Q2 2020 Hydro One Ltd Earnings Call
Good morning, ladies and gentlemen, I won't be too the hydro one limited second quarter 2020 analysts teleconference.
At this time all participant lines are in listen only mode.
After the speakers presentation, there will be a question answer session.
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I would now like to introduce your host for today's conference Mr. Omar job It Vice President Investor Relations at Hydro one. Please go ahead.
Good morning, everyone and thank you for joining us in hydro one second virtual earnings call.
Joining us today, our president and CEO Mark for Wesco and.
And our Chief Financial Officer, Christopher <unk>.
In the call today, we will go over our second quarter results and then spend the majority of the call answering as many of your questions as time permits.
There are also several slides that illustrates some of the points, we will address in a moment.
It should be up on the webcast no or if you're dived into the call. You can also find them on hydro ones website, the investor relations section under events and presentations.
We also released our 2019 sustainability report this morning, which should be up on the website as well.
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 I'd say all applied to this call.
That I turn the call over to our president and CEO Mark for Wesco.
Thank you Omar.
Good morning, everyone and thank you for your joining us today to review our second quarter results.
I hope you're at healthy stains face during this time.
Todays update we'll focus on.
Our sustainability achievements and path forward to building a more diverse and inclusive company.
The second stage of our operations as we continue to navigate the Coburn 19 pandemic.
And our Q2 financial results.
As a world continues to grapple with the impacts of Cobot 19 pandemic.
We've also seen social movements around the world.
We will share responsibility confronting racism.
Our organization is on a collective journey to better understand the experiences a block and indigenous employees with systemic racism bias in order to create an inclusive environment.
Recently I joined other Canadian Ceos in signing a pledged to the black North initiative.
For Us this means committee to seven goals to move Canada toward ending anti black racism and creating opportunities for underrepresented groups.
As Ontario's largest electricity transmission distribution company.
We recognize the impact we have in developing meaningful.
Long term change in our society.
The events of this year have also put a spotlight on the collective responsibility governments companies and individuals share building a more sustainable world.
Corporations will be evaluated on how they adopt actions they take today.
As part of our corporate strategy I prioritize the focus on environmental social and governance issues.
Why.
Because our long term performance depends on incorporating sustainability into all aspects of our business.
Our stakeholders told us they expect an unwavering commitment to exceptional customer service safety efficiency and sustainability.
They want us to look out for future generations.
By becoming a more sustainable company, we can help create a better what brighter future for all.
We're pleased that our efforts are being recognized as we recently secured a spot in corporate nights 2020 list of candidates 50 best corporate citizens.
And right fourth amongst the global listed above 143 utilities.
This morning, we released our 2019 sustainability report.
Solidifying our leadership in environmental social and governance issues.
Some highlights include on the environmental front, our commitment to reduce our carbon footprint by converting 50% of our fleet of sedans and as you eat to electrical vehicles were hybrids by 2025.
In addition, our significant savings as a result of our recycling program.
On social 20, Nineteens, our highest ever indigenous spend.
Our recent achievements of catalyst courts commitments on gender diversity.
Including 50, 50 gender diversity on our board.
And our commitment to develop diversity hiring goals.
On governance.
Our use of the sustainability accounting standards Board framework and the global reporting initiative.
Core sustainability reporting standards.
We're also aiming to adhere to the passports on climate related financial disclosures in the near future to secure transparent disclosures and drive the consistency of our sustainability performance data.
The social elements and sustainability, our vital right now in determining how we all emerge from this uncertain period.
Me.
The social element means ensuring the health and safety of employees and the public it means affordability for our customers removing racism building an inclusive culture.
Oh, adapting our business model and helping to restart the economy.
As an essential business, we've played a critical role in energizing. Unlike in the province during the Cobot 19 pandemic.
And we will continue to play a critical role and rebuilding the economy.
We continued to do everything we can to protect our employees and stand up for cuts customers and communities.
We weathered a number of storms.
Adding one in June we safely restored power 200000 customers.
Hardworking crews demonstrated the we're still able to restore power just as quickly just to safely as they were prior to the pandemic.
Project work and capital deployment has ramped back up and as of the beginning of June our field work is back to normal levels.
We now anticipate we will complete most of our work programs by the end of the year or in the beginning 2021.
We still have more than 3000 office staff that are working from home.
Our cautious measured and safe approach to returning stuff back into the office setting is working.
It's wrote a pandemic, we have not had any workplace transmissions of cold and 19.
Consistent with our staged approach. The first stage is a return of up to 10% a burst office staff into an office.
Concentrating on employees, requiring access to special equipment to perform their job effectively.
In the long term, we're engaging with our employees on our work from home strategy.
We continue to monitor our network system very closely during this pandemic.
This has been a very hot summer we've experienced higher usage.
And much higher than last year.
Our electricity system is prepared for this and we continue to monitor agreed to provide safe and reliable power to our customers.
We believe we have a great responsibility to support our customers through the pandemic.
Especially those who are struggling with affordability.
We continue to offer financial assistance to residential customers through our pandemic relief program.
And we've returned $5 million and security deposits to over 4000 eligible business customers.
We've also extended our ban on Disconnections for residential customers. During this time.
Our community investment strategy has been focused on the most pressing needs facing or communities.
We partnered with global metric in the mid teen nation of Ontario to provide food and supplies touring degenerates customers communities.
We also provided funding to feed, Ontario, which provides supplies to food banks across the province.
By being more in tune with the needs of our customers. We've been successful in advocating for more measures to provide customer release.
The government introduce coven, 19 recovery rates, which put a pause on peak pricing and introduce flexible electricity pricing until October 31st 2020.
And introduced the Cobot 19 energy assistance program.
As we continue to navigate the pandemic our strong foundations have resulted in a proven ability to adapt.
Now we will look at the at how the electricity sector can support economic recovery in the problem.
A safe reliable transmission system is fundamental to supporting economic growth and jobs.
This quarter, we move forward on two large transmission projects.
First.
We continued our engagement process to build it and transmission line from China to Lake shore to support the greenhouse industry.
Otherwise known as Leamington line.
We were pleased with the record attendance of 4000 people during our virtual community information session.
Illustrates the impact.
Impactful nature of the project.
Second we launched community engagement for the Wassa give transmission line, which is the first step in the environmental assessment process.
