Q4 2020 Hydro One Ltd Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the Hydro one limited's fourth quarter of 2020 analyst teleconference.
At this time all participants lines are in a listen only mode.
And the speaker's presentation there'll be a question and answer session to ask the question. During the session you will need the press star one of your telephone.
As a reminder of the call is being recorded.
I would now like to introduce your host for today's conference Mr. Omar job at Vice President of Investor Relations and Hydro one. Please go ahead.
Good morning, everyone and thank you for joining us and hydro one's fourth quarter earnings call.
Joining us today are our president and CEO, Mark for Wesco, and our Chief Financial Officer, Chris Lopez.
And the call today, and we will go over our fourth quarter results and then spend the majority of the time answering as many of your questions as time permits.
There are also several slides that illustrate some of the points, we will discuss in a moment.
It should be up on the webcast now or if you've dialed into the call. You can also find them on hydro one's website, and the Investor Relations section under events and presentations.
Today's discussions will likely touch on estimates and other forward looking information.
You should review of the cautionary language in today's earnings release, and our MD&A, which we filed this morning regarding the various factors assumptions and risks that could all.
That could cause our actual results to differ as they all apply to this call with that I turn the call over to our president and CEO Mark per worker.
Thank you Omar and good morning, everyone and thank you for joining us.
This morning, I'd like to talk to you about our fourth quarter and the annual achievements and will then turn to Chris to review the financial results.
One I think back to January of last year, we were entering the new year full of optimism.
And having released our strategy with wind at our back we were ready to charge forward and executing our vision and mission.
Shortly after our successful inaugural Investor day in March the World was transformed.
While the pandemic brought four new challenges. It also presents opportunities for us to demonstrate our support for our customers and partners in Ontario.
We leaned on our vision mission and strategy to help guide us on our way forward and set our two priorities to help us make decisions during this time.
Firstly to ensure the safety of our employees and the public.
And secondly to continue energizing life per Ontario.
And the hydro one has performed exceptionally well.
But the problem solving innovating and never losing sight of our vision of a better and brighter future for all.
We were able to advance our strategy complete.
Complete our work programs and have limited transmission of Covid amongst our employees.
And dedicated and safe and play base allowed us to deliver on the strategy that was put forward at our Investor day.
We've continued to build the grid for the future by investing and our assets we.
We deployed 1.87 and $8 billion of capital and and serviced 163 $9 billion of assets.
Which is within 2% of our stated goals.
This level of discipline and accuracy is commendable and most years, but exemplary when we considered the challenges posed by this past year.
We continued to invest and technology <unk>.
To modernize the grid.
And to protect our assets.
This led to transmission reliability b and the second highest it has been and 12 years.
We made sure our essential services, including hospitals.
Pharmacies and grocery stores and their lights on.
Safety and efficiency of always been a key priority for us.
We lost the safety improvement team, which after a thorough review came back with concrete recommendations to improve the safety culture of our organization to eliminate serious injuries and hydro one.
We will put these recommendations to work and the coming years.
One of the things my career and the utility sector has taught me.
Is that the safety utility is and efficient utility.
And 2020, we continued to drive operational efficiency and <unk>.
Work towards optimizing all aspects of our business.
We generated productivity savings of approximately $286 million.
Which represents a year over year increase and productivity of approximately 41%.
We recognize that our success is dependent on us being a trusted partner.
And supporting first nations customers and communities that we serve.
The pandemic gave us an opportunity to further strengthen these partnerships.
I am pleased to report the this year, we further accelerated our spending with our indigenous partners.
During the pandemic, we've continued to expand and they did a supplier base and spent $43 million with indigenous businesses for goods and services and 2020.
The highest amount to date.
And we were delighted to be recognized for the work we are doing by the Canadian Council for Aboriginal business with.
With silver level certification and progressive Aboriginal relations.
Advancing from our bronze level certification in 2017.
Our goal is nothing short of achieving of gold level certification.
Early in the pandemic, we reached out to the first nations communities that we serve and.
And how can we support them.
This resulted in us partnering with global medic to deliver over 13000 kits of food and safety supplies to first nations communities across Ontario.
We also launched the new funds to help communities respond to new and urgent challenges.
Charitable organizations.
And it's policies and indigenous communities and now apply for support towards pandemic response efforts and initiatives that improved physical and emotional safety.
This is part of the hydro one's commitment to build safe communities across Ontario.
The focus on customers and customer advocacy has resulted in us achieving our highest customer satisfaction score to date.
This reflects the ongoing engagement with our customers and supporting them with the program such as the suspension of late payment charges.
And returning security deposits.
In addition to the pandemic relief measures we put in place.
Just days after a global pandemic was declared we put in place of pandemic relief program to assist customers affected by COVID-19.
<unk> offering financial assistance and increased payment flexibility.
We know people across the province are experiencing monumental challenges and we have a responsibility to be there for them.
That's why we recently extended the financial relief and flexibility to small businesses, who have been experiencing hardship.
We also recently launched the connected for life program.
This is our promise to help customers stay connected to safe and reliable power, while we help them access financial relief programs and more flexible service options.
The events of the last year gave us the opportunity to advocate for our customers.
The encouraging and supporting greater customer choice with respect to time of use pricing as well as temporary relief offered by the government.
We applaud the government for their efforts to provide assistance during this challenging time.
We also applaud the government for improving Ontario's competitiveness.
And the last budget by removing a portion of the global adjustment costs from the electricity Bill for commercial and industrial companies.
This action will save our commercial and industrial customers between 14% and 16%.
And we will make the electricity prices and Ontario competitive with other North American jurisdictions.
The rate relief is important as we invest responsibly and our core transmission and distribution businesses and continue to innovate and grow our business.
Primarily through our investments and organic rate base growth.
And in addition to this organic growth we were pleased to announce the completion of the two local distribution company acquisitions.
Last year.
And this resulted in further rate base growth.
We are now busy integrating barilla and Peterborough and into the Hydro one network.
As we grow we're also keeping a keen eye towards innovation.
Earlier in 2020, we launched the IV charging network.
Our partnership with Ontario power generation to create Ontario largest and most connected electric vehicle charging network.
I am pleased to report that we have opened 23 fast charging sites across Ontario.
And on the or are on track to have over 160 fast Chargers across approximately 60 locations in Ontario.
