Q1 2021 Hydro One Ltd Earnings Call

May 7, 2021

[music].

Yeah.

Okay.

Good morning, ladies and gentlemen, and welcome to the Hydro one limited first quarter 2021 analyst teleconference.

At this time all participants are in a listen only mode.

After the Speakers' presentation there'll be a question and answer session to ask a question. During the session you will need to press star one of your telephone as a reminder, the call is being recorded.

I would now like to introduce your host for today's conference Mr. Omar Jarvik, Vice President Investor Relations at Hydro one. Please go ahead.

Thank you Sharon good morning, everyone and thank you for joining us and hydro one's first quarter earnings call. Joining us today are our president and CEO Mark <unk>.

And our Chief Financial Officer, Chris Lopez.

Call today, we will go over our first quarter results and then spend the majority of the call answering as many of your questions as time permits.

And they're also several slides that illustrate some of the points, we will address in a moment.

It should be under webcast now or if you're 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 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 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 <unk>.

Good morning, everyone and thanks for joining us this morning.

As we continue to work through the pandemic, we are encouraged by the vaccine rollout and the prospect of returning back to normal and the near future.

However, we remain vigilant as we are still in the midst of a third wave of the pandemic in Ontario, and the virus continues to surge globally.

Despite the recent increase in case counts and Ontario, Hydro one and fulfilled its responsibility and then essential service and maintained its field work programs.

Our robust processes and safety measures resulted in a low COVID-19 case incident rate compared to the Ontario, and the Canadian National averages.

Safety protocols, good governance, and revised work processes and methods of allowed us to complete our work programs, while keeping our employees safe.

We will continue to be diligent and are following these protocols and <unk>.

Look forward to a bright future when we can ease up on the restriction.

I am very pleased that hydro one and continues to make progress and working for and with our stakeholders.

As Chris will discuss in detail in his remarks, our financial results remain resilient and stable.

We continue to demonstrate our leadership role and the electricity sector and Ontario.

We continued to execute on our operational plan and progress through our work programs.

And most importantly, we continue to support our employees.

Customers and communities.

In the first quarter.

We solidified our position as the provider of choice and the steward of the electricity sector in Ontario.

The independent electricity system, operator requested us to develop and new transmission line between Chatham and Lampkin.

The new 230 kv doubled circuit transmission line, which if approved by the OMB could be and serviced by 2028 and would provide electricity to support rapid agricultural growth and the Windsor ethics and Chatham areas.

We see a lot of potential for economic activity, and Ontario, which will result in a sustained strong demand for electricity.

The award for this new line further demonstrates the trust that is placed in us by the people of Ontario to build a better and brighter future for all.

We also continue to strengthen and operate our existing assets.

Capital investments continue at a pace that is in line with our stated objectives.

And our teams have maintained focus on transmission and distribution reliability to ensure families.

<unk> and essential services have the power they need.

Hydro one continues to support its customers and communities as they navigate the pandemic.

As referenced in the last call Hydro one launch connected for life.

And I promise that helps customers to stay connected to safe and reliable power, while we help them access support.

Since it launched.

Support provided to customers with four times higher and during the previous quarter.

During this quarter more than 32000 customer transactions were processed for various financial assistance and flexible payment options.

Similarly <unk>.

During the quarter, we lots of small business pandemic relief program to provide financial assistance and flexibility to our small business customers.

Combined with the government of Ontario, as COVID-19 energy assistance program for small business, our new relief program helps customers with up to $3000 and financial assistance.

We continue to see our efforts being rewarded with strong customer satisfaction scores.

During the quarter, our residential and small business customer satisfaction came in at 91%.

Versus 87% and the first quarter of 2020.

Last call I spoke about the release of the government's provincial budget, which included a commitment of an additional $1 $3 billion over 27 months to help reduce global adjustment cost for commercial and industrial customers.

I am pleased that this has come into effect January one and has resulted in a bill savings of 14% to 16% on average for commercial and industrial customers.

At the same time at.

Net of Hydro one and we continue to work hard to reduce long term cost per hour customers.

We've all learned the value of robust services, especially during this challenging period.

And I'm pleased to report that we repatriated some of our it services functionality and welcomed back a number of employees to hydro one.

In addition, we signed a new Master service agreement for the remainder of our information technology services with cap Gemini Canada.

The agreement allows us to further reduce overall.

Got.

Increased efficiency.

And maintain a high level of service.

Our collective agreement with the society of United professionals expired on March 31.

And we're currently and the bargaining process with both parties remain committed to reaching a resolution.

To respect the process and both sides, we will not be making any specific comments.