This transmission line will increase the amount of electricity the can flow through the system, northwestern Ontario, providing local businesses and communities with the electricity they need to grow.
These two projects are examples of how we continue to add value and support economic growth in Ontario.
We're also doing our part to drive costs out of the system benefit of our customers and shareholders.
We've realized $86 million in productivity savings this quarter, that's a pandemic provided an opportunity for us to accelerate work that use technology more effectively and with safer to execute in a socially distant manner.
Chris will speak more to this later.
In April we received as incision from the Ontario Energy Board on the company's 2020 to 22 transmission rate application.
Demonstrating ontario's constructive regulatory environment.
In this decision the only be approved approximately $3.4 billion of capital expenditures, which will allow us to meet the necessary investments required for a safe and reliable electricity system.
In order to advocate for more flexibility and relief for customers. We ask the only be to defer implementation of the approved breach rate.
Which they have supported.
By doing this we are able to eliminate any increases to the transmission portion of the built 2020.
At a time when relief is needed more than ever.
We're pleased with their decision to allow rate deferral. So we can minimize any further adverse customer.
The only be will determine the collection period for our foregone revenue in a future decision.
Last month, we received a decision on our appeal to the Ontario Divisional court regarding the OE bees decision on the deferred tax asset.
The Ontario divisional core set aside the decision of the only be in order that the matter be returned to the OE beat correct the errors identified.
And make the appropriate tax savings allocations.
We are waiting next steps from the Ontario Energy Board, but are pleased that we'd be did not appealed that decision at the Ontario Divisional court.
Chris will go into further depth of both the impact of this really on our financials.
We are further pleased with the past the government is taking on the implementation of the only be governance structure.
The recent leadership announcement strengthen the always be and we welcome the new appointees and the returning members.
We look forward to working on behalf of customers and all Ontario ends in a period of constructive rate regulation under their leadership.
In other updates in August 1st we successfully completed the acquisition of the distribution business assets Peterborough distribution.
And we look forward to completing the acquisition of or are really a power shortly.
We're pleased to have the privilege of serving both cities and their unique needs as they continue to see significant growth.
I'm happy to announce the we've reached a tentative three year deal on two collective agreements with the power Workers' Union.
Which represents 3800 regular employees and approximately 1400 casual employees critical frontline roles across the company operations in Ontario.
Union members will now bolt on these tentative agreements with the outcomes anticipated in September and October.
Our chief Human Resources Officer Sailor Middle its Lee will be retiring this fall.
Sealer has been a trusted member of my executive leadership team.
Visible advocate for employees and has been instrumental in leading our human resources transformation journey.
I'd like to welcome Stacy Mowbray.
To the hydro one board of directors.
We all abella benefit from her strong track record and lead successful publicly traded consumer brands and I look forward to working with her.
With her appointment our non executive board maintains the ratio of 50% women, 50% men, which is a testament to our values.
In closing.
The last few quarters have been positive for hydro one.
Were successfully executing the strategy that was released last year November.
And these desk efforts are bearing fruit.
Our relationships with our partners and stakeholders have strengthened.
We have received multiple favorable rulings from the legal and regulatory bodies.
We've reached a tentative agreements with her unions.
And our customer satisfaction is higher than before.
Hydro one is on the stable and secure path towards long term success.
Over to you Chris.
Thank you Mark good morning, everyone and thank you for joining us today Dream what continues to be an extra ordinary time I hope you and your families are then we'll continue to be safe well.
Until recently entered stage three of the provinces three stage, we hadn't planned, which most businesses and public spaces have reopened with requirements to fully public health the bus and workplace safety guidelines.
We continue to remain optimistic that together, we will find a solution that will allow everyone to move forward with a new normal way of life in the not too distant future.
In terms about financial results for the quota we saw an increase in basic earnings per share totaled 84 compared to 26 cents last year.
Adjusting for the Ontario Divisional court decision regarding the deferred tax asset on which I will elaborate later in the coal you adjusted earnings per share was 39 cents compared to 26 cents last year.
In addition to other without positively affecting peak demand there were a number of favorable events.
This quarter that have contributed to the higher adjusted earnings.
Well, we received the 2020 to 2022 transmission rate decision, which included onetime items such as the recognition of revenues related to prior year conservation and demand management as well as transmission revenues related to the first quarter.
Despite the money high reported eliminate number we sort of positive contribution from home and age earnings this quarter.
Excluding other post employment benefits, which are covered in revenue and therefore net income neutral Albany costs were lower despite additional private 19 related expenses.
I'm pleased with these results, which is a testament to the resiliency of our employees a continued commitment to reducing costs for our customers and the fundamentals of the underlying business.
A second quarter revenue net of such as Pell was higher year over year by 13.4% as mentioned the probably draws on the increase was the heart of went up this quarter, resulting in higher average monthly until you 60 minute peak demand.
Well couldn't 19, a milder weather has negatively impacted peak demand in April we saw substantially hotter weather being made in June with you have you peak demand up 23% in may and 5% in June.
Despite the weather pattern, resulting in a year over year quarterly increasing peak demand of approximately 5%.
We continue to see the hardware that translate into higher peak demand in July as a year or the peak demand increased by approximately 12%.
In addition to transmission decision included revenues related to changes in the proved rights. The recognition of other post employment benefits that were previously capitalized and onetime items such as catch up revenue for the first quarter, which is recognized this quarter and the disposition of balances from the back into the burden and parents accounts.
Previously recognized.
Distribution revenues net of purchase power. We're also high by 4.5% driven by improved rates as well as higher energy consumption in the quarter.
Turning to operating expenditures reported eliminate was higher by 1.1% you are the yeah. As I mentioned earlier included in the transmission decision was the requirements you recognize other post employment benefits as both a cost and the revenue item and disciplined anything mutual rather than capitalizing and advertising.
Adjusting for these we saw a marginal decreased eliminate year over year.
Despite the additional quite a bit 19 related costs.
In response to the pandemic, we prioritized essential and high quality work and to fit other work in April and May.
We expect to complete the deferred work programs within the yet as our teams are trying to full complement at the beginning June.
On an ongoing basis I'm pleased with that continued efforts to reduce cost structure Huston and highlight the lower corporate support costs this quarter.
