Q4 2019 Earnings Call
19 teleconference.
At this time up to spend lines are in listen only mode.
After the speakers presentation therapy, a question answer session.
The question during this change will need to press star one of your telephone.
As a reminder, colosseum accordingly.
I would now like to introduce your host for today's conference Mr. Omar Chauffeuring, Vice President Investor Relations at Hydro one. Please go ahead.
Thank you Shirley good morning, everyone and thank you for joining us I'm here in charter with our President and CEO, Mark for Wesco, and our Chief Financial Officer, Chris Lopez.
Will provide some comments on our fourth quarter results and that spend the majority of the call answering as many of your questions as time permits.
There are also several slides that illustrates some of our points will go over in a moment they should be up on the webcast now what's your dialed into the color you could also find them and on either one website in the Investor Relations section under events and presentations.
Today's discussions will likely touch on estimates and other forward looking information.
You should review the cautionary language in today's earnings release, and our Mdna, which we have filed this morning regarding the various factors assumptions and risks that could cause our actual results to differ.
All the applied to the school.
With that I turn the call over to our CEO Mark for Wesco.
Thank you Omar and thank you to everyone for joining us today and for dedicating your time to review our year end result.
A reminder, that if you don't get a chance to ask a question near the end of this call. Please keep in mind that Omar and his team remain available to you.
So after I review the highlights for the corner, we will turn to Chris to review the financial results.
So I'm pleased to say that we call lets say last quarter 2019 on the high note, our corporate strategy, which I outlined on our last call with very well received bar many stakeholders and we've already made concrete steps to implement our plan.
Last year, we dug even deeper to find boy money saving our operating costs. After if we adjust for Mr related expenditures decreased by approximately $50 million year over year.
At this level, we've achieved in nominal terms a reduction in oil money of nearly $92 million or approximately 8% since the IPO in 2015.
29, T., we realize productivity savings of $202 million, representing 49.3% increase year over year.
It's now means that since 2015, our total productivity savings amount to close to half a billion dollars.
Given the strong operational performance and higher demand for electricity I'm pleased to report <unk>, we will be sharing the fruits of our efforts with our customers.
We will be returning approximately $20 million under the earnings sharing mechanism, which was envisioned within the incentive rate, making regulatory construct.
The sharing also highlight why we believe the regulatory environment.
Instructor and aligned both our and our customers' interest.
On the regulatory front, we received the decision on the motion to review and repair and very the ruling on the pension costs within the distribution rate application.
Within the decision the Ontario Energy Board clarified the rationale and <unk> was on account of overall high a woman eight cost. This overall reduction to or money is within the per view of the OE B and where you respect that mandate and our regulator as such we're not pursuing the appeal that is currently being.
Hello, and in a balance with the divisional court, we will endeavor to offset this headwind in future years through our efforts to further productivity gains.
I'm not no I welcome the announcement made by minister of energy of their intention to propose.
Mr. Richard discerning as the new chair of the already be board of directors. Mr. Concerning chaired the already be modernization review panel, whose recommendations we end the electricity industry support it.
Under his leadership, we hope for a period of continued constructive rate regulation in Ontario that helps our efforts to support Ontario's growth and our customers.
Consistent with our promises strong project execution also led to annual capital investments of $1.67 billion in 2019, which is an increase of 5.8% from last year and inline with the plants that we put forward to the Ontario Energy Board.
Our focus on customer has delivered positive results with our residential and small business customer satisfaction scores in our distribution business, reaching 86% in 20 Nike.
This represents a 10 year high and an increase of 9.3% year over year.
Our commercial and industrial customer satisfaction with also at an all time high.
In addition, we continue to see strong satisfaction scores with our transmission customers. What we saw a minor decreasing 29 team from 90% to 87%, we're confident that our strategy to become a trusted energy advisor to our customers will drive this score.
In 2019, we made a renewed commitment to build stronger relationships with the communities, we serve through community investment partnership and local customer engagement.
Last year, our community investment program reached over 190 community and provided safety training to over 200000 you across products.
Our work to support the digital economy through Progressive procurement was recognized as an award from the maybe in the Energy Association in the first or in the fourth quarter.
We also continue to support the booming economy in the Leamington area with new electricity infrastructure in the last quarter. We brought another transmission station online in that area, reflecting our commitment to the economic development of Ontario.
These are just some other ways, we are becoming a trusted partner for our customers communities we serve.
