results to non-GAAP (adjusted) results on a consolidated basis.


	Three months ended June 30		Six months ended June 30
(millions of dollars)	2022	2021	2022	2021
Net cash from operating activities	595	401	1,025	914
Changes in non-cash balances related to operations	(79)	34	124	95
Distributions to noncontrolling interest	(2)	(2)	(6)	(4)
FFO	514	433	1,143	1,005

Revenues, Net of Purchased Power

Revenues, net of purchased power is defined as revenues less the cost of purchased power; distribution revenues, net of purchased power is defined as distribution revenues less the cost of purchased power. These measures are used internally by management to assess the impacts of revenue on net income and are considered useful because they exclude the cost of power that is fully recovered through revenues and therefore net income neutral.

The following tables provide a reconciliation of GAAP (reported) revenues to non-GAAP (adjusted) revenues, net of purchased power on a consolidated basis.


Quarter ended (millions of dollars)	Jun 30, 2022	Mar 31, 2022	Dec 31, 2021	Sep 30, 2021	Jun 30, 2021	Mar 31, 2021	Dec 31, 2020	Sep 30, 2020
Revenues	1,830	2,037	1,768	1,903	1,712	1,802	1,857	1,894
Less: Purchased power	852	1,014	914	933	838	894	1,046	993
Revenues, net of purchased power	978	1,023	854	970	874	908	811	901


Quarter ended (millions of dollars)	Jun 30, 2022	Mar 31, 2022	Dec 31, 2021	Sep 30, 2021	Jun 30, 2021	Mar 31, 2021	Dec 31, 2020	Sep 30, 2020
Distribution revenues	1,314	1,517	1,347	1,395	1,263	1,354	1,457	1,410
Less: Purchased power	852	1,014	914	933	838	894	1,046	993
Distribution revenues, net of purchased power	462	503	433	462	425	460	411	417


			13

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

Debt to Capitalization Ratio

The Company believes that the debt to capitalization ratio is an important non-GAAP ratio in the management of its debt levels. This non-GAAP ratio does not have a standardized meaning under US GAAP and may not be comparable to similar measures presented by other entities. Debt to capitalization ratio has been calculated as total debt (including total long-term debt and short-term borrowings, net of cash and cash equivalents) divided by total debt plus total shareholder's equity, 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.


As at (millions of dollars)	June 30, 2022	December 31, 2021
Short-term notes payable	1,432	1,045
Add: bank indebtedness	28	—
Less: cash and cash equivalents	—	(499)
Long-term debt (current portion)	738	603
Long-term debt (long-term portion)	11,856	12,593
Total debt (A)	14,054	13,742

Shareholder's equity (excluding noncontrolling interest)	11,430	11,172
Total debt plus shareholder's equity (B)	25,484	24,914


Debt-to-capitalization ratio (A/B)									55.1		%	55.2		%

Earnings Coverage Ratio

Earnings coverage ratio is defined as earnings before income taxes and financing charges attributable to shareholder, divided by the sum of financing charges and capitalized interest, and is calculated on a rolling twelve-month basis. The Company believes that the earnings coverage ratio is an important non-GAAP measure in the management of its liquidity. This non-GAAP ratio does not have a standardized meaning under US GAAP and may not be comparable to similar measures presented by other entities.


Quarter ended (millions of dollars)	Jun 30, 2022	Mar 31, 2022	Dec 31, 2021	Sep 30, 2021	Jun 30, 2021	Mar 31, 2021	Dec 31, 2020	Sep 30, 2020
Year-to-date net income to common shareholder	568	312	972	813	511	271	1,792	1,628
Year-to-date income tax expense	148	80	179	125	54	27	(783)	(812)
Year-to-date financing charges	232	114	453	331	215	114	469	352
Earnings before income taxes and financing charges attributable to common shareholder	948	506	1,604	1,269	780	412	1,478	1,168

Twelve months ended (millions of dollars)	Jun 30, 2022	Mar 31, 2022	Dec 31, 2021	Sep 30, 2021	Jun 30, 2021	Mar 31, 2021	Dec 31, 2020	Sep 30, 2020
Earnings before income taxes and financing charges attributable to common shareholder (A)	1,772	1,698	1,604	1,579	1,516	1,526	1,478	1,503

Quarter ended (millions of dollars)	Jun 30, 2022	Mar 31, 2022	Dec 31, 2021	Sep 30, 2021	Jun 30, 2021	Mar 31, 2021	Dec 31, 2020	Sep 30, 2020
Financing charges	232	114	453	331	215	114	469	352
Capitalized interest	31	15	60	44	29	13	49	36
Financing charges and capitalized interest	263	129	513	375	244	127	518	388

Twelve months ended (millions of dollars)	Jun 30, 2022	Mar 31, 2022	Dec 31, 2021	Sep 30, 2021	Jun 30, 2021	Mar 31, 2021	Dec 31, 2020	Sep 30, 2020
Financing charges and capitalized interest (B)	532	515	513	505	502	516	518	516