And of 2021.
Part of a revision of the better and brighter future per all includes the cleaner and greener future.
We are proud to transmit and distribute energy that comes predominantly from zero carbon emitting sources.
We know we can take the further by reducing our carbon footprint and managing the impacts of climate change on our business.
As we reinvest in our system, we continue to adapt to our design and equipment standards to address the impacts of climate change.
We recognize the great companies are.
Are those the value diversity and create equitable and inclusive cultures.
Gender diversity has always been important to us and then signatories to the catalysts of cord I am proud to say we met those commitments.
As the leading Canadian institution. It is also of our duty to take a leadership position and the fight against racism.
In addition to signing on to the Black North initiative.
We also started a dialogue with our black employees with the objective of listening and understanding to inform the creation of meaningful ratio of quality programs.
We have now established of diversity and inclusion council to help guide us through our journey.
And the wake of the COVID-19, Lockdowns. We also felt that it was important to address mental health and wellbeing.
Hydro, one and Jack Dot Org and announced the partnership to address the growing demand for mental health resources.
The partnership brings free virtual mental health talks to young people and their families across Ontario.
At Hydro one we believe the governance around our initiatives is important.
That is why we chose to enhance our sustainability report further this year.
We aligned with the global reporting initiative the core standards.
And the sustainability accounting standards Board framework.
We also committed to aligning with the task force on climate related financial disclosures in coming years.
This effort is paying dividends as we were yet again designated a sustainable electric company by the Canadian Electricity Association.
And we recently received and ESG risk rating of low risk from sustained the Linux, a global leader and ESG research and ratings.
Placing that's 11 out of 156 and its global industry group from the utility sector.
And we were again voted one of the 50 best corporate citizens and Canada by corporate Knights.
This past year has been a busy one on the legal and regulatory of trucks.
We obtained a positive decision from the Ontario, and divisional court on the deferred tax asset.
With the expectation to have full resolution of the case from the Ontario Energy Board the <unk>.
First half of 2021.
We received a number of rulings from the OSB that highlighted the constructive nature of our relationship.
The only be approved the Arabia, and Peterborough transactions that I referenced earlier.
In their decisions they highlighted hydro one's unique position to extract value from these transactions.
We also obtained the favorable approval on our transmission rate application.
Net the transmission capital investments and rates till the end of 2022.
This means that both of our distribution and transmission segment, now and and incentive ratemaking framework until the end of 2022.
Given us regulatory certainty for the coming years.
We like the incentive ratemaking framework as it gives us an opportunity to share the fruits of our labor with our customers.
This year, we shared approximately $15 million with our customers on accounts of high demand and disciplined cost management.
The successes on the regulatory front have helped reaffirm our preparation for the upcoming joint rate application for both transmission and distribution businesses.
The J Ralph will consist of both the distribution and transmission rate applications per a five year period, starting in 2023.
To prepare we've embarked on a robust customer engagement that helps inform our views and plans with respect to affordability and service levels.
We are more in tune with the needs of your customers and this application will be informed by that feedback.
We expect to find the filed the application and the second half of the year.
And our ability of problem solve and being nimble and would not have been possible without the devotion and hardworking of our employees and the partnership of our unions.
We were pleased the despite the pandemic, we were able to renew and two collective agreements with the power of workers Union covering a large sector of our employees.
We have great partnerships with our unions, particularly as we continue on our journey to zero serious injuries.
And I am proud of how all of our employees have supported one or another be creative and adapting to changing circumstances.
And United behind our vision, which enables us to deliver great results for our customers and shareholders.
Hydro one was selected from Forbes annual list of Canada's best employers for sixth consecutive time.
This honor reflects hydro one's the ongoing commitment to our incredible employees, who proudly energize life for our customers and communities in Ontario.
Chris over to you.
Thank you Mark good morning, everyone and thank you for joining us today.
I Hope you and your families of both safe and doing well.
As Mike mentioned, there was the let's be positive about together, we've accomplished a great deal since launching our strategy a year ago.
Faced with the challenge of COVID-19, our teams have continued to perform admirably.
I would like to thank all who have contributed to this positive outcome and unique and challenging circumstances and look forward to continuing to create a better and proud of the future and 2021 and beyond.
In terms of our financial results for the quarter, we saw a decrease in earnings per share or EPS from 35 since last year compared to 2017 this year.
For the full year EPS was $2 96, and adjusted EPS was $1 51, compared to EPS of $1 30, and adjusted EPS of $1 54 last year.
On a full year basis on income in 2021 sort of a $1 77 billion.
While the seems extraordinary this includes the one time impact of the Ontario Divisional court or OTC ruling on the deferred tax asset of $867 million.
Adjusting for this and comparing to the adjusted net income for last year, we see a marginal decline and here are the year with adjusted net income at 919 million last year compared to adjusted net income of $903 million this year.
So the three main drivers for the decline and adjusted earnings first you will recall the one time catch up revenues for 2018, following the distribution rate decision and adding approximately 85 million of revenue or 11 cents EPS to 2019 earnings second.
Second and 2020, we incurred direct costs of approximately $50 million related to the COVID-19, pandemic all of which I will elaborate further and the coal.
Despite the challenges faced in 2020, we were successful and partially offsetting these headwinds with productivity improvements and stringent cost control leading to an overall reduction and eliminate.
In addition, we recognized revenues related to prior year conservation and demand management.
And the proof rates as part of the transmission and distribution rate decisions by the Ontario, and the G Board of ebay.
And finally, the heart of where the drive up demand as part of summer, which further support of revenues.
We are once again pleased to share of approximately 15 million with the customers buy the earning sharing mechanism following the admirable performance and the distribution segment over the past year.
Consistent with last year. This is an example of the constructive incentive based regulatory model and which together, we can and has enhanced value for our customers we.
We will continue to strive to be of leading utility and efficiency and productivity.
On the productivity front, we achieved 286 million and productivity savings in 2020.
This is an increase of approximately 41%, which brings our cumulative productivity gains since the initial public offering to over $775 million.
We saw meaningful increases in productivity and in areas such as operations fleet optimization procurement corporate costs, and Ikea contract reductions and call center costs.
Overall productivity was split evenly between Oh, M&A and capital expenditures.
Focusing on the fourth quarter and the main driver of lower quarterly earnings as compared to last year was high of COVID-19 related costs.