We've also been building the grid of the future by using smart technologies to enhance and bolster the infrastructure.
The close of 29 team, we had installed about 1200, smart switches and fault indicators across our grid to reduce the number and length of power outages.
Women the last quarter the year, we did experience several large storms, we used our store prediction tools to position our crews in the area is projected to be hit hardest our crews demonstrated their expertise and restored power safely and efficiently in the harsh conditions.
This performance is evidenced by our 9.7% year over year improvement in customer average.
Duration index also known as Katie.
In October 2019 were once again recognize for industry, leading expertise after sending crews to support Manitoba hydro following a severe storm that caused record pod power outages and not province.
At the end of last year, we were informed that the Edison Electric Institute would present us with our Camp Award for emergency assistance and response.
For the fifth consecutive year Hydro one was recognized by Forbes and its list of counted the best employers for 2020.
We moved up in the ranking this year to become the top rank utility in Ontario in the third utility across Canada. This reckon not this recognition underscores our commitment to creating engaged workforce.
I would also like to welcome Susan Walbert Jana to the Hydro one board of directors.
We all would benefit from her exceptional experience and I look forward to working with her with her appointment our non executive Board is now up made up of 50% women and 50, 50% man, which is a testament to our values of diversity and inclusion even at the highest levels of this company.
We also ended the year with the straight kind of executive team, we welcome David Lee butter, as our new Chief operating officer.
His extensive experience both the utility enforced three factors will prove proved to be invaluable as we execute on our strategy.
Don I mean broadly is now serving in our newly created role of Chief Credit Officer reporting directly to me the creation of this position on our executive team underscores our dedication to improving our safety culture it either one.
We have set a clear direction and put in place the right leadership team to drive our plan forward in 2020 investors will get a chance to meet the leadership team as well as her team members at our Investor Day on March 15, Toronto, the Battle showcase our progress on several fronts as well as give investors an opportunity to interact with the.
Bench strength of the organization.
I would like to thank our employees for the hard work dedication that delivered the impressive results we achieved in 2019.
Our annual report was released today and is available on our website I encourage everyone to review it as it showcases the greedy effort that was made in 2019.
I would like to end my portion of this call on our dedication to safety.
Earlier this year, we tragically lost one of our colleagues who passed away from injury sustained on the job well doing forestry work.
This is unacceptable to me.
Hi, I'm deeply committed to enhancing our safety culture and eliminating serious injuries at hydro one.
Q4, Darlene Bradley are cheap safety officer launched a new frontline lab safety improvement team.
As for combined employee feedback in industry best practices to determine the actions we need to take to ensure every employee goes home at the end of each and every day.
I'm very confident in leadership ship team that we haven't place and the entire team at hydro one.
With that I would like to pass over to Chris.
Thank you Martin good morning, everyone before I get into the financial results I too would like to welcome our newest team members to Hodja one at this exciting times the company Endo stakeholders.
29 team was year in which we refreshed our strategy and confirmed our commitment to Ontario. The one aspect that did not change was the fundamental model of this great business we operate.
The business continues to be strong we're pleased with the word about teams the desktop and our partners have done to achieve you efficiency and productivity outcomes that you see in today's results.
As Mark mentioned, we ended the year on a strong note.
In terms of the financial details earnings per share an adjusted earnings per share in the fourth quarter increased to 35 cents compared to a loss per share of adult 18, and adjusted earnings per share of 30 cents.
For the full year earnings per share with its almost 30 and adjusted earnings per share with the dollar 50 full compared to a loss of 15 cents per share.
I know adjusted as well, but don't 35 last year.
Well I was also good the comparability of the fourth quarter and even a full year results to the prior year required some adjustments.
Significant driver of the yet by the year increase in earnings was a decision we received on the deferred tax asset which resulted in a net income charge of 867 million in Q4 of 2018.
In addition, we incurred costs of approximately 140 million to terminate the if the transaction in Q1 2019.
So while the headline number a year over year increase of 867 million net income for the full year insignificant. It does not accurately convey the whole story and reflect the operational performance all the business.
So if anybody operational performance of the company, we will compare the adjusted numbers as presented in the financial statements.
For the fourth quarter of 2019, net income was 211 million compared to 176 million in 2018.
For the full year net income was 918 18 million compared to 807 million in 2018.
When we look at full year results. There were three main drivers of this performance. The first was the decision we received on the distribution rate case that allowed us to book revenues for 2018, and 29 team under the new incentive rate based regulatory constructs.