Consistent with the first quarter coal the impact of that measures taken by husband wants to support our customers, including endemic relief fund financial assistance and increased payment flexibility.
Turning to winter release program and the temporary suspension of late fees not expected to be material.
We continue to incur a high operating expenses in the quota of approximately 23 million related to cope with 19.
This includes the temporary stand down those casuals and the purchase of additional facility and cleaning related supplies.
The cost of credit 19, a year to date basis, excluding any impact from load now total approximately $46 million, which includes a 14 means a lot allowance for bad debts, which has been to food.
We continue to track the impact of credit 19, as directed by the <unk>.
He has recently initiated a consultation process on the deferral accounts relating to the impacts the rising to cope with my team.
Consultation will assist the only be and the development of appropriate accounting guidance as it assesses the policy direction with respect to denounce trusts and establishes a tiny and process for disposition.
The consultation plus is lucky concluding late Twentytwenty early twentytwenty, one as such we expect to receive definitive guidance on the could 19 tracking and deferral accounts.
In late Twentytwenty it'll be 2021.
On financing, we saw a slight increase in interest expense due to a higher weighted average long term debt balance as a result over 1.1 billion dollar debt issuance in the first quarter Twentytwenty.
As a reminder, this issuance was completed at some of the most competitive rates achieved by Canadian issue.
We remain very pleased with our strong balance sheet and robust investment grade credit ratings.
The income tax recovery was 849 million for the second quarter compared to 6 million last year.
The increase in income tax recovery was primarily attributable to the Ontario Division Court decision issued on July 16.
We set aside the only be ruling on the deferred tax asset.
As a reminder, the deferred tax asset had resulted from higher ones initial public offering and these transition from the payment in lieu of text messaging and electricity Act.
<unk>.
Tax payments under the federal and provincial tax regimes.
Well, the Ontario Divisional Court decision concluded that it did not have the authority to substitute its own decision, but then of the only be the courts order trend the medicine, the only be with clear direction.
So the decision was received in July it was a subsequent event that required adjustments in the financial statements.
As such we have reversed the onetime charges taken at the end of 2018 and recognized an income tax recovery that has a onetime net income impact of 867 million.
Although one time item will result in an average annual increase if that's all in the range on $50 million to $60 million per year. Once the only be has determined the possible.
Due to the recent discussed earlier.
The effective tax rates this quarter was negative 326.5%. This is negative 3.9% last year.
Adjusting for the income tax recovery.
Let's take your tax rate would have been 6.92 cents, which is consistent with previous guidance bump seeks to 13%.
In the new chain, how effective tax rate guidance. He is not expected to change.
We will update you further once the only be has determined the possible.
Moving over from investing activities the company placed $165 million of assets in service in the second quarter.
A 40.2% decrease to the prior year.
I was largely results of having servicing of station Sustainment investments at civil transmission stations last year and lower volumes.
The headlines and component replacements in the second quarter of this year.
We also instead of a substantial portion of the development project at Brent transmission station in the second quarter Oftwenty 19.
Capital investment for the second quarter was 429 billion, which is a 15.9 cents increase from the second quarter and 29 team.
The increase was mainly due to higher investments in multi year development projects for the transmission business. The construction of a new Ontario, good control since it really.
Investments in distribution system connections and modernization initiatives and a high volume you customer connections and storm related asset replacements.
I was curious have been able to do an outstanding job on execution of the capital program and in servicing of projects. Despite the challenges posed by the pandemic.
We continue to recover from the impact so Don King has had on out until each incept. This project in the quota and we'll make business. It's for a full recovery in the latter part of Twentytwenty.
As promised you know if those quarter coal we've updated the future capital investment focus to reflect the changes arising from the transmission decision as well as the Peter <unk> acquisition.
The table, we will be updated next quarter with the expected closing of the really acquisition.
The changes do not materially impact our long term capital investment growth rate or a longtime rate based growth.
Productivity savings of 86 mean in second quarter represents a 61.7% increase year over year.
Productivity improvements were a result of ongoing work labor force efficiency and the previous rollout of technology solutions in the fourth street corporate and customer service areas.
Well, we differ somewhat programs with logic crews to lettering yeah. The pandemic provided a unique opportunity to accelerate would that use technology more effectively and was safe execution in a socially distant memory.
This resulted in hospice activity being realized in the quarter.
For the remainder of the who do not expect the same run rate as experienced this quarter as we revert back to the cadence of out like ULA program.
Subsequent to the ended the quarter on July 16, we received the final rate went up from the only be well that 2020 to 2022 transmission rate decision.
The only be accepted Hodgman's proposed reductions to insist additions included in the dropped right away.
As a reminder, since the capital reductions, but predominantly in sustaining pedigree, we expect the deferred portion of capital to be deployed coming on next rate application.
As Mark mentioned.
We were pleased with the only be agreed to defer the implementation of a pre priced in support of our customers.
Well there is no impact to net income collection of that Twentytwenty foregone revenue will be determined in the future decision from the only thing.
On the acquisition front I'm pleased that we successfully completed the purchase of the business in distribution assets of Peter Bauer distribution from the city of Peter Barbara on August Onest.
We also continue to make good progress and expect to close that condition of the really appellate distribution cooperation from the see over really yet in the third quarter of this year.
Finally at this time, we do not see a change the guns we issued.
Just a day and being food in last quarter's call.
Well, Judy quite benign team, we have prioritized meats and capital delivery to work that is essential we're confident that we will complete the capital program as committed over the right period.
Further considering the effects of kind of 19 and the recent decision on the 2020 to 2022 transmission rate application. The approval of the really competing for acquisitions, we continue to be committed to and the fan out guidance of 47% earnings per share growth through 2022.
I'll stop there and we'd be pleased to take your questions.
Thank you Mark and Chris Ah, Yes, shining to explain how she'd like to organize securing a pulling process.
In case, we aren't able to address your questions today My team and I are always available to respond to follow up questions.
Please go ahead Chen.
Thank you.
As a reminder to ask a question you will need to press star one of your telephone to withdraw your question press accounting. Please stand by one compiled acuity roster.
Our first question comes from Ben Pham with BMO. Your line is open.
Okay. Thanks, good morning.
I know you mentioned that Dps guidance here, you're reaffirming that you had a capex numbers helps in moving.