Reduction of insurance proceeds received.
Depreciation and asset removal costs due to growth and kept the lessons from timing of work.
And high Texas.
And these will partially offset by range previously approved by the Ontario and <unk>.
Revenue net of purchase power was higher year over year by approximately two 5% the distribution.
Business was the primary contributor can you increase revenues and distribution revenue and net of purchase power was higher by 7% year over year.
This increase was the result of distribution rates approved by the OBP and 2019.
The addition of revenues attributable to the Peterborough and the B and the acquisitions.
And the lower regulatory adjustment related to the earning sharing mechanism as compared to last year.
Transmission revenues were lower by two 2% and the fourth quarter compared to the same quarter last year, primarily due to lower peak demand driven by weather.
The lower transmission revenues were partially offset by the <unk> decision on transmission rates, which included the recovery of certain other post employment benefits well OPEC costs and.
Now expenses, making the net income neutral.
On the cost front operating maintenance and administrative expenses for the fourth quarter were higher by $34 million or 14, 2% versus the fourth quarter of 2019.
The increase was primarily due to COVID-19 related costs lower insurance proceeds received from the Finch Longwood and Mary.
<unk> and 2020 and the costs that have been collected and revenue and recognized and eliminate following the OED transmission rate decision.
As referenced earlier.
Net charges on net income neutral.
With respect to quite a bit and 19 costs for the fourth quarter, we incurred operating cost of approximately $18 million.
And with two reasons for these costs. So this following the issuance of the OEM stopped proposal and December we reverse the recognition of the regulatory asset associated with the incremental bad debt provision recognized in the first quarter of 2020.
And we'd be staff issued the proposal following receipt of reports from external consultants regarding how to treat COVID-19 related costs and lost revenues.
The staff proposal suggests that utilities must demonstrate the financial need and meet certain criteria to recover COVID-19 related costs and lost revenue.
Based on how interpretation of the staff proposal. It is unlikely that we would qualify for recovery of any significant amount of COVID-19 related costs all of lost revenues.
Accordingly, we have of boost the recognition of the regulatory asset associated with the incremental bad debt provision recognized in the first quarter of 2020.
And of recognize this expense and eliminated in the fourth quarter.
That said consultations with the <unk> are still ongoing and the final one decision is expected in the first half of 'twenty and 'twenty one.
Second we had additional expenses this quarter with the purchase of additional facility and cleaning related supplies.
Consistent with the previous quarters and the impact of the measures taken by hydro one to support our customers, including the pandemic relief fund financial assistance and increased payment flexibility.
Attending the winter release program and the temporary suspension of late fees are not expected to be material.
On the financing, we saw a slight increase of $3 million or two 6% and interest expense in the quarter compared to the same quarter last year.
And due to higher weighted average debt balance driven by the successful debt issuances in 2020.
And last year, we issued a total of approximately $2 7 billion of debt between Hydro one limited and Hydro One Inc.
And at competitive rates.
As referenced in the last call we used the net proceeds of the issuances and the fourth quarter to redeem all outstanding series, one preferred shares of Hydro one limited.
And accretive transaction.
We expect to use the remainder of.
All of the proceeds to repay and or prepay maturing long term and short term debt, including maturities and early 2021 and for general corporate purposes.
Yeah.
For the full year financing charges were lower by 43 million or eight 4% compared to full year 2019, due the financing costs related to the merger.
And the first quarter of 2019, partially offset by an increase in interest expense due to the increase and the weighted average debt balance and 2020.
Overall, we are pleased with the stability of our balance sheet and a robust investment grade credit ratings.
As we look forward to 2021, we will continue to access the debt markets Opportunistically.
Turning to the income tax recovery.
Which was 795 million compared to 6 million last year.
The resulting in effective tax rate or ETR was 77, 6% negative.
Compared to <unk>, 8% negative last year.
The increase and recovery was primarily attributable to one time $867 million tax recovery recognized following the Ontario Divisional court ruling on the deferred tax asset.
Similarly last year, the lower effective tax rate, resulting from the $51 million recovered and related to cost associated with termination of the merger.
Adjusting for the two nonrecurring events the <unk>.
Adjusted tax expense was $82 million compared to $45 million last year.
This represents an ETR of eight 1% compared to four 6% from 2019.
These values are consistent with the EPS guidance range of 6% to 13% debt, we had provided last year.
We expect the ETR for the remainder of this range for the next five years subject to the timing and manner in which the OLED will implement the divisional court ruling.
We expect to stop collecting more revenue with a corresponding increase in Texas one.
It is resolved.
The increase in annual tax expense was related to two main factors first and 2019, we had higher incremental tax deductions from the deferred tax asset sharing relating to the catch up with the need for 'twenty and team.
We had temporary differences related to the mix of assets placed in service, which impacted accelerated CCA venues and higher tax relating to non service overhead costs recovered through a home and Nate.
Together. These factors resulted in a Hyatt and T O.
During the fourth quarter tax expense was $27 million compared to 2 million last year.
The effective tax rate for the quarter was 14, 2% versus <unk>, 9%.
The increase in income taxes for the quarter was primarily due to temporary differences, resulting in lower deductions.
In addition, we had lower incremental tax deductions from DTA sharing attributes into the 2018 catch up revenue.
The increases were partially offset by lower income before taxes.
Moving to investing activities.
And the investments and the quota increased by two 7% with the majority of these increases coming from the transmission segment as we continued investment and multi year development projects.
Thank you and refurbishment and building out the new Ontario grid control Center.
Capital investments and the distribution segment declined year over year, as the lower investments and reinforcement projects and lowest bang on with the customer connections.
For the year capital investments were up 12, 7% and in line with the out of expectations.
You'll notice that the future capital investments per fall. So both of the segments have changed marginally for 2021 and 2022.
This is due the timing differences in our project planning and does not impact of projected rate base growth.
As a reminder of.
The capital investment number it's the future years remained subject to OMB approval as part of the joint application.
We placed $878 million of assets and servicing and the fourth quarter and.
Three 4% increase.
Yep, owing primarily to the distribution segment.
Distribution assets placed in service rose by 13, 7% driven by the completion of the customer contact center.
Technology modernization project.
The Woodstock operations Center.
And higher volume of storm related the placements.