The catch up revenue for 28 seen alone which was booked in the first quarter of the Shia was approximately 85 million what 10 cents per share.
The second was higher and actually see demand in the distribution segment, partially offset by the lower transmission peak demand that combined drug total revenues net of purchase power up 3.6%.
The third and final dried up was a reduction in nominate costs, but Mike referenced earlier, we have reduced or eliminated by approximately $50 million year over year on accounts, all lower corporate support costs receipt of insurance proceeds in relation to losses at the Finch Longwood, and maybe about stations and the repatriation.
Full center that resulted in operational improvements.
The higher electricity demand coupled with.
On a fixed deep and disciplined cost control has allowed us to share approximately $20 million, we've got customers in the distribution segment.
As Mark referenced earlier, we strongly believe the constructive incentive based regulatory model lines, all stakeholders interest to the benefit about customers and we're pleased with our customers participate in our journey to become a leading utility in efficiency and productivity.
In terms of productivity, we continue to have to do more with less.
We achieved over $200 million in productivity savings in 2019.
An increase of approximately 49%, which puts our cumulative productivity gains since the initial public offering to probably about $450 million.
This year the increase was driven by further improvements in procurement and supply chain reductions fleet.
And optimization about corporate expenditures over.
Overall, 60% on productivity came from capital expenditures, while the remaining 40% was from overnight.
Focusing on the fourth quarter itself, we saw a few key theme that helped shape the full year results.
In the transmission segment. Unlike the previous two quarters between 19 average monthly 60 minutes peak demand for electricity was approximately 1.2% hot in the same period last year, which you may recall was in itself favorable.
Just to get up with reduced overnight on account of timing of work in stations in line maintenance as well as have visitation management program.
The receipt of insurance proceeds and lower corporate support costs, resulting in strong performance for the segment.
In the distribution segment weather, which included storm activity was again similar to last year's fourth quarter.
This resulted in similar levels of energy consumption. However, after accounting for earnings sharing with our customers and clarity on the pension decision in the fourth quarter, the resulting revenues net purchase power costs were law.
On the M&A lower corporate support costs and operational improvements due to the repatriation of pull synta resulted in a slight reduction year over year.
Turning to the balance sheet.
Our balance sheet remains strong and the resulting savings from low interest cost continues to be a key factor in the provision of cost effective services for our customers.
In the fourth quarter financing costs were lower by 5.7% year over year. As we did not include the interest charges related to the convertible debentures that had been issued in conjunction with you at least the transaction.
For the year, how interest costs were higher by 55 being as we issued additional long and short term debt at favorable rates and incurred higher merger related financing costs compared to the prior year.
In November we received two rating agency actions.
That hollowed out continued balance sheet strength.
First decent P. affirmed hydro one issue up and hydro when things you show an issue level credit rating at minus and changed its rating outlook from negative to stable, starting a stabilized operating environments and out Ontario focused strategy.
Second Moodys upgraded hydro winnings longtime debt rating from beat a one two athree with a stable out like so outlook sizing similar drivers.
Texas in the fourth quarter declined versus last year due to the deferred tax asset ruling mentioned earlier.
And the enactment of the accelerated tech depreciation measures related to the federal and provincial budgets.
Effective tax rate for the quarter was 0.9%, which resulted in a 29 team effective tax rate for the Oh negative 0.8%.
While we had previously guided on a 2% effective tax rate for the year the accelerated CTO capital cost allowance studies for the mix of assets placed in service was higher resulting in a lower effective tax rate.
Lower taxes, the passed through to the customer in the form of lower rates with no impact to net income for our after tax return on equity.
Our effective tax rate over the next five years is expected to remain in the seeks to 13% range.
On the capital investment side, we had a modest increase in capital investment for the 5.8%, which was inline with expectations and consistent with the capital forecast put forward to out regulator.
You'll notice that the future capital investment profile for both segments has changed marginally.
This is due to timing differences on a project planning and does not impact of projected rate base growth.
The year or that you can pass it on assets placed in service is challenging due to the lumpy nature of the in servicing of S is in 2018.
In addition storm activity was muted in 2019, which led to lower ethic capitalization.
Despite these minor fluctuations rate base increased by approximately 5% year over year, which again was inline with expectations.
While we're pleased with financial performance this year, given the number of onetime items and demand impact will be providing a normalized view of 2900 earnings at our Investor day on must fit.
We continue to be confident projections.