In general as with all of our Union partners, our priority is to advance our corporate strategy and our shared goals such as safety diversity and inclusion and supporting our employees through the ongoing challenges of the COVID-19 pandemic.

Our overall focus on cost control will feed into our upcoming joint rate application and.

And ultimately will benefit all of our customers.

We are close to finalizing our application and expect to pilot sometime in the third quarter of this year.

The application will contain our view of the capital investments required to maintain and improve the quality of infrastructure.

And then Ontario can continue to have safe reliable electricity to support a brighter economic future.

We undertook extensive customer engagement.

Developed evidenced supported by independent studies.

And leverage our robust asset management approach.

To develop our application, which.

Which will meet the long term needs of customers and the system as well as support economic growth in Ontario.

We are also pleased that our efforts to control all M&A cost and our business since our last filing will be shared with our customers in the upcoming rate filing.

Further ensuring affordability.

Yeah.

Subsequent to the quarter, we were pleased that the OSB render their decision regarding the implementation of the deferred tax asset recovery.

This decision puts to rest the regulatory back and forth over the past few years on the matter.

We value our constructive relationship with our regulator and are pleased with this outcome.

Chris will deal with the financial impact of the decision and his comments.

And finally I am pleased to report that the board has approved an increase to the dividend by 5%, reflecting a resilient and stable performance last year.

This continues the track record of an annual dividend increase since the initial public offering in 2015.

Chris over to you.

Thank you Mark good morning, everyone and thank you for joining us today.

You and your families are safe and doing well.

In terms of our financial results for the quarter, we saw an increase in earnings per share to <unk> 45, compared to 38 last year.

The main drivers of hydro earnings this quarter would only be approve rates to the transmission and distribution segments and favorable weather, which positively affected peak demand and the transmission segment.

This was offset by a modest increase in operating costs, resulting from Highwood program spin as well as higher depreciation and higher taxes.

Now first quarter revenue net of purchase power was higher year over year by one 8%.

This was reflective of OSB approved rates to 2021, and both the transmission and distribution segments, specifically for the transmission segment. The range reflects the approved transmission rate filing received and the second quarter of last year.

We also experienced colder weather during the quarter with year over year peak demand up one 1% and generally three 5% in February and six 4% in March.

The stable without resulted in an increase and year over year peak demand during the quarter of three 6%.

Electricity distributed to hydro one customers was also nine 1%. However, maybe 45 percentage of that increase was attributed to the inclusion of the acquired local distribution companies or Ltc's, Peter Barra and <unk>, which were not included last year.

As a result of transmission revenues were up by 12% and distribution revenues net of purchased power was six 5% higher.

On the cost front operating maintenance and administration expenses were higher by six 4% year over year.

Hi, Rob eliminate resulted from the acceleration of certain work programs this quarter, including vegetation management station maintenance information technology and customer program spend.

Home and I was also higher due to the acquisitions of Peterborough and really was closed and the third quarter of 2020.

These were partially offset by lower corporate support costs.

Consistent with previous quarters, the financial impact of measures taken by hydro one to support our customers, including the pandemic relief funds financial assistance and increased payment flexibility.

Extending the winter release program and the small business pandemic relief program, which was launched in January 2021 were not material.

Yeah.

With respect to COVID-19 costs, we've incurred incremental operating expenditures of approximately $4 million related to the purchase of Additionally, additional facility related cleaning supplies and.

And personal protective equipment this quarter.

With the inclusion of this $4 million.

The company is now tracking approximately $64 million in COVID-19 related costs.

The depreciation expense was higher year over year due to the increase in capital assets, which is consistent with our stated capital investment program.

And financing we saw a slight decrease in interest expense and a quarter due to lower weighted average interest rates on short term nuts and long term debt.

We also capitalized more interest as compared to last year due to a higher amount of assets under construction and the first quarter of this year.

Income tax expense was $26 million per quarter compared to $15 million last year.

The increase and income tax expense was primarily due to higher income before taxes.

The effective tax rates and this quarter was eight 8% versus $6 one per cent last year and consistent with our previous guidance of 6% to 13%.

Subsequent to the quarter the OLED render its decision.

And order regarding the recovery of the deferred tax assets or DTA amounts allocated to rate payers for the 2017 to 2022 period.

In the decision and the only be approved recovery of the DTA announced plus carrying charges over two year period, starting on July one and 2021 and ending June 32023.

Per the decision the amount of proved to be recovered totals approximately 257 million of which 165 million is attributable to the transmission segment and $92 million to the distribution segment.

The recovery portion of the decision is expected to result, and an annual increase in funds from operations.