The decrease and transmission assets placed in service during the fourth quarter, primarily from a substantial investment placed in service from Leamington transmission station in the fourth quarter of 2019.
On a full year basis assets placed in service were lower by three 8%.
The transmission segment was lower by 12, 4%, mainly due to the in servicing off of Nigeria reinforcement project and 2019.
The distribution segment was up 13, 6% versus last year, primarily due to the same reasons of trade the increase and the fourth quarter as well and the completion of the Leamington transmission station teed up and development project.
On regulatory matters. We are very pleased that we have stability with both segments, having approved rate cases and certainty on our forward capital investments under the incentive ratemaking framework through 2022.
As Mark mentioned, we look forward to filing of joint right application and the second half of this year.
Finally, we are awaiting the final decision on the timing of the DTA recovery and expect the resolution within the first half of the year.
Lastly, we continue to be committed to and affirm our 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 we ask the operator to explain how she'd like to organize the Q&A clothing process.
And in case, we arent able to address your questions today My team and I are always available to respond to follow up questions.
Please go ahead Ken.
Thank you as a reminder to ask a question you and we need the press star one of your telephone to withdraw your question press the pound key please standby one we compile the Q&A roster.
Our first question comes from Mark Jarvi with CIBC capital markets. Your line is open.
Yeah. Thanks, good morning, everyone.
And maybe Chris can win.
Clarify just a little bit and you say it was $15 million of earnings sharing with customers and maybe split between distribution and transmission and maybe you can even share roughly what the sort of earned ROE for the transmission and distribution in place this year.
Hi, Mike Thanks for the question so the.
And the sandwich entirely attributable to the distribution. So it all comes from distribution and it compares to last year's Esa and <unk>.
Of approximately $20 million, so pretty much achieving results in line with last year.
Okay.
And then I think there was a comment also about opportunistically accessing the debt markets I mean, you did.
Come to market.
And in the fall of last year and take care of inventory. This year. So what else could that mean is there anything longer dated one side of the higher coupon notes out and playing 30 of 2032 that you could opportunistically refinance or maybe just share any color in terms of opportunities and the debt market.
And thanks, Mike.
But overall really one way, we're indicating the areas that we ended the year with.
It'll be a higher debt, our cash balance and we normally would so we ended the year with around $695 million at Hydro One Inc. And that really was to pre fund a.
Our debt maturity here in February so we are not.
We have no need to come to the debt market until the second half of this year, Yeah, we may come and only if the right opportunity presents.
Not looking at those long term and.
Refinancings, and they don't really I mean to get out of the ones. We have today, we would have to pay out of market and then you would refinance it and today's right. So the there isn't a large gainful the rate pays off of the company and that matter. So so really we're just highlighting the fact that we don't need to come to market anytime soon at least until the second half of this year.
And when we do come to market and all debt requirements may be slightly lower than normal.
But we could also consider funding some of the mixed use debt maturities of about one coming June early and the media and January so it's something that could be and the order of 1 billion to a billion and five as is normal we could be almost on a slightly lower side of that and not until the second half of the ship.
Got it thanks for clarifying.
Okay.
Thank you. Our next question comes from Robert Kwan with RBC capital markets. Your line is open.
Great and good morning, just on the.
Some of it costs.
You mentioned that Youre going to continue to work through their process.
But given the huge.
So the income statement.
How far would you.
Thanks, Dan and I'm thinking about.
R&D or to the court and similar to what you did on the tax side.
And it's Mark here and maybe I'll start with that and then Chris can weigh in and so so yeah. We are working through the process. As you said Robert on December 16th the OE be stopped released their proposal of the the deferred of cat.
Accounts.
And really.
This is the the stops opinion, we're still going through the process and the panel will make the final decision. So there are subsequent sessions underway and the OSB anticipates finalizing its guidance and the spring of this year, we are participating fully in all of those subsequent sessions with the with the OSB as law.
Along with our other partners and through the association that we belong to.
And I'm really what the only be stopped proposal was and again. This is this is the staff proposal of this isn't the final decision is that utilities needed to demonstrate the financial need and meet certain criteria to be eligible and seek recovery and.
And essentially what they're saying is is the mechanisms that are in place right now.
With our with our incentive ratemaking construct allow for things like this so we'll continue to participate and those we did reverse our bad debt provision the we'd taken earlier in the year and it was primarily based on on the the.
The staff proposals that are that we felt there was less certainty around the recovery of that bad debt and based on those proposals, but we'll continue to work through that process. Chris you got anything you want to add.
Yeah, So I think really close.
And the only thing I'd say is that we are being conservative here and given that there still is some debate around what can and can't be recovered in.
And the stopped proposal if you read of it talks about of general principle debt. If you are above your allowed ROE lead and they took the there's two tests being financial need and certain criteria of the financial and he does he feel overeating well above your allowed ROE and potentially you know maybe you shouldn't recover.
And then meeting certain criteria was when there was a specific in position.
And the extinction of of the winter ban or some government direction as part of COVID-19 that they would make exceptions for that so still a lot to be result, Robert we of being conservative at this point and we're also conscious that every utilities affect the differently. So we want to make sure that it's the right decision.
All of the electricity industry, and Ontario, not just philosophy here, but yeah.
Looking forward to the shield will not really no.
The impact of could still change from the point forward. So I wouldn't read into that the reason the recovery what we're suggesting is right now the conservative approaches to write it all off and that's what we've done we ask of tracking it and were still part of the conversation.
And just to follow up Chris you brought up a really good point there of that worked out okay for you and 2020 because of all of the great work you did on productivity savings and you've got saved by weather.
And you just hopefully it doesn't and if it continues to play out through 2021.
You can't.
Necessarily when you definitely can't bank on weather and necessarily the same.
And further improvement and productivity savings. So I guess question just like the hardest unites us.
Like I said, we're going to stay and the conversation and we can agree on principles and I think that's what that's what the OE pitstop of trying to do because I'm talking about of principle based approach that meets the needs of the utility industry overall and so that's why we still day. So I agree. It's all of the case of saying look at work the 2019, 'twenty and 'twenty. Therefore, it's it moves forward.
The other thing I'll point out Robert is that stops the opinion and then by the decision is made by a panel of the only the two separate and distinct parts and.
So it's still a ways to go to to get to a final conclusion, we're still fairly confident given the the large increases we had on COVID-19 that you were referring to really happened very early in the piece.