5% rate based growth translating to positive earnings growth and 5% dividend per share growth.
On the registry fronts as Mark mentioned, we received clarity on a motion to review and Barry the pension decision.
In this decision the only be clarified that the cut was made to the category overall expenditures.
The impact of this decision was a reduction of our M&A with a net income impact of approximately two cents per share.
In 2019, this impact was offset by a 1% one cent per share reduction.
Due to earnings sharing for net impact of once impishly on overall results.
For the next three years and until our next distribution rate application. We expect there will be a per year headwind of approximately one to two cents per share.
On a kind of this decision.
While challenging we aim to manage the reduction in overnight and capital expenditures throughout productivity programs.
For the transmission rate application, we made a final submissions in January 2020, and expect the decision from the regulator in the first half of this year.
As a reminder, this application, we'll take our transmission business into incentive.
Right regulation through 2022, this is consistent with our distribution business.
We also made up of submissions for the acquisition of really Peter Barra in January 2020, and expect the decision sometime in the first half of this year.
Finally, even though we have reflected the impact of the only be decision with respect to the deferred tax asset financials.
We filed an appeal with the divisional court, which was heard on November 21st 2019.
We made a strong ties to the court and now a white the decision.
I'll stop there and we are pleased to take your questions.
Thank you Mark and Chris Shannon could you. Please explain how you'd like to organize the Q in a pulling process. Please go ahead.
As our finest asked a question you need to start wondering your telephone.
A question press the pound key please symbolically coupled that you any roster.
Our first question comes from Robert Kwan with RBC capital markets.
Line is open.
Good morning.
Chris I guess, you alluded a little bit that you're going to give it sounds like a specific kind of normalized 2019 number but im just wondering if you can walk through some of the puts and takes.
For 19, as we head into 20, you did talk about the 10 cents on the Dx true up.
[music].
Other things.
Can you just talk about.
What the insurance proceeds were in the fourth quarter.
This Q4 19.
As well as heading forward on the pension side of things.
Is that going to be a year over year headwind or did you actually take 2019 into Q4 results as well.
Yeah. So that's sort of single largest one as you as you mentioned Roberts Weve reported $1.54. The single largest one is the distribution rights.
Decision related to 2018, which was 10 cents and there are a couple of other one offs insurance tissue was slightly higher.
Well, we have instruments proceeds every year. So it's an ongoing was on read that compensating for loan losses that we booked in prior years. So so that one is yes. It's one off an issue was slightly larger and we'll give more guidance on that at.
Investor day as to how to look at that.
There are two or three items like that but nothing that is substantial.
And how much was the insurance specifically in the quarter.
In the quota insurance so over the year, so hope that year over year, we're in the $10 million to $15 million range different.
10, 15 million plus Q4 19 for Q4 18.
So in Q4 it it was time differently. So we've received all proceeds issue in Q4. So in Q4, it was closer to $19 million, but across the year. It was in the 10 to $10 million to $50 million range. So like I said you do get recurring proceeds this happens every year across the whole fleet.
This time it was time to Q4.
And then directionally heading into 20 other things to think about then I think weather was a benefit not for 2019 is that correct. And then you have and are are we headwind.
On T. shirts.
Greg So so overall, we did very well.
A reminder, on transmission issue, we did any inflationary application so it wasn't ER and incentive based.
Application. So it doesn't have an hourly attached to it.
But on our distribution application you can see that we are sharing benefits with customers. So what that implies is that we have.
Done very well this year so.
That is weather.
And a part of that is the cost control that we've we've highlighted.
Got it okay magna's finish on just the pension costs decision.
You set out why you decided to discontinue the appeal just wondering is there potential impact than this being brought into the transmission proceeding or you just not concerned that.
By not not appealing it in the courts that and the effectively accepting it for de accident Selwyn find its way into the T X proceeding.
Yes, it's mark care, Robert So the ruined from emotion review and very really what it did was a clarified the intention of the original decision, which was was directed at reducing our overall M&A costs. So based on that we decided not to to appeal during the transmission rate hearings in that this issue.
You didn't get a lot of airtime during that process. So so we don't expect any different I'll come from the transmission filing okay.
So how does have there been actually very specific behind the scenes.
Kind of discussions with the OE be that that.
Kind of was just about neon Oh, M&A envelope and not it's Sean can find its way into tier.
No we havent had those behind the scenes discussions with the already be our discussions with your own public Forum.
That's great thank very much.