Growth of approximately $65 million 135 million and 65 million in the years 2021 2020, two and 2023, respectively.

The ongoing impact is expected to further increase funds from operations.

And the $50 million in 2022 and will decline over time.

With the OIBDA decision on the DTA and our effective tax rate guidance changes to 14% to 22% over the next five years with the most significant impacts over the 2021 to 2023 recovery period.

As a reminder, the change and the effective tax rate will be net income neutral.

Moving to investing activities the company placed a 157 million of assets and service in the first quarter and.

32% decrease compared to the prior year.

This was largely a result of the lumpy nature of placing assets into service.

The year over year decrease related primarily to the transmission segment, which had substantial completions in 2020.

And the distribution segment, we saw a year over year increase of 11, 6% due mainly to higher high volume of work on customer connection and high volume of wood pulp placements.

Capital investment for the quarter was 527 million, which is a 41, 7% increase from the first quarter of 2020.

The increase was mainly due to a higher volume of refurbishment and replacement and stations.

Lines and wood Poles.

Our investments and multi year development projects for the transmission business.

The construction of and you, Ontario grid control center, and <unk> and higher investment and information technology projects further contributed to the increased spend.

As Matt mentioned earlier, the board approved a 5% increase in our quarterly dividend to <unk> $26 63 per share.

Lastly, we continue to be committed to and affirm our guidance of 47% earnings per share growth through 2022.

Between the increasing our dividends and reaffirmation of our guidance Hydro one has and continues to demonstrate a resilient business strategy and stable fundamentals.

Together, they allow us to support our customers and communities, while delivering positive results financial results.

I'll stop there and.

And we'd be pleased to take your questions.

Thank you Mark and Chris.

Shannon could you explain how you'd like to organize the Q&A polling 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.

As a reminder to ask a question. Please press Star then one.

And for your questions asked and answered and you'd like to leave yourself and the queue. Please press the pound key.

Our first question comes from Linda as a Dallas with TD Securities. Your line is now.

One thing.

Thank you.

And congratulations on a strong start to the year.

I'm wondering if you can help us understand a little bit more context around.

And other aspects.

And your joint transmission and distribution filing that you are preparing and.

And some of the the capital plans that you mentioned in your prepared remarks related to it.

And some sort of economic stimulus.

The expectation and the province in Canada and.

And.

How might we think of the evolving regulatory framework.

And process as it relates to the filing as well and all of them.

Yeah.

Thanks, Linda it's Mark here.

So so as we prepare and poor R. J, Ralph we are looking at updated and our investment plan to reflect both the the growth that we're.

We're seeing in the province as well as.

The needs of our assets to we've gone through several rounds of investment planning and we come back from current customers twice two to test that with them and test their appetite for different levels of spend and we've gotten good positive feedback from our customers.

In addition, we developed evidence through third party independent studies that that we will help to support our position on that is.

Far as economic stimulus some.

And you know federal or provincial stimulus and the way we see the impact on US is that stimulus is driving the economic growth in the province and in part one.

And when I announced with an additional line down and the language and the area is part of that so we do see the positive impacts on hydro one as far as.

And the economy grows and Eze and <unk>.

People need more electricity that drive that mix more assets that we need to put it into service.

So.

On the regulatory framework.

The process is unchanged.

And the the regulator and a.

New leadership.

<unk> is focused on actually becoming a top quartile regulator and they just released their strategic plan, which we were really pleased to see because it actually makes a.

Commitments on the OE beep for their performance as well as per utilities. So so you know I think it's a positive outcome from the new leadership and aligns with the OE modernization report that.

Actually the chair of the OE be helped to Orcher. So.

We're not seeing changes in that regulatory process.

That's helpful contacts growth.

And you.

You know you have a recently announced a collaboration with Electra and Hamilton and it's a.

Interesting to see your evolving relationship with B L. D. CS I'm wondering if you can give any sort of update on the potential for other types of collaborations and maybe even outright amalgamation.

And consolidation as a result of some of that cash.

Discussions youre, having and how might any sort of future acquisitions be accommodated and your transmission and distribution filing if at all.

Thanks.

Yes, so so.

As we've said in the past that the LDC as are our customers. So we are supporting them through that.

But we we have through previous acquisitions and true Peter Rural and really and we are demonstrating that we can drive benefits and efficiencies for customers. So we have started to engage with <unk> on their willingness to to transact.

This year, we are still and the process of integrating both Peterborough and Arabia and and.

And those will be fully transferred over.

And within the next quarter, when and when I say that that means that our customers will see hydro one on top of their bill at that point.

And so so we're continuing to focus on that.