At lower here because it is this decision I think an update us on that.
Okay makes sense to the new rate base CAGR that expecting over next five years and and.
The lower Capex, and where do you guys skiing and transit and offsets there.
Keep in that that guidance range.
Yeah, Chris do you do you want to your question.
Sure.
So I think.
The last comment I head into my in my opening remarks moves that we've we've termed out 4% to 7%.
Bps quarter at that time, so it's still very comfortable but the rate base cagar he's in the upper falls.
So, yes, we did reduce it but it was very manageable.
The reduction that you just you just saw that was put through.
It was the net impact on.
The transmission rate case, which is roughly a 10% reduction in.
Capital expenditure that still approvals are 90% being more than $3.4 billion of capex over the next three years or and then secondly, we updated for the acquisition or Peterborough. So in short lived very competent seem to be up before was just on rate based approach and then you add on.
The other growth that we get out about potentially over Rooney and no unregulated business, which is a small.
All right. That's that's great. Thanks, you make sure that that update.
And I am not.
Sure.
How much more detail you can provide on some of that the trends you're seeing and volumes that the data is the debt AC July also.
Quite a bit but it is quite high.
Okay tracking as he Washington, but quite a bit trend covert 19 says is any way to to normalize.
And then are wider.
Conditions, you're seeing and as anything maybe as high while we are seeing and trends that you're capturing mix and what's been occurring within featured efrain classes on on demand.
It Ben just Mark I'll, maybe start with that Chris If you Wanna add and go ahead, there wasn't a recent call with so and stakeholder engagement between when they really talked about what they're seeing across province for loads between the different customer classes.
So on the residential side.
We've seen about a 10% to 15% increase daily volumes. During these heat waves relative to pre cobot demands. So on the residential it's the the heat is really had an impact on on the loads.
For small commercial daily peak in energy reductions of about 4% compared to pre cobot period, and then for the large commercial industrial we're seeing recent increases in consumptions in stage two reopening.
However demand for this segment is still slightly below the pre cobot levels. So to summarize really I residential loans are increasing obviously a lot driven by the fact that people are are working from home a lot of people and that the heat.
Small commercial slight decrease.
And ER and consumption, there, which as the economy reopens, we expect that to to start to recover and the same thing with the large commercial and industrial but haven't seen that demand increasing that quicker as seeds to his reopening.
Yeah, Mike I'll, just had a couple of comments I think you're correct. We did see in July and other increases all publicly available information from the also.
So peak load was up 12% to 13% for the month of July.
We've seen a very strong start to August so it is a trend thats continued.
No doubt the warmer weather has added to that but I think the underlying shift from where we can see about power hasn't been as I think some of the assumptions early on that we sold from other countries was that load and dropped 10%. We think we haven't seen that so dx load for the last quarter Q2 was up 2.4%. So that's.
Energy consumption, and then TX Pete which is that transmit transmission business was up 5% than I think I'd guidance on last quarter's call that said if it's based on other countries experiences we would've seen a 10% reduction so it's quite quite an increase I'm part of its no doubt due to weather, but the other parties I don't think we're being.
Acted in the same way other countries with quite a bit 19.
The OS also commented on as the coming to stage three with more business is opening we should see any of those potentially pexip type of 19 start to be relief. So the combination of a strong weather pattern and coated 19 sort of starting to normalize we should see that continue in fact, we has in July and August.
All right. That's that's great. Thanks very much.
Thank you. Our next question comes from Julien Dumoulin Smith with Bank of America. Your line is open.
Hey, good morning team. Thanks for the time Hope you all are well save as well I wanted to follow up a little bit on cash flow I mean, obviously, there's some gyrations did you already alluded to here, but can you speak to how the DTA might start to flow and how you think about the future uses of cash benefits just broadly.
Yeah, Chris do you want to I do want to talk to up.
Absolutely, yes, so thanks Sterling. Thanks for question and a good to see if I mean again.
Overall, what we've done so far we've received the decision that says.
It's a divisional caught that says look.
The money will be returned to shareholders based on that decision. So that 867 million. The next phase of these he's the court will issue an order. So the time has expired for an appeal mccourt when that we should know that that is very specific to the OE be the only people go through a process to confirm.
That they've corrected and then there will be.
A process by which we worked out when it gets put in right.
There are a number of option. They could you asked for an update to a rate order thats in place today.
Oh, possibly the more likely scenario would be to ask us to consider the return of the DTA at the next.
Rights order.
And that could be as late as 2020.
So that's the Nick the into 20 to 22 going into 23, so that could be the next period for the so it's uncertain Julien exactly when we would start to see the casualty Bennett said that I would say would be no later than 23 on which is the next rate case, it could be sooner, but that would depend on the only be process.
As for what we would do if that the benefits would be 50 to 60 million need to so let me say need saying that's that's the average run rate of the DTA going forward, but recall that we've already been sharing.
The benefits with existing rate paid today. So by the end of 20 to 22 that could be as hot as high as 300 million a as it stands today, it's approximately 150 million. So if you add that on that could increase the DTA cash like benefit for a period of time up towards the 100 million dollar amount, but the long term.
Prediction is around $50 million to $60 million per year.
As to what we would certainly guide.
Julien that's what we do is that it's probably too soon to call. It would depend on when we get it and when it starts coming through I think clearly would look at our position on a its I phone and that would put us in a much stronger position and give us more ability with our balance sheet. So we haven't looked at that and determined that at that point.
Got it excellent and can you comment a little bit more municipal backdrop and potential for the roll ups could be I could see both koby being an impasse, while municipal budget and some of the pressures. There could also lends itself to further credibility of such moves. So just if you can speak beyond.
Formally disclose processes, you've already alluded to Q looking ahead to 21 and 22 the road board.
Yeah, It's mark Mark here Julian welcome and.
Oh, sorry. The response you my question really young the wasn't communities right now we're focused on coal bid and <unk> and how they're oh, they're going to.
You know reopened and restart their economies as well.
We are working with those communities many more customers. So we're we're working to support them through Covidien and and do what we can do to help support that what they might do with their local utilities in the future as result of the impacts of coal that is still yet to be known.
Obviously, if it's a one is willing to to divest of their their municipal assets, we would be interested in looking at those but at this point, we're really just looking at supporting those communities through cobot, and and we'll work with them in the future.