Thank you. Our next question comes from Andrew Ski with Credit Suisse. Your line is open.
Thank you good morning them, maybe just following up on somebody on M&A related questions and I think Chris you gave a bit more clarity on just the timing of some of the issues in the Q4.
The broader question when we think about the M&A on transmission just on a year on year basis, Theres pretty big step function downwards.
From the four on nine to the 355 distribution you've had a bit of moving downwards in Q4 of 19 versus 18.
A little bit drifting upwards on the year.
When should we expect a step function downwards in just the Distributionnow M&A.
Yeah. So.
Taking a distribution eliminate specifically we manage.
Now what program across.
The duration of the rate application, which is the five years, so what you're seeing in the distribution spend a is that weve due to.
Mild weather from.
From a maintenance perspective, we've been out do more maintenance issue then than we had planned. So we've gotten ahead of that program. So you can see some benefit of that coming through in future years on the distribution segment.
In relation to the transmission segments, we pointed out quite a large kept it.
Really that was a function of we did the inflation, we falling so oh M&A was reduced in the Shia in our filing that we put forward to the regulator that program will go back to a more normal level in twentytwenty, but that would also be recovered through rights. So with no net income impact.
The benefits of insurance proceeds also flow to the transmission segment.
Okay. That's helpful. And then and then maybe just the broader question. All this is given the improvements and eliminated as productivity across the whole business really since the IPO.
Does this wind up being a much more helpful, calling card and the policy direction within the province for potential further consolidation or just other efficiency initiatives or incentive earnings in the future.
Yes I.
I agree Andrew So it's just it's a further progression all and evidence of hydro one continuing to transform to being an efficient and a productive utility. So when you compare our cost structure in the future and going forward you can expect that structured to continued to improve.
One of the.
The items it'd be hard in the past is in some cases compared to small regional utilities, our cost structure could be slightly higher that gap is closing quickly and we also as you know when we do out.
Matt applications for acquisitions, we can demonstrate approximately a 50% reduction in overnight.
Okay. That's great. Thank you.
Thank you. Our next question comes from Ben Pham with BMO. Your line is open.
Okay, Thanks, and good morning.
Just with some of your product <unk> productivity and expectations that next few years.
Can you comment on on where that's that's coming from I know you you've looked at I T.
Optimizing staffs and and whatnot, Tom good how about the domain sources and as it in transmission or distribution or both.
And do you expect a that tomorrow to offset that one or two cents drag you have mentioned.
Yes, it's mark here. So so the main areas that the productivity has come from and we will continue to build on that going forward our from supply chain sold through strategic sourcing through a maximizing married repayments volumes those types of things that you you do in supply chain.
And we've looked at certain categories. So far we've driven cost savings through those categories and we'll continue to look at other categories of our spend and continue to drive similar savings going going forward.
We talked about the fleet optimization, so five putting.
Telematics and ER.
Technology on our vehicles, we optimize the use of our vehicles as well as the size of our fleet.
And then corporate costs overall, we've had a reduction in overall corporate costs over over the years and our customer service. This year because we in source. The call Center, we had significant savings in the call center cost as well as we improved our customer service and you can see that in or customer service.
Stat, So we see going forward our ability within those segments to continue to drive these productivity savings.
As well as an increase in productivity of our field crews through better planning and execution of our work. So we do see a pretty good runway of our ability to continue the path that we've been on since we IPO in 2015 of driving out this level of cost savings incremental each year.
Okay, and then maybe Tonight and more detailed question can can you comment on year.
I realize the our OEM in both transmission distribution recognize there's just some onetime items I didn't factor.
Yes.
So overall in distribution and when we report this in April so what I'll I'll caveat with right now is that the actual calculation will be based on separate and distinct financial statements for.
Distribution and transmission, so, but the high level calculation that we have today is that the distribution segment performed at approximately 10.9%.
With that said is we shared 50% of the benefit above 10% with rightsize and that's why we can give back $20 billion to $21 billion to re pies next year. That's when it will go back to right size. So very good news story that incentive rate, making is working and the company is performing as expected.
On the transmission side as I said there was noted calculation for early this year, but if you did a back calculation.
It would be north of 9% ROI, which is consistent with the approved our OE that would have been so if we had a bond for right.
Custom.
Okay. That's great and then just just one last cleanup question on on the tax a tax rate. That's it is below what what do you have been getting.
All year. So so as it is it your if he if we take.
Just one on deferred tax asset sharing cc rate, we take that out.