I personally don't expect to see that reoccur now we are ticking along at a much smaller boone right to stay safe and healthy and operations, but early on as you would appreciate when it first strike you know a lot of.
Of those direct cost of crediting Q2, and Q3, so I wouldn't expect that to be the same and going forward. So I don't think of the cases.
And it's it's one for 2020 and one for 'twenty and 'twenty. One I think there are equal in Austin and piece of the day, but we're going to remain part of that Robin and so it's not a case of just walking away. It's the case of spending and that compensation.
Got it and making sure.
Im sorry, guys.
Let me pick out of the add Robert is as your point around around and kind of weather helped us hold last year with which it absolutely did but theres a lot of puts and takes to load and and we don't have and approved wave from the b to really dissect the COVID-19 impacts from from weather, but I would point out net in January and February from the you know and this is all of pulp.
The information the the loadings up again over and over previous years year over year by 1% and in.
And January and $3 five per cent in February. So you know I think there there's just not as I said puts and takes to load and.
And we're not trying to dissect those of these points, but just point out that the we are entering the year and in a fairly good position.
Understood and if I can just finish on.
And my question around customer rates.
And you've had a focus on customer facing initiatives and navigate some of your customers.
Trying to find different ways to keep rates affordable.
And I guess, just mark with your integrated utility background.
And having been in Ontario, now for a little debt are you getting traction.
And all level with respect to things that you've seen and done that could help achieve efficiencies reduce duplication drive costs out of the system.
To kind of help rate payers, but not necessarily.
The impact of hydro one.
Yeah, Great question and.
Yeah, I am seeing a much better cooperation over the last year with the the of the different players and the sector. So the oil you'd be the I S. O ourselves. The other are the other entities.
Also pleased to see that our that the government and made the changes that they made which you know one of the biggest drivers of the cost and Ontario is the global adjustment is the result of that the the policy to close down coal early and move to renewables.
Government recognize that in and their November budget, and they took a substantial amount of the global adjustment off of the ratepayers and put it on to taxpayers, which I think was prudent from my perspective. It was government policy the drove those costs not the the utility sector. So I think that was a really good move with.
Which helped to reduce rates on customers overall, but it also help too to facilitate all of the the people and the sector.
And I do want to point out that we did recently launch our connected for life of program and and and I won't give you a little bit of context of what that was of both and that's really our promise to keep our customers connected during this time.
And what we discovered is that a lot of our customers Werent aware of the AR the relief available to them and so really the connected for life is two to attempt to reach out to our customers to get them to contact us and.
And to work with us if they are having trouble paying their bills, so 70% of our customers. When we surveyed werent aware of the relief available and the 8% to billing wood wood are of balanced billing throughout the year would help them, but only 30%. We're aware of it. So there's a bunch of programs that the customers weren't aware of so we launched the.
The connector per life program on your specific question around you know and one of my seen as far as opportunities to drive out efficiencies and the overall sector.
I think where we're getting to that there's new leadership at the OE B who's looking not looking for for that and it's open to feedback and which is a it's a really nice oh and you know.
Breath of fresh air for us because they are listening to our ideas the.
And so is working with us on on options to meet future loads and what the most efficient way of doing that is and and we're working through the other L D CS and the province.
And on putting together joint submissions on these types of things so I I see it real cooperation across the sector and the last year that I'm I'm not sure I saw when I first came back.
That's great. Thank you very much.
Thank you. Our next question comes from Rob Hope with Scotiabank. Your line is open.
Good morning, everyone.
The first question's just on the day wrap.
You said you had started consultations with your customers whats your kind of initial asked there or are you looking for any kind of changes of how the revenues of our structure and how the ROE is structured or are we a little early there.
Yeah, maybe I'll talk a little bit about the process. So we are still under the the you know.
Evidence development.
The stages of preparation, we did do two rounds of customer outreach and very extensive of a customer outreach and far more than we've done and the pass and part of more than.
From what we understand any other utility has done and that's really too to test our customers' appetite for different levels of spend and what that might mean to bills and what that might mean to reliability of the system and.
And so so we just finished the second round of customer engagement about 43000 customers did participate in that and there was an extensive online booklet that they had to go through which really commented on you know of a certain level of spend you would get this level of reliability. This was one would mean to your bill and and and we got really good feedback from that.
Which really supported our case and our need to invest in our and our existing assets to keep them safe and reliable for the for the long term.
So as you know the the the.
The setting of the ROE and the end of the process and the the regulatory construct chart our debt to equity construct that's defined already so that's not up for debate and and it's it's a formulaic so and so we won't be debating that but we think we're in good shape to file and on track to file in Q3 of 2020.
And one this year.
More of that joint rate application.
Alright, Thanks for that and then just a follow up on the earning sharing mechanism.
And where the COVID-19 costs, specifically the ones that you booked in Q4, but that was that included.
Or was that accounted for in that $15 million of earnings sharing or is that the set aside from it.
Chris do you want them and give the specifics on that.
Sure. Thanks, Rob Yeah. So the the way the of earnings sharing mechanism works. If you look at the overall.
Net income of the.
The segments. So in this case it was distribution so that $15 million a like all the other COVID-19 the costs would be included and the net income that you calculate for that segment sort of beating me then you work out what your amount of Alibaba and is above your of loud and clearly we were above 100 basis points over L. L.
The early which means that we shared any of that excess.
Earnings with the right pace and that's what made up the 15 million. So it is net of all of the COVID-19 costs that we've incurred during the year.
Alright, thank you.
Thank you. Our next question comes from Linda and Thank Alice with TD Securities. Your line is open.
Thank you.
I was wondering if we can.
Reflects maybe an ethical local pandemic has and.
Unfolded and unfortunately, maybe some of the local distribution and utilities.
Utilities have not fared as well as hydro one.
So you know how has hydro one and been able to provide assistance to the LDC to date.
Strengthened over time and might this ultimately lead to an acceleration of consolidation can you talk about what the the pulses and your conversations right now and at this point.
Sure I'll start with how we can support them and then I'll ask Chris to talk about the opportunity for consolidation because the leads that portfolio. So you know Linda we weave.
Recognize that the the old D. CS are our customers. So we've been there to support our customers through this.
Early on there were the liquidity concerns overall with the L. D T sector.