Thank you seem very much.
Thank you. Our next question comes from Linda Ezergailis with TV TD Securities. Your line is open.
Thank you just a follow up question with respect to shifting mode.
As you see residential load, having increased and not affected as much.
As initially contemplated potentially how might the shape. Your capital expenditures are there any projects maybe that might be accelerated are there some that might be a deferred or less of a priority or getting its still too early to tell kind of how.
So structurally loads might be shifting over the longer term.
Let's take that.
In the short term there isn't a lot of CIT change, we we have our approved rate filings from now till 2022, and those are based on our capital investments and that hasn't changed. So we don't expect that to change. So in the short term don't see an impact I think the longer term impacts of cold it on demand and load and required.
As for new infrastructure is still yet to be seen I think there is an opportunity for investment in the electrical system as part of economic recovery for the province, and and we will be working with the others in the sector.
So and governments on putting our our.
Ideas forward on on where some prudent investments in the system could help with recovery from from Cowen but in short we have improved rates for both the X. and TX based on our capital investments from now until 2022, and I don't see that changing.
Thank you and maybe.
You can just help give us an understanding of the recent power Workers' Union settlement that was announced how might this change your cost and cost trends and because it tends to settlement provide for any additional flexibility as it relates to use of technology or potentially outsourcing.
Can you comment on attributes beyond just a the cost.
We do have a tentative agreement with the VW for both the customer service operations and the main PW agreement, which represents a large portion of our employees.
It is premature for me to speak about the details of that because those agreements haven't been ratified a we're expecting the customer service.
Ratified in early September and the main agreement to be ratified in October at which time will be more freedom to speak about the elements of those agreements.
Okay. Thank you I'll jump back into queue.
Thanks.
Thank you. Our next question comes from David Crizotinib with Raymond James Your line is open.
Thanks morning, everyone. My first question here just on the topic of productivity savings, obviously had another really strong quarter, there and there's some technology additions that drove that could you just maybe talk about how you're tracking versus your targets and what you see as the runway for additional savings going forward.
Yes, as we talked about in the past really what we're trying to do with her productivity savings is essentially offset inflation. So that means about $50 million year and productivity savings increases and and we saw a fairly good increasing our productivity savings.
In Q2, a lot of that driven by by our Ah our ability to deploy technology, which I think coven helped to accelerate.
And our our move to mobile with a lot of our fourth street teams to Oh I pads in their hands dispatching crude resources using electronic needs has really has really helped us.
On the other areas that we saw improvements in Q2 is incremental customer service savings, which.
Came as a result of our call center in sourcing.
And settlements of settlements, which is another element of our of our call Center, which we we brought back into the company and we're seeing savings as a result for that.
As well on the capital front, we thought incremental fleet rationalization.
We accelerated our overtime reduction in transmission stations and we saw increased wrench time in in the move to mobile so so right across where we saw quite a quite a bit of productivity improvement in Q2.
The other area.
Was we increased our procurement during Q2 as we stockpiled some some resources materials like pools, and Transformers, which are as a result from cobot.
Has you know we wanted to make sure we had enough stockpile. So we we got the incremental productivity savings as a result of improved volume buys.
That's great color. Thank you and then just maybe one other one appreciate it's not not a huge part of your business, but the unregulated side I'm. Just wondering if you can update is where you are with the charging network and maybe any any news on the fiber optic side of business.
Yeah, Chris leads our girls portfolio, So I'll ask Chris to Ah to speak to those.
Yes, I'll take.
A quick telecom plus which is the follow up question. So overall, we see that telecom is quite strong popped up plan is to grow that business. So so growing that business.
Products has been a little more challenging industry. So when you think about the longer term it has been impacted slightly hearing.
Q2 in Q3, but we think we can the public that but the positive side as you see a higher demand for our services in regards to no short term telecommunications made by corporates. So that is actually underpinned our profitability that basically what most of this year. So we've seen that Lubbock once at the.
In regards to the be charging network, we continue to expand Dell L. partnership day, with Ontario power generation.
And it's going very well we had started with.
Fast charging.
Units and then when looking at some of the slow charge against that would be used in a residential and so that the non commercial uses so that business.
Continues to grow at a very good right for us, but then detailing the bonds. Your overall he decided not to be complained about business the 99% of.
Turning to comes from regulated sources and that will continue to be the case for some time to come but on the unregulated side, some other things up within themselves out quite well.
Great. Thanks for that I'll get back in Q.
Thank you. Our next question comes from Rob with Scotiabank. Your line is open.
Yes. Good morning, everyone. First question just on Mark's comments about the potential of infrastructure spending as a as a measure of stimulus train covert 19, you know how would that occur under your incentive or framework or would there have to be an overlay there.
Yes. Good question. This merger. So so I think early on to figure out how how that would work with the always be 50, I am so directed us to to build the additional infrastructure as a result of economic stimulus, we would have to work with the ISO and.
And the OE beyond whether it would be incremental above our approved capital program or offset some of within so I think it's pretty early on to to determine what that might look like we're really just putting forward up to needs for where we see there is load growth and the need for additional infrastructure.
Particularly in the southwest we're building one new line in infrastructure to feed the green host industry down in the southwest of Ontario, but we haven't built that is fully subscribed by customers already and there's opportunity for more growth there as well as in the mining sector that we see but there is opportunity and the northwest.
For mining and additional infrastructure to support that so early days were putting things forward that we take might be helpful. How that might be be rolled into into it to rates and into our capital program would have to pull all of that.
All right appreciate that.
And then secondly, how are you thinking about your co would cost that you are tracking including a bad debts. Those actually started to pick up and then as you go into the consultations with the OE be how do you.
How do you come to discuss the fact that you're actually seeing eliminate large savings versus the increasing cobot costs as well as a strong result, so far.
I think part of what's happening right now with the cost recovery or the cost collection accounts is is we're working with the others in the sector and we will work with the only be on how do you separate the impacts and cold it from from the day to day impacts of weather and things like that and.
And that's not clear to us yet even on the on the revenue side and how do you separate those things. So part of the consultation process will be too to get some clarity on how each of the utilities in the province will will capture and dissect those costs and then at that point they consultation war.