Equation that does that get to that that 2% tax rate do you guys and matching or is are you, whereas are coming a little bit lower in <unk>.
So we actually came in we recorded negative 0.8% and there are three drivers of that one was the deferred tax assets. The second one was the accelerated CCH, but remember this year. We also had being 29 team. We also had the tax shelter from the abuse deposits. So that's what drove it to be negative but going forward.
Regarding to a seeks to 13 range.
So why did it go below two that we had originally thought ice because when we actually did the yearend tax returns which has been done.
We actually had a high a benefit from accelerated CCIX. So they just made that the texture that was being provided from the government incentive was more than originally first calculated again, there was no impact to net income for us It doesn't drive a bottom line it doesn't change our return on equity.
Any benefit from that gets deferred and return to customers.
Okay, that's great thanks for everything.
Thank you. Our next question comes from Linda as again.
From TD Securities. Your line is open.
Thank you.
With respect to a youre five your outlook on the income tax rate, that's very helpful. But I'm wondering if you can give us some thoughts on what might drive given year being at the bottom or the top of the range can we assume that it might be increasing over five years as.
You work through certain pools.
So we might start at 6% and grow to 13% or might it be quite variable year over here.
You're correct Linda it is going to go back to 13 over the long term and the reason for that is in the early part of this accelerated CCH program capital cost allowance you get three times the deduction on the capital expenditure and then dropped to two and then disappears. So by the time the benefit from that program will disappear.
So it will go from six to 13, the other driver would be easily have high net income for example, well well end up exposing hi, a variable income to Hy techs writes the 26.5% so that could be another dried up and I'd expect to start at the low end over the next two to three years and then go up to.
Awards that 13%.
Thank you and your transmission application I'm wondering if you could give us some more color on.
The focus areas of Interveners yourselves and the only be was there anything that was particularly contentious or surprising as though as you work through the the hearing process.
Yes, Mark here. So so I would say that as we went to the hearing process that there was nothing unusual that we havent heard in previous cases in general the the transmission hearings are made up of quite sophisticated customers because of the source of of where those customers come from on the trial.
Its mission business. So I don't expect any any outcomes different than than what we've seen in the past because there was nothing really raised in not obviously the form is is there for us to justify.
The expenditures, we need to make on the system and we had good support from a many of our interveners funding needs for those investments.
Are they are focused on reliability of the system deeper for their businesses and their needs. So so we had quite a bit of sport from an intravenous ROE and I think we put a very good case together for for the rationale behind the investments we need to me.
Okay, and I realize you're unregulated business is not necessarily the focus and the largest part a of your business, but I'm wondering if you could just help us understand some of the practical milestones and timelines related to growing yet.
Now that you've had a little bit of time to start thinking of implementing your strategy.
Yeah, I'll start and then I'll pass it over to Chris because Chris is actually managed in that part of the business right now, but oh, the unregulated areas that we talked about.
In in.
Our debt as well as in previous calls were around or our telecom business and we've already kicked off starting some new services in that in that business. It's through the LTC consolidation and as you know we're in front of the only before Peterborough in Australia, and we're assessing not where there maybe some other opportunities and working with others.
Communities on the possibility of caused consolidation there than in the final one is in our energy management services business, which we are working with some specific customers right now in some third parties to ER to join them up to provide those types of services in particular.
Trying to offset their peaks.
So that we can bring some of the cost of services down for those people until all Oh.
Chris build on that yet I think as you said quite rightly at the outset, Linda it's a very small part about strategy when we talk about growing the business.
99% of its going to come from regulated business. So.
Generic rate based reinvestment in the greed.
Transmission and distribution and LDC consolidation positive sign.
And then the other probably talking about the unregulated piece the.
That's not included now guidance on 5% growth in earnings so that would be in addition to that and really that's optimizing on telecom business and then this providing energy services too complex large complex industrial and commercial customers not to the.
Residential sector.
In terms of what you can expect day, he is knowing more than 1% in any one year, that's what I would see in the first year. It's about building that business and then thereafter. The objective there is to try and get an additional 1% growth.
For the next few years.
We will provide more clarity and exactly how that might be done.
At Investor Day.
Thank you.
Thank you. Our next question comes from Bob Hope with Scotiabank. Your line is open.
Yes.
Good morning, everyone.
I was hoping you could add a little bit of color on kind of the tone or any incremental conversations you're having with local local ldcs.