And the and we joined forces with them to advocate for certain relief with the ies. So.
Which really gave them a backstop that if their customers weren't paying them you know that they had some support from the eye and so on payments to the ISO So really we've been we've been you know.
And part of the the overall sector to advocate core for you know how the how the entities can support the sector. During this time.
And and we have you know.
Through our through our customer and our community outreach supported customers. So for example, we we launch the a pandemic program where communities could actually applied of hydro one for for a grant of up to $25000 to support them with the with health and safety measures, including the.
The health measures that they need for the community and.
And a lot of that was recognizing that we and our budgets, we we budget and allocate a certain amount for community events and the province, and a lot of those weren't happening. So we were looking for ways to get our to support our customers through that through other mechanisms. So we did that.
So Chris do you want to talk about about consolidation and what it might be.
So.
Just first quickly expand on the development of all of our approach with L. D C. So.
And as Mike said, there of customer valves, and so that's being developed out and we're doing everything we can't help and they're also appear within the electricity industry and Ontario.
Obviously, it's on a number of associations as to why debt advocate for our customer, but also to the industry, including the L. P sees them. So we're working to ensure that they are supported and I'll tell you early in the process. There was this belief that as Mark said, they were gonna have credit challenges well through industry consultation and.
Support and they ended up with some support through the ASO in terms of and they ran into some financial challenges and I had some financial support that the government of Ontario, as well as the federal government helped the municipalities with the purchase of municipal bonds.
Really gave them access to financing throughout that period, which are laid a lot of those concerns debt that would day, but really we are being that that good partner a good provider.
And then we will extend that relationship into consolidation and the future. If we can work together in a in a in a way that's.
Meaningful for customers and and for the municipalities each municipalities different I'll be the first we acknowledge that so it's not a case of it's a competitive and electric market with everybody with the same objectives.
And for profits and for other areas. So.
And we go to approach each L. D C independently and really work with them on what makes sense per day municipalities and.
I do think it will enhance the ability to to complete LDC consolidation.
What we said early on and the in the Covid.
COVID-19 situation was that we weren't going to be predatory and anyway. We're there to support them first and foremost I think as we're coming out of COVID-19, we are studying this conversation around what can we do more you know, we part and the better with some during COVID-19, how can we now help them achieve their objectives are and the municipality for the next.
You had 15 20 and 40 years so the they're.
And they're starting now and Linda I would expect it would help.
And I don't have done, but the point today that I expect it would help accelerate LDC consolidation going forward.
Thank you and as a follow up.
There's and I guess and.
And the drive for economic stimulus spend and the province, and I'm wondering Mike.
And like that create incremental infrastructure build opportunities for hydro one.
And you know given.
Given the the tradeoff between reliability and cost and you've got some good feedback on that I'm wondering if there that also makes the point of case for more investment and.
And I guess, the the third Congo. My question would also be and consultations with your.
With your staff and your Union and what sort of support is there for them for innovative solutions to drive efficiencies and.
And enhance the rate process now for the next five years that beyond 'twenty and 'twenty two.
So I'll start with the the economic recovery and and really you know we were expecting that the government and the last budget pet for it to be and economic recovery budget, and then theyre going to read the at least another budget and March which originally we thought it was gonna be of economic recovery of budget, but given where we're at with Covid, we expect its likely going to be.
More of a support budget and the likely.
Need to release and another budget and the fall, so which which we're expecting to be the economic recovery. One. So what we're doing is is we are we are operating up where theres opportunities, where we could help stimulate the the economic recovery. We've also pointed out that of our investment in our and our current rate base.
The growth does have a large spin off into the economy of the Ontario and <unk>.
And as we execute that we are supporting it but we have identified opportunities to advance spending on certain projects debt, one wood wood and.
And increase our our spend which kind of pullback from the communities, but also can open up the industry, we've talked about the the Leamington area and southwest, Ontario, and Theres opportunity for more transmission down there to unlock more.
More supply to that area, which which there are there and nida.
As well as we're working on the wall of sick and line as you know and there is an opportunity that if if the Ias one of the government wanted to advance that and accelerate that we can do that as well. So we're putting those types of things on the table to say here's.
And here's how we could support the economy by spending and our existing assets, but also how we can build new assets, which would open up other sectors of the economy from further growth.
Yeah.
And the second part of that is sorry, sorry, yeah, yeah, the type and part of that which was the the innovation of our staff. So.
One of our productivity achievements are a ground up driven productivity achievements and theres not one thing that we've done to achieve the level of productivity of good talked about we have what we call of lighthouse program in our AR and our distribution sector, which is really call. It a similar to a Toyota of lean type process, where we engage.
Mine are employees, and and problems and and solutions with which drive out efficiency. So we've got a list of things that are that we can and will be looking at and the and engage and our frontline staff in the solution to that to drive out of more efficient organization.
Thank you.
Thank you. Our next question comes from Ben Pham with BMO capital markets. Your line is open.
I think like the morning, it's one of you can talk of that about the.
Perhaps on some of the volume trends you saw kind of quarters of transmission was what was down and so that that's most of the weather related and you started distribution ramp.
Ramp up and Youre seeing some uptick and can recover this year. One of you can unpack that a little bit and talk about the residential.
Volume trends and C&I and the one weather impact probably.
Yeah, I can talk generally about that as I said earlier the OSB hasn't.
Really come up with and approved methodology to kind of dissect you know.
And how we separate normal patterns from Covid, but we are seeing in the residential like you said in in Q3 or Q4, sorry of the residential overall consumption was up on the distribution side, yet the peaks were down and really you know I think that's just representative of the number of people who are of work.
And at home and as the government puts.
More constraints on on.
And.
And people not moving around the comments are going to the businesses.
Youre going to see that on the residential side and it's gonna go up simply because people are at home all day.
The on the peak aspects of a lot of it's driven by weather, but there's things like the hiatus on the industrial conservation initiatives, which which took the pressure off of the industry from from shave and peaks. So so you know there's weather input and there's there's decisions such as that the drive.
And the outcomes and I think theyre, all contributing to what we're seeing but as I said, there's no real approved methodology that we can dissect those right now and and wouldn't want to speculate on the the makeup of each of the segments and and what's driving the the lowered both on the PT side and transmission and distribution.
I pointed out earlier, we are seeing you know in January and February debt, but they they are up year over year again and the law.