I will turn to what might be appropriate for us for recovery in the future from the utilities. So again, yeah pretty early on we are in consultation we aren't expecting really didn't clarity on what it might look like until late 2020 in early 2021. So we'll we'll continue to work.
The others in the sector in the we'd be through that and update you guys as we go along.
Hello, Thank you, Chris Robert's, Chris just a clarifying pull up the.
Let me just another question Weve cost starting to accelerate just in regards to bad debts, we had not seen that.
But they remain very flat in fact was slightly down on last year. So we know the provision in Q1, plus $14 million and we kept that we did not change it.
There's still a ways to go here in terms of clothing 19, So we kept that for now, but we've not seen an increase in died from that TV.
In regards to cost you did see an increase in this quarter 23 million that was primarily at the front end of Q2. So at the backend it's really slowed down here. So we did not expect that run rate to continue no gain if you end up with the second go through it laid that could change but for now we believe that those costs are going to they may increase increase.
Mentally from here, but not at that night, and then we're going to do everything we tend to try and offset the cost as much as we can.
Thank you appreciate that.
Thank you. Our next question comes from March RV, Let's see RBC capital. Your line is open.
Well.
Thanks, Chris I thought I heard you said its entire inside the district utility that some of the lower all M&A came from standing and crews and had a little bit reduced activity, maybe can help parse apart how much that contributed a quarter and maybe what would be more normalized.
M&A for the distribution segment this quarter.
Thanks, but I.
I wouldn't.
I think if you think about the questions on productivity, we were able to accelerate some productivity from late in the year.
So I don't expect that same level of productivity. We achieved this quarter to continue at that rate for the balance of the here in the first half of the year. If you add up the states from Q1 and Qt we've had quite an impact on productivity. So that's been a large source all the the eliminate savings here in Q2.
So I would still expect us to what you should see is quite a bit 19 cost sort of drop away now I mean, some of that what program pick up but I would expect a run rate to stay roughly similar so but that's probably the best way to look at about is that to and I was thinking to that a second ago neutral Tibet up close to 19 costs being heavily weighted to April night.
Okay.
And then are you able to provide any sort of a color around when you think about when trends are favorable whether it's lower storms or weather and try to get ahead on all M&A, whether or not that transmission distribution, but how much flexibility you guys have enough in a given here in terms of how much you can manage M&A costs.
Yeah, it's mark here.
As we've talked about it's really we tried to to manage and and achieve $50 million in productivity savings, we do oh have expectations by the only be that we complete our work programs during the the rate period, which in this case for both TX Mdx and go.
It is until 2022, so we do have flexibility within that rate period to advance and or move a work in and out of a particular year provided we achieve our overall objectives by the end of the rate period. So we do look at the flexibility based on what's happening with a year to a two.
Due to move work from from period to period with the objective of completing all are all are required work and and achieving the outcomes that we committed to to the only beat by the end of the rate period.
Chris do you have anything you want to add to that.
Yeah, I think the other one but then you can go that there is that we had some demand programs like customer connections storms and so one. So so we will be conscious of that also so we will the flicked <unk> program to absorb those additional costs and when those cost analyst day, we can accelerate some of the work program.
We had for future needs. So so we do have that flexibility, we insist that quarterly depending on what happened in the quarter and what we see happening for the balance of the yet so we have quite a bit of flexibility to do that work.
So with net revenues much higher in transmission given favorable conditions is that what we saw in Q2 to try to get ahead, a little bit on eliminates ending the quarter.
Yes, well, it's always transmission was more just the cases when we looked at the work that we could do safely and in isolated manner.
We focused on those kinds of activities that could be done safely full well stop so we accelerated somewhat from later in the year that allowed us to do that safely. So that's what you saw in the quarter not necessarily a they focused on bringing cost school with each year.
Okay. Thanks helpful.
Thank you. Our next question comes from Robert Kwan with RBC capital markets. Your line is open.
Good morning.
Just wondering if you could talk about your interactions with the government does operational as well as prospective generally but a couple of things I'd just your thoughts specifically first whether its operational just spending.
Your thoughts on.
71.
Whether you could quantify what you think the cost.
For the rate base impacted.
We'd be and then as it relates to rates.
Your discussions ever news.
Corporated.
Thoughts on the generation mix and the cost of generation. Notwithstanding you don't have any bad debt, maybe position to use a little bit more independent.
As it relates just optimizing the the mix within the customary basket.
Yeah, Robert It's Mark Scare me, maybe I'll talk in general about a bone interactions with government focus is that I'm seeing from government right now and and probably no surprise to you that the government is really focused on on on the impacts.
The pandemic and how they can support the electricity customers across a province until they've they've taken several auctions as result of that.
Including a holiday from Tom abuse rates fixing that or eliminating or or freezing the industrial conservation initiative, which which is really targeted that not penalizing large industrials for for using energy peaks because of.
The fact that we are energy logging capacity long right now and and they don't want them to ramp back and slow down the economy by doing that so they were trying to send.
The use of energy to to get the economy going so there's there's a lot of things. The government is looking out right now and and we've seen the actions taken which is really around supporting customers and restarting the economy, there hasn't been a lot of Chattered lately.
Around them.
The what they're doing with rates long term and what they want to do the global input or global adjustment.
I suspect at some point, they will turn into bad.
The bill provide the mechanism by which utility companies may be required to move utility infrastructure if necessary for toward the transit. So we are working with with the transit authorities to to make sure that we're doing our part in order to two not pulled up the investments in the.
Transit infrastructure, particularly in a in downtown Toronto. So so the risk utility is that if if utilities delay projects. Some of the costs can or cannot be passed on to the utilities. So we're working very closely with metro links on the ones that were.
Associated with to make sure that were in lockstep with them. So that we don't have the risk of bye bye.
Some of those costs being passed on us.
Got it.
See any major.
Moving to facilities that would be larger kind of tickets.
71.
Yeah. So far the largest said we're seeing is is the new subway line. There is some some infrastructure that needs to be moved as a as a result to that it's not you know a large in that perspective of its can change or or or rate base growth.
It is within the portfolio of of our capital program.
[noise] and maybe just finish.
<unk> costs.
You've highlighted your cost to date and largely being able to offset that.
What seems like more timing on the.
Pushed back into the second half.
Can you talk about putting numbers 46 million you current today so much of that you see.