Just given that kind of new vision and Tiger one as well as the cost containment are they more willing to engage in.
I may discussions there.
Yeah. So it's mark here, the where weve reengaged for there with a bunch of the forms and in in Ontario, including the Ontario Electricity Association, but also one of them. It is the electricity distribution distributors Association, which we're now on the board there and we're at the table and what I would say is.
Yes people are recognizing the improvements that hydro one is made in the productivity in the things that we bring to the table.
That the some of the local distribution companies can't bring on their own and they see the value in a in.
The things like our leveraged by and things like that that we can bring to the table and drive costs.
And so I would say that that that there is an openness in not forum to to be looking at consolidation I think everybody in the sector recognizes that we have to work together in the sector to drive costs overall and there is a lot of inefficiencies in the overall sector driven by the frankly.
Patients so so.
That is a driver overall for for all of us and and in those forms like I said in like the electricity distributors Association.
There is quite an openness at that table to be discussing this.
All right that's great.
And then just a clarification question all right clarification.
The 10.9% achieved our a lead that you mentioned for distribution does that include the catch a benefit of 2018 into 2019 or is that more of a well call that a strong 2019, just given the weather inevitable M&A.
I would call that a healthy 29 team.
It does not include the catch up revenue for 2018 that would be adjusted back to the 2018 calculation.
There's a very small sharing in 2018 as a result, so he goes slightly above 10% day, and we're going to share that benefit with right pays as well. That's included in the total amount being shades about $21 million. So 10.9% does not include 2018 catch up revenue.
Alright Thats helpful. Thank you.
Thank you once again, ladies gentlemen, if you wish to ask a question at this time. Please press Star then one are you touched on telephone.
Our next question comes from Mona Nazir.
Thank you Sir you may begin.
Thank you and good morning.
My first question is just in regard to the team with management additions and even.
It's important that might I believe that you're now at full capacity.
Is that true are there any other areas that need to be felt.
Yes, there is one additional executive position that I'm in the process of recruiting for right now and not as the leader of our planning strategy and growth.
Team and really there the front end of our operating model, which which is responsible for the asset management portion of our business as well as identifying where we have growth opportunities right now Chris is looking after the growth or the growth portfolio. The intent is long term to put it over to not that executive ones.
The higher.
During the process of recruiting right now and I'm optimistic that we have some really good candidates to choose from.
Okay.
So pretty stable, though.
Yes, okay.
And my second question.
I know that you touched on kind of the transmission eliminating some of the one off and even going forward, but I'm, just perhaps a different way to try to ask it is in the guy because the sustainability of eliminate levels and you mentioned, it's down 8% from the IPO, what kind of annual production.
Have you targeted.
Yes, so I think generally.
Generally speaking, we look to try and offset inflation so thats it.
Certainly a reduction is offsetting inflation.
We've we've gone ahead of that in some respects what I will remind you also in regards the transmission application that was a one year.
Inflationary falling so the cost in that will always as a result that is not sustainable. So those costs will go back up a little I expect into $15 million to $20 million range.
But that will be recovered in right. So there's no impact on that income. It was just a bridge year if you like.
Okay.
And then lastly, and this is just a clarification.
I understand you're not pursuing an appeal with only be related to the deferred tax asset, but do you did you say that you presented to that divisional course at the end of November and you are awaiting that decision.
Yes, just just to clarify him.
We are appealing the deferred tax assets I'm decision and it is in front of the divisional courts right now and we're awaiting a decision for them that that's separate from the motion to review and very up before we'd be pension costs, which which we decided not to appeal. So we are we are moving forward with the DTA process and it is in front of the courts right now.
Okay perfect. Thank you.
Thank you. Our next question comes from Mark.
VC capital markets. Your line is open.
Thanks, Good morning, mailed to start with financing is mr., Chris but.
Usage of commercial paper here.
Taken up over a billion here just thoughts on that versus where the debt markets aren't and looking to turn now.
The next year.
Yeah. So my each year, we look at somewhere between one and 1.5 billion depending on.
When did sort of needs to be rolled up and we'll be doing that same posted to ship. We don't have to come to market. We have fairly large credit lines that said, we do see the market being quiet accommodative at the moment. So I would anticipate that we would be doing something this year.
In that range.
Okay, and then kind of coming back you guys talk to that it but the transmission in the last question here, but on on the distribution utility you have sort of offset inflation is sort of one ish one of the half percent sort of increase in M&A year. You guys. Thank you can get to a level are you asking an absolute reduction as you look into 2020 or 2021.