One of that I think it's because people are we're kind of home as well as we haven't been of of cold snap this debt the.
And the last month.
Okay.
And maybe to follow up on the joint.
Application you're implying.
Do you think you have.
And we will have enough visibility for.
But the duration of that that you're thinking here I mean, obviously the and.
And as he mentioned that the volume because there's so much the debatable an unprotected projections, perhaps on sustained work from home and.
The.
ROE and moving around and walked and where interest rates and are going and you have to be mindful of that but youre going and ROE and how long do you Wanna one picks up the five years and and also the.
The team of electrification and when that comes on and do you see.
The other theory.
And a big push for you guys the tap of the five year.
Duration and the plan or.
And maybe just thinking all of the latter.
Yeah.
We are required by the <unk> b to file a five year plan and the and right now that includes the five year load forecast.
We will this summer when we file we will we will submit based on what we know today, but but we will provide evidentiary updates and near the end of the process. The next year both on the rates aspect based on current rates.
Our next year as well as on current thinking around the load forecast. So so there is a lot of uncertainty and the load forecasting right now because we're still in the middle of the pandemic.
We think that we will get more certainty and clarity on the impacts of the longer term impacts of upload.
And by by the end of next year, we'll have more clarity and we do today.
And the the load is is you know one.
One thing I would say is as we reset the load going into this period, so really there wasn't the climb and load and the 2015 to 18 period.
We reset that AR and AR.
Latest applications, which really kind of things.
So where we're coming from a good position on that and are and will continue to monitor the the lower the overall, but we do have the opportunity to reset of just is just the for the period starts.
Okay.
And.
And you mentioned that the COVID-19.
That's reflecting the.
E S and and so it may just to close all of the.
The question there a debt I mean, if you.
If you push hard on ongoing through the appeal on that.
And I really question I mean and.
And you basically are the recovery.
The recovered from customers and you're pretty good and half of it back to customers and that.
Christina.
Yeah sure.
The increased the part of it yes, so we said $15 million with customers, which meant that the overrun and was around $30 million. So.
First 30 million will be shade, and 50% with customers and so you're absolutely correct and hence that was my comment earlier and the call around the AR the position of the only be stuff around if you've ever and a position where you were above the allowed ROE and when you're over on the right and mechanisms and their opinion.
Take care of reducing debt.
But that is the position that the shopping keep it was on the downside of the downside would be true as well so that's.
That's the principle based approach that the only be stuff at the cadence and Youre correct and we would ship 50 per cent of any recovery with banknotes.
Okay and then my last my last question is on a 2025 Capex estimate of the you pointed out and put that out maybe around the the following the joint application and the second half.
Chris do you want to do you want to pick up.
Can you just repeat that please spend on just I couldn't catch it.
Yeah sure. So you you have you ever.
And for your Capex program, right now and what's the timing with respect of adding another year of their debt.
And in conjunction with the the joint application or if he do it because the person out earlier.
Yeah, exactly correct and.
We looked at do we had a zero and today.
It would be based on.
Our practices to try and stay as close as we came to what's been approved by the OE beat to give certainty to twin of investors. So as soon as we file the the.
The joint right application will extend the playbook and it could be beyond five years, and you know that we're going to provide clarity in the application at the 2027. So it's likely that we would do that at that time.
Okay, Alright, thank you very much.
Thank you next question comes from Andrew Kuske with Credit Suisse. Your line is open.
Thanks, Good morning, the Mark in your opening comments, you outlined reliability and just the improvements you've seen over the last I think it was 12 years.
Could you just outlined the little bit on how you think that translates into economic benefit for hydro, one and ratepayers and whether it's by way of smart or maintenance costs and freeing up capital for growth better customer relationships to just give some color on that that would be appreciated.
Yeah.
I think all of the above Andrew you know when we do our customer survey and on what's important to them.
Reliability is important too to them and.
And on the upside and gives us good customer satisfaction. When it's not there is the number one thing that drives down kind of summer satisfaction. So so there is a customer and you know driver around the.
The of the reliability of the system.
And my and <unk>.
My opening and I talked about the transmission system and because of the transmission system as the as the backbone and so the main arteries the.
And the reliability of that system is really important and so you can see that our our focus has been on ensuring we are we maintain the reliability of that system on the distribution side of its quite a different story being our reliability.
And is third quartile overall part of that's because of a rural as part of our different route right application is recognized and best over time.
And because we've had to move costs out and deferred card the first spend for other reasons.
We are looking at investing and the distribution side two to improve the reliability there. So we.
We do need the capex to do that and and part of our customer outreach is to to get the support from our customers and the evidence.
To support our need to do that and so you'll see that one we filed the joint rate application.
Okay. That's the.
That's very helpful and then of different bench, but the question for Chris and it's really just on rate sensitivity and.
And given the Steepening, we've seen and the curve recently, how do you think about just the rate sensitivity of hydro one overall and and then maybe tied into that as you know the U S. Shelf that you filed late last year.
Yeah.
Hi, Andrew and thanks for the question look racist activity and we're well placed and at this point weighted.
Three of five years until the distribution.
Application, what kind of rate period.
One of them to using two of our transition are.
We've done a lot of that refinancing and and getting the financing done and setting us up for this period to take go into J Mac and we've got about $1 billion per year for the remaining two years.
And to go to the the debt that's coming off of is roughly the same maybe slightly higher.
The coupons and then what were the full costs down on interest rates for the next two years. The part that I will remind you of the Andrew is as we go into the next rate period.
And what's important to US is the arrow that sits at the beginning of that might be where she was at the back end of 'twenty and 'twenty two so that steepening yield curve and we have seen just recently and if you speak to some of the banks and see a little more between now and the end of Q1 might be.
Quite a bit more and that would be supportive of our lease with the next rate period of 23 through 27, and so that's how we're thinking about it.
The balance we were and a good position today, we've got a lot of all of a large financing that we had to get done.
And more of the the longer dated maturity.
Which is good.
In terms of the the shelf really what we've done there Andrew is that was the shelf that was set up really from a distance at the time, we've paid all of the the fees the hub.
And so really what we're doing and maintaining the flexibility we have no intention at this point.
To use that in the coming year, but we thought it set up it gives the company additional flexibility and tapping the debt markets with these things and content in the future, but we have no intention of and the next 12 months of abuse potential.