Earnings coverage ratio = A/B	3.3	3.3	3.1	3.1	3.0	3.0	2.9	2.9


			14

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

RELATED PARTY TRANSACTIONS

Hydro One is owned by Hydro One Limited. The Province is a shareholder of Hydro One Limited with approximately 47.2% ownership at June 30, 2022. The IESO, Ontario Power Generation Inc. (OPG), Ontario Electricity Financial Corporation (OEFC), the OEB, Acronym Solutions Inc. (Acronym Solutions) and Hydro One Broadband Solutions Inc, (HOBSI) 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, 2022 and 2021:


(millions of dollars)		Three months ended June 30		Six months ended June 30
Related Party	Transaction	2022	2021	2022	2021
IESO	Power purchased	408	392	1,186	1,031
	Revenues for transmission services	512	443	1,028	885
	Amounts related to electricity rebates	243	242	544	548
	Distribution revenues related to rural rate protection	60	60	121	122
	Distribution revenues related to supply of electricity to remote northern communities	9	9	18	18

OPG	Power purchased	5	1	11	5
	Revenues related to provision of services and supply of electricity	2	1	4	3
	Capital contribution received from OPG	—	—	2	2
	Costs related to the purchase of services	1	1	1	1
OEFC	Power purchased from power contracts administered by the OEFC	—	—	1	—
OEB	OEB fees	3	2	5	4

Hydro One Limited	Dividends paid	165	157	322	306
	Stock-based compensation costs	2	1	3	3
	Cost recovery for services provided	2	1	4	3
Acronym Solutions	Services received – costs expensed	4	5	11	11
	Revenues for services provided	1	—	1	1
HOBSI	Reduction in capital contribution from HOBSI	2	—	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 Enterprise Risk Management program 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 2021 MD&A.

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, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s disclosure controls and procedures and internal control over financial reporting.


			15

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

NEW ACCOUNTING PRONOUNCEMENTS

The following tables present Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board that are applicable to Hydro One:

Recently Adopted Accounting Guidance

Guidance

Date issued

Description

Effective date

Impact on Hydro One

ASU 2020-06

August 2020

January 1, 2022

No impact upon adoption

ASU
2021-05

July 2021

The amendments are intended to align lease classification requirements for lessors under Topic 842 with Topic 840's practice.

January 1, 2022

No impact upon adoption

ASU 2021-10

November 2021

The update addresses diversity on the recognition, measurement, presentation and disclosure of government assistance received by business entities.

January 1, 2022

No impact upon adoption

Recently Issued Accounting Guidance Not Yet Adopted

Guidance

Date issued

Description

Effective date

Anticipated Impact on Hydro One

ASU
2021-08

October 2021

The amendments address how to determine whether a contractual obligation represents a liability to be recognized by the acquirer in a business combination.

January 1, 2023

Under assessment

ASU 2022-02

March 2022

January 1, 2023

Upon adoption, the Company will disclose the current period gross write-offs by year of origination relating to its accounts receivable

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, the industry, regulatory and economic environments in which it operates, and includes beliefs and assumptions made by the management of the Company. Such statements include, but are not limited to, statements regarding: the Company’s transmission and distribution rate applications including the JRAP and its proposed investment plan, resulting and related decisions including the DTA Implementation Decision, as well as resulting rates, recovery and expected impacts and timing; expectations about the Company’s liquidity and capital resources and operational requirements; the Operating Credit Facilities; expectations regarding the Company’s financing activities; the Company’s maturing debt; the Company’s ongoing and planned projects, initiatives and expected capital investments, including expected results, costs and in-service and completion dates; contractual obligations and other commercial commitments; collective bargaining and agreements, including the expiry thereof; Bill 257 and Bill 93, related regulations and the expected timing and impacts; future pension contributions; non-GAAP financial measures; internal controls over financial reporting and disclosure; recent accounting-related guidance and anticipated impacts; and the MTN Program. 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;


			16

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

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, including the spread of its variants, 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, competition with other transmitters and other applications to the OEB, 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 (as defined in the Indian Act (Canada)) (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;

•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 asset condition, capital projects and innovation, including public opposition to or delays or denials of the requisite approvals and accommodations for the Company’s planned projects;

•the risk of failure to mitigate 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 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;

•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;

•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 any new accounting pronouncements.


			17

HYDRO ONE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

For the three and six months ended June 30, 2022 and 2021

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 the 2021 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.


			18

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS – FULL CERTIFICATE

I, William Sheffield, Interim 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, 2022.

2.No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3.Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4.Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5.Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a)designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i)material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii)information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.

5.2 N/A

5.3 N/A

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2022 and ended on June 30, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.



Date:						August 9, 2022

						/s/ William Sheffield
						Interim President and Chief Executive Officer

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, 2022.

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

5.2 N/A

5.3 N/A



Date:						August 9, 2022

						/s/ Christopher Lopez
						Chief Financial Officer

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