And views on that in terms of being able to sort of hit the upper end the range of.
Maybe 10% again on achieved early 2020.
Yeah, I think so Mike the drivers on achieved our OE cost is one the other is also demand so either those three things can drive drug the outcome.
We look at our cost structure over the.
Entirely.
Duration of the rate case, which is five years. So you will see go up and down a little between needs. This year, we did say we've accelerated some.
Maintenance work from future periods.
That's just a timing.
A timing decision that we haven't that's because we could take advantage of good weather and the workforce being more productive.
Over time, I would expect that we continue to be able to offset inflation.
Okay. Thanks, Chris.
Thank you. Our last question is from Jeremy Rosenfield with industrial Securities. Your line is open.
Yeah. Thanks, just a little bit of a quick cleanup question the sale of the Niagara line.
Was recorded in the fourth quarter I think it was mentioned is 12 million or something that is that an after tax number Chris.
The site would've been up cost.
So there was only profit on that side of the nine or line.
So we finished it and we transferred.
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Ownership of its if those nations at the cost of the the line going in service.
So there's no no net income as a result of that transaction.
Okay I understand okay perfect. Thanks.
Thank you and our next question comes from Patrick Kenny with National Bank. Your line is open.
Yeah. Good morning, guys, just with respect to the capital plan for transmission.
Since filing the application last spring.
Wondering if there's been any incremental demand for investments from either the Leamington region from greenhouses or.
Apps reinforcing some lines into the nuclear plants that there will be maybe online for a little bit longer just curious if.
No there could be any upside to the capital plan for TX over the next few years given the political support for these demand pockets.
Yes, so so.
The Leamington line actually Didnt it didnt meet the full tasks of the energy for that area. So that's a growing area. The a growing area down in Leamington. So so the new line that will build will provide about six to 700 megawatts. We do have request for up to 1500 megawatts of additional loader not areas. So that may lead.
To additional investments or that is the per view of the yes, so none of us.
But we will continue to advocate for customers.
In that area. In addition, the is whole released their planning outlook document in in January which is a 20 year forecast looked at the province and growth and and it does show a slow and steady incremental demand in areas like transportation agriculture and moderate as resin.
Ventral and commercial growth. So there is a growth Oh energy in the in needs in the in the province, as well as there or is that capacity shortfall in the mid 20 Twentys as a result, primarily of this shutting down some of the nuclear plants. So so there is some draws in some new.
On the system. The next step and that is for the I am so to do the regional planning that we will get more visibility into where they're seeing those growth and what those needs are and will have a much better idea on whether there's incremental transmission required for those.
[noise] that's great color. Thanks, and then just on the balance sheet frontier now it's.
No the rating agencies moving to.
Stable looks maybe just a quick refresh alone.
Good.
Leverage metrics from FFO to debt whatnot.
I guess you know there were some puts and takes out there but to the extent that you do.
We'll have a little bit of excess cash to put to work.
Just wanted to confirm if that will be.
Going towards accelerating the telecom initiatives or.
Perhaps allocating elsewhere.
Across the business lunch.
Yeah I think.
But what you're highlighting a just to clarify if we don't necessarily targets a specific credit rating, we target capital structure that the only be is approved for us, which is really 60% debt and 40% equity. So we stated.
Right.
But chase pellets in a very low volatility part of the rating agencies schedule, which says that will have an AFFO of somewhere in the 10% to 12% range.
The upper end of that right now.
If I put a date so you guys some capacity.
In terms of our disciplined in where that capital goes number one and it should go to regulatory Reg regulated assets transmission distribution.
You some excess capacity on our balance sheet. We can look at the opportunities you now telecom and other business again that is more constrained by you know, we still want out business to be no no less than 90% or regulated today. So it's always going to be the major part of that business and you will not be seen gross.
Anything more than 1% per year from any other segment. Therefore, there's no real need for capital in those in those businesses.
Got it that's great guys. Thanks, a lot.
Thank you and that does conclude our kewaunee session for today I'd like to turn the call back over to Omar job. It for any further remarks.
Thank you Shannon the management team and hydro one thanks, everyone for their time with US. This morning. During what is a busy period. We appreciate your interest in your ownership. If you have any questions that weren't address on the Paul Please feel free to reach out and we'll get the madsen for you.
Thank you again and enjoy the rest of the day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect everyone have a great day.
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