And children anyway.
Okay. That's great. Thank you very much.
Thank you and our next question comes from line of here and.
Thank you your line is open.
Good morning, and thank you for taking my questions.
Firstly just over the last 12 to 18 months optically, we're seeing the turnaround from a number of perspective and that youre hitting and executing the number of targets of customer satisfaction and improvement there.
The regulatory and potential of relationships and recent one and that Frank looking into 'twenty and 'twenty, one and beyond and I'm just wondering what are the key.
Focus areas kind of for you guys now that you've achieved the fats and some of your targeted areas.
Yeah, Great question more of it and it's really to continue execution of our overall strategy and the and you know and the deck, we talked about the five elements of of the strategy and back and we'll continue to do that and <unk>.
The focus on Ontario, and really a lot of of the turnaround we you've seen in and and the Prince you just talked about our renewed focus through our strategy on Ontario, and on really becoming and excellent.
And operator of a utility and so we will continue to focus on that and continue to execute on that.
We're not done yet and it's a five year strategy and one of a year into it. So I don't think that you'll you'll see a lot of change as far as direction goes but.
But we will continue to to put initiatives from some place to execute on that.
Okay. Thank you and just secondly from me and you just commented on the continued Ontario strategy. So is it fair to say that I'm going to direct and move into the U S and it.
Killer and whole following that of its determination and I'm just wondering with the passage of time, ultimately changeover and management and board and your thoughts toward the U S acquisition, right and that really kicked in.
Yeah, it's really too soon and we're still focused on on right here in Ontario, We do see the theres good growth potential and are in our regulated rate base and.
And the our need to reinvest and our current rate base and we've talked about there is opportunity, possibly to get a little bit more growth through consolidation and the sector and we do have a relatively small unregulated business and here in and and hydro one debt that other small growth from there but ah.
The focus will be on Ontario, and <unk>.
And to be Ontario, and the and you know make sure we do a good job of of.
Submitting our J rack and the and building the case for why we need to continue and invest in our existing system here.
That's great. Thank you.
Thank you. Our next question comes from Patrick Kenny with National Bank Financial Your line is open.
Yeah. Good morning, guys I just wanted to follow up on the Covid related costs discussion and I guess, including any future costs associated with the connected for life program.
Obviously, you guys are doing the right thing here, but to that and I mean should you not be covered for these costs by the Ontario government of at least and still you know at least until the stay at home orders are lifted.
And more outside of the process, you're in with the OE b or potentially pursuing any legal recourse, but more of a you know of.
Direct and immediate reimbursement from the government.
And again, you know the right thing to do so or are you planning on having any non legal discussions with the government for direct cost recovery.
Yeah, we're not planning on that the the way the regulatory construct works here is it's through our regulator not government and and you know I think the government has done a good job of of making sure that they're allowing the regulator and regulate so we'll continue to work through that Avenue the connection per life program.
It's actually a program of up to support customers and connect them with our relief programs, but also with the programs that are available from government and other areas that our customers actually don't know about or don't know how to access. So it really is a program to connect them with the relief we provide but also broadly what's available.
And to them. So some of the government is funding and a bunch of that they have small business relief programs. They have the individual customer relief programs and and we have some top ups for those but the connected per life is really to connect customers with all of those programs and quite frankly it.
It it should help.
Mitigate some of the impacts of bad debt because right now as I said before a lot of our customers aren't available or aren't aware of the supports available to them.
And so as we connect them with those.
And it should help mitigate the risk of increased bad debt.
Got it thanks for that Mark.
And then switching over to the energy efficiency front. So just curious how this accelerated pace of technology.
Across the economy over the past year has maybe influenced your ability to implement the smart grid infrastructure.
And what it could mean for your like I spoke through capital investment plan as well as your earnings growth rate over the coming years say.
You know relative to your pre Covid outlook.
Yeah, I would I would say I'm not sure COVID-19 have the impact on that.
We are we do have a you know one of our pillars is building the grid for the future and part of that is reinvesting in our smart metering and assets reinvesting in their grid control center and <unk>.
Things like that and so so we do have our work programs that are are focused on those types of things.
I think that what we're seeing now is that.
And there is a focus on on carbon and climate and and.
And Decarbonize and the transportation sector, and Youre seeing that boats and the private sector from from the auto manufacturers here on non tariff, but we're also seeing that from the government supporting the building of Evs in Ontario, and the and the desire to per for people to be able to charge their vehicles, if they buy them here.
And that's and that was part of what drove us to to starting our IV network. So I think there are a bunch of I call. It things that are climate related and innovation like distributor of energies and batteries and things like that.
On the horizon.
But I don't think Covid has really kind of changed that.
Okay, that's perfect. Thanks Mark.
Thank you and our last question comes from Matthew Weekes with Industrial Alliance. Your line is one thing.
Good morning, Thanks for taking my questions. Most of mine have been asked at this point. So I wanted to just follow up on the on it.
One was talked about a bit earlier with kind of.
Increasing interest rates going forward as you know, we're likely to see some kind of inflationary.
Pressures, how do you see that kind of impacting the capital side of the business and the capital spending plan.
Yeah. So our rates are locked in until the end of 'twenty and 'twenty two so it shouldnt have an effect at all and are on our current capital plan.
And the and we will.
And put our joint rate application forward it will be reflective of.
And the needs of the system and what that means.
And the the the rising interest rates from an ROE perspective, because you.
No. It's formulaic based on the kind of one bonds and that so so as the interest rate goes up our Roe.
Formulary plate goes up so so I don't think it'll have a and impact on the short term capital program.
On the longer term capital program, we are as I said before building the case for what we need to invest to keep the system reliable. So interest rates shouldn't have an effect on that but it will impact our Roe.
And if they go up the impacted and a positive one.
Okay. Thanks, very much I'll leave it there.
Thanks.
Thanks.
Omar you're on mute.
Oh, Hey.
That concludes the Q&A session for today.
And thank you Shannon for your help and managing the Q&A process the man.
And the team at Hydro one thanks, everyone for their time with US this morning.
During what is the busy period and we appreciate your interest and your ownership.
If you have any questions that weren't addressing the call feel free to reach out and we'll get them answered to you and.
Thank you again for everything and enjoy the rest of the day. Thanks al.
Ladies and gentlemen, and 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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