Able to offset.
And they should get into the consultation process.
The largest.
LDC, what's your position.
Looking to recover.
'cause it cost versus.
Whether it's any cost offset or or bringing things that have benefited like whether in residential use into this just kind of minimized business.
Yeah, I'll start it and then I'll ask Chris talked for doing M&A costs. So so as I said earlier, we will work with the with the OE B and the others in the sector on the three cost recovery counts they've set up and just a reminder, that's one one is looking at the.
The cost for us to make the billing changes. The other is looking at revenue and the third is looking at miscellaneous costs such as bad debts.
So we will we will continue to work with the or will you be on that and and as we get more clarity on on how that will be calculated and what what parts of that might be recoverable in the future or we will we will share that with you.
Well, it's all just to clarify something too so the 46 million that you're quoting that the total subtotal, what we've tried to date and no reported to the only be every utilities doing that by the way.
So in that number.
$14 million that bad debts.
So we decided that essentially but that's related to non recovery of.
Well revenues and the remaining part is mostly eliminate so we had $5 million strong Q1, which reported in Q1 and $22 million in Q2, there was a small amount for lost revenue.
$4 million, but a lot or not so 20, I mean does that is the largest piece, which is eliminated like I said, we do not expect that to continue to increase at the late and so in Q2 buckets in small fleets. We cost in Q3 office job is to minimize that as much as possible and that's what we're doing to the extent, we can offsets and then we need to look at the.
The way that you calculate the net impact to cope with 19. So part of it is he's actually impact, but then often savings from the potentially doing differently. So so how much of that get subscribe to cope with 19. The ideal situation is if the industry could put off said like rule, but again that will come through the consultation process and not every utility has that.
Same ability to do that where we can do that will lead by example, but we're not expecting ever utility to being the same condition that that's a how's your line is.
It's different parties you need to look at the impact on load. It given that had a very positive weather impact. So how does that sort of get squared away. We could 19, we've not been reporting impacts on loads because 90, even through the tracking accounts, we want to discuss that through the console.
Patient consistent and show that when all the lines, but that's still effect transmit is as well as generators as well as distribution units. So so we're going to take part in the consultation process that comes up but right now that focuses on minimizing those cost as far as we can.
Makes sense. Thanks.
Thank you. Our next question comes from Andrew Kuske scheme.
Please your line is open.
Thank you. Good morning, the question really relates to your customer satisfaction scores and they've been rising.
So I guess for the real question is where do you want to beyond the satisfaction scores, obviously higher but where would you like to be what's the endpoints and how do you benchmark yourselves relative to other needs across the province.
Yeah, Great question, Andrew and you're right, we do want to be higher we are at some of that the highest we've seen in customer sat and a lot of that's driven by the sport we've been getting per customers in the improvements we've made in our in our customer service both from the call center as well as in our connections processes.
So we are seeing me a good.
The improvement in increase we're actually looking at how we can benchmark to other utilities across a across the sector. Both in Canada. The U.S. there there isn't actually a good consistent way in which utilities.
Measure customer satisfaction, which we found so far so we're we're working on on what that might look like and we're also working through the Canadian Electrical Association to see if we can standardize had at least across a Canadian utilities. So that we we can know how we oh, we compared to others.
The reasons why customers are satisfied with has so far is really kind of improvements in our time to restore power outages or improvements and reliability or the that the work we've been doing for advocating for customers such as our release measures for cobot as well as a trusted partners, we've been lobbying for or.
Advocated for customers with things like come off peak time use pricing, then and working with governments to to provide some relief for customers.
Areas that we can improve so that we can can drive up our customer even higher is is improving our true treat declaring maintenance efforts. So we've been doing out through our OTIPRIO program, but we will continue to do that and obviously electricity prices, even though we're a small percentage if that.
Continues to be a.
On the customers mines, so I don't have a target yeah, but we are looking at what is a good compared or we have consistently measuring customer satisfaction that we can compared to other utilities and we hope to have something not this year on that.
Okay, that's great color and when you think about that collection of activities and efforts you've had.
Through the system and your customer base is that part of your calling card when you have M&A discussions with other munis around the province.
Yeah, We think we think that our results are demonstrating.
We can bring to the table and we can bring to the table for other ldcs and and it's not just us saying, that's our customers telling us that now with some of the highest customer sat scores as well as or proof points, such as our productivity improvements and things like that so absolutely Andrew I think that demonstrating that the where the best.
So what we do is there is a good way too to incent, others too to look at us as a.
Partner or possibly.
A good acquired their assets.
That's great. Thank you.
Thank you. Our next question comes from Patrick can with National Bank. Your line is open.
Hi, Good morning, guys I'm just on the back of the strong quarter here, thanks to weather plus the positive impact AFFO still to come here from the DTA decision.
Can we just get a refresh on how much dry powder you see there being on the balance sheet to pursue LDC consolidation opportunities over say the next 12 to 18 months.
Yeah, Chris do you want to a well talk to that.
So so I think definitely a strong quarter strong quota really just underpins the current position.
Boy sit around and I suppose so.
It's maintain the current ratings, we didn't stay above 11% disappointed that we are comfortably above that.
It's my many time the benefit from the DTA decision would be factored into our indefinitely to date calculation until they reach certainty around when the did say will be with public three right. So let's say in one of the audio questions.
The smallest went the other question does that could be latest 2023. So it's too soon a pet to call. What that's why battery we have enough flexibility in our balance sheet today to continue to acquire a.
The smaller ldcs.
Karen I think Thats, where we can deliver the most W. In 2345 years. If we wanted to so there is no restriction there that's not a limiting factor for us and any any particular upkeep from the DTA still.
Some time off so it's too soon to give you a figure on just how much.
Flexibility that will provide.
Okay. That's helpful. Thanks for that and then over on the U.S.G. front.
No as you look to establish more concrete targets this year, such as GHG reductions.
I know most of your missions come from your your vehicle fleet, but curious as you continue to switch certain customers over from propane to electricity.
If that will count as a net reduction to your emissions.
And I guess, just maybe how material to switching opportunity might be for the company you know from a load standpoint say over the next five years.
Yeah. Good question I'm not sure have the details for the answer is that right now are.
Our GHG emissions. The mean sources of 2.1 to one is our fleet. The other is we do have a diesel generation for someone burden on integrated or off grid facilities as well as at six gases, which gas, which is a and insulating.
So using or and our equipment. So those are the three big areas that we're going to look to offset and set targets on on how we can reduce those switching from propane to electricity because it's not included in our our base GHG emissions right now we'll have to determine on you know how we how we take credit for or.
If we take credit for that the reduction in Gi. She as a result to that switch right now we're seeing a small uptick in our in our fuel switching program, so getting off of either either.
You'll gases or oil based heating.
Or propane to electricity.
I don't see it is a big part of a future growth or a big part of our GHG focus, but but it's something for us to think about Patrick.
Okay, that's great. Thanks.
Thank you. Our next question comes from Morgan is here with Laurentian Bank. Your line is open.
Good morning.
I'm not sure if you have that but just looking at the fine with potential LDC consolidation and targets what kind of cumulative growth to think that could bring and perhaps another way to think about it is even on an annual basis is our number targets that you have in mind, whether that's one or two things.
Yeah, Chris leads our or our growth portfolio, something an asterisk just be tough.
Hi, Mike Thanks for the question, so I I think.
We could it really depends on a willing seller in no willing buyer. So we definitely are willing buyer and we think we can bring the most benefit to the utilities that are within our service area. Today. So they weren't the remote locations that we can bring significant synergies there that will benefit customers in the long term, but also just let's hope the a phase.
Yes.
Watson so.
I I I think it really does come down to that I think mocking the question previously around close at 19, the pressures that may be facing.
Right now really we know the municipality to focus more on.
Helping the residents and ensuring the safe and reliable power just like we do today. So we really helping support them as we go forward today is a customer that we can only within our service territory and then we can help them in any other ways. We move forward, we stand willing and able to partner with any of them.
We'll continue to to to be there in terms of the opportunity. That's left there is around $9 billion all right facelift. The province that is not in the hands and say hydro one or an electric what does the consolidation of smaller LDC.
The largest which is one of hybris. If we exclude that is around $5 billion just under of smaller ldcs around the province, ranging anywhere from.
Tens of millions up too.
For the beating dolomite close to being told them up.
On a lot so they're all of the role we'd be willing to speak to all of them. It's just the cases when does it make sense and how do we bring the most value to the municipality and the the rate base. We did talk a little bit about a balance sheet up LNG can support a lot of these smaller roll ups, if and when they.
Hi, good right now so this year with focused on closing Peter Bauer and are really we just closed Peter Bauer here in August I really I will be in September in Q3 on the one we want that used to be very successful.
Acquisitions against its good to demonstrate how we partner and benefit the communities in which we we we work and we supply power. So that's not focus going forward. There is no specific number maybe not but there is around $4 billion, a bright basically afforded by that we think.
He is available when the time as Rob.
But pond.
Perfect. That's very helpful and just lastly, Im wondering if you could share perhaps you know one of the biggest surprises there take away.
When you been dealing with the cool, but could impact on the overall at night.
Yeah, It's mark you're maybe I'll just wanted to buy one and really I am I was impressed with the organization's ability to quickly transition to working from home and our deployment of technology to to enable that working from home as well as.
As our crews ability to safely get back to work.
Turning to quickly after the pandemic broke out and we put our safety measures in place.
So so I've been proud of and and impressed with the organization's ability to adapt overall I also think ITSM, it's really accelerated our use of digital tools and technologies that we've been we've been using or looking out for a while and and this is really provided an opportunity or or otherwise.
Forced us to really use those said I think some of those will stay long term and provide long term benefit.
That's great. Thank you.
Thank you and we have time for one last question or last question is funny lies hospitals with industrial line. Your line is open.
Hi, good morning.
With respect to their revenue be referring to the stronger year over year revenue I guess.
Q2.
You attributed the majority I believe to the warmer weather, but would it be more accurate to call. It.
The warmer weather plus the combination of load shift that.
Residential.
Yeah, well welcome to call it is Oh, sorry.
Or pick up on that definitely we've seen a shift based on behaviors and Ur Cobots brought some about on being more people working from home yet offices still being being open hotter weather has had an impact on not and ER and drove.
The peak demand overall so so.
We did see that the overall consumption is is how much energy our customers use them and their customers of the other ldcs use is dependent on the sector as I talked about before whether that'd be residential commercial or industrial it's a different story for each of them.
So Ah so I think.
Dissecting that as I said before what are the impacts of coal that versus what of impacts of the hotter weather and how do you separate goes out it's something that we'll work through with a with the other utilities as well as the we'd be going forward.
Chris do you I do want to add to that hurdle.
Sure Hi, lifes, so I would say that revenue wise.
On a massive that did come from weak, we say volume, which is the highest peak demand. So what drove that it appears to be planarity, whether or not increased consumption. It could be a shifting load about when we are using those peaks now with more people being at home. So we could be changing the shape of the peak, but not not particularly high load.
And at home I, just remind you that a chunk of our distribution business. These fixed. So for example, if you if you consume more palla made the flow through cost of power. So that doesn't come to hundred one so we bought the power, but we just got through so there is no no increase in net revenue to hydro one as a result is.
Well that but there's a second pot of on that which is when we received a decision on transmission. We received in Q2 and we received the number of one time benefits from that so we talked about conservation and demand management revenue. So once that decision with receive.
We're able to book that but that relates to pry use I mean, when all said, it's a book catch up revenue from Q1, because the decision Didnt come to Q2, So I would say roughly half of that comes from these onetime benefit that was just the timing of the decision and the other half comes from peak demand, which is not increased consumption, but its a.
A change on went the load that below peak has occurred so so I would say that 50 50.
The way that my question was.
Great.
I Didnt end was kind of what I was looking for Chris So Ah I appreciate.
The roundabout way I asked that in your direct answer.
Thank you.
Thank you and that does conclude our county session for today I'd like to turn the call back over to Omar job. It for any further remarks.
Thank you shed a the management team here at Hydro one thanks, everyone for their time with US. This morning. During what is definitely a busy period. We appreciate your interest and your ownership. If you have any further questions that weren't address on the call. Please feel free to reach out and we'll get them answer for you. Thank you again and enjoy the rest of your day NBC.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program you may all disconnect everyone have a great day.
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