And any LDC tuck ins or acquisitions will not be part of <unk>, because they will be outside of the day process.

And our giant rate application and we will have to file for separate applications for any future acquisitions.

Yeah.

Thank you I'll jump back and Nokia.

Our next question comes from Rob Hope with Scotiabank. Your line is one thing.

Good morning, everyone and.

Just a question on capital allocation. So if we go back hydro one has always had a very strong balance sheet and a strong funding plan and the DTA decision further enhances that so when you are taking a look at the uses of your capital and the potential incremental capital from the DTA decision and like how are you thinking about.

And the investing and growth buyback dividends and how do you kind of weigh all of those.

Yeah, Great question. So so yes, the DTA gives us more and more cash and particularly in the front and a couple of years as we collect the past amounts.

So our <unk>. It does look the cracker and the next couple of years and then it drops down but there is a ongoing benefit on cash flow from the from the DTA really the way. We're looking at it right. Now is is using that cash flow to help support our organic growth and our in our business and.

And helped us on that and.

And so at this point I don't see a large change and capital allocation.

But Chris if you want to weigh in and go ahead.

And I think your covenant model and I think really what it does.

And Rob is it gives us greater flexibility on organic growth.

And we'll use that that's flophouse and looked at.

The flexibility with with regards to Jay Rep with regards to flow the transmission and the province, and LDC acquisition, We've always stated that we could.

And grow rate base of 5%.

Earnings per share dividend per share of 5% for the foreseeable future with no need for equity and this really shows that statement up.

And provides additional room for further growth.

And that next period up to 2027.

Mainly LDC.

Foundation is.

And there is any additional capacity, we look at this and the Pos but it hasn't been that hasn't been the preferred option up until this point, but we'll look at the non course issuer bid. So if there's excess capital we won't keep it.

But certainly we would we would make our first priority.

Expanding organic growth, where we could without the need for new equity.

Alright, that's helpful and just a follow up question. There. So you know the buckets of capital that you you kind of mentioned there were largely on the regulated side. So how are you thinking about your potential that do some unregulated or quasi regulated investments, whether that's electric chargers or the telecom business or other kind of value extension.

Opportunities.

Okay.

Yes.

Yeah go ahead, Chris you run the unregulated business.

Okay. Thanks, a lot.

And so all I think at Investor Day, We said look and.

Of course, and the last year is that regulator is going to continue to be the main part of that business. There's no doubt about that we would absolutely not go below 90%, which is a bright line tests with S&P before you change your ratings.

And right now, it's 1% or about cash flow or this one.

And one for symptoms on regulated so the areas we are going to continue to grow he needs.

Energy management services, which is really around things like batteries and helping some of our larger industrial customers manage their electricity consumption needs.

The second area is telecom and we continuing to do that and we're seeing that.

Progressing.

We will continue to invest in that so I know you've recently heard that debt.

Announcement on growth broadband faster that means a lot of things it could mean growth and the regulatory side it could be and a combination of regulatory and growth and that telecom business. There's a number of different aspects to that but we'll be looking to participate wherever we can and and ensure the governments and successful enrolling broadband adds.

But really the focus is going to be.

Keeping net.

Unregulated side to listen.

And 10% more likely five one and it will be focused on CNS and energy management services Telecom and we have got five years.

EV charging business, but I'll just remind you they are very small today say, even if they double every yet and we wouldn't get to 5% and.

Feel free to find these out and so it's still very very small.

Alright, I'll jump back and make here. Thank you for your answers.

Our next question comes from Andrew Pesky with Credit Suisse. Your line is open.

Thank you good morning, I guess, the question really revolves around others and the market and and ask the question and part just with what the Canada infrastructure Bank with one or planning to do with the Lake Erie connector that was reported as project.

And obviously and federal government made.

Statements about transmission and connectivity across the country and not directly and Ontario, but things like the Atlantic with.

So how do you think about federal government involvement and.

And the projects, whether in Ontario, with the Lake Erie connector or anything prospectively to try to spur things along.

Yeah, we do see transmission is one of the key aspects of achieving long term climate goals for the country and for North America, and quite frankly, and I think youre seeing that and some of the stimulus and of course the federal government.

Stated goals around net zero by 2050, and so so we are looking at and and considering and working with the ISO and others and the sector on on how do how does transmission interconnections with other provinces play into the long term planning for that.

And the system and Ontario, It's early days on and Andrew and the government has kicked off a long term energy planning process, where where they've asked industry on what type of governance and one that should look like and we fed back into that I would perceive coming out of that process.

There's more clarity on on how Ontario has kind of tied together climate plan, along with energy plan, which which leads into a long term energy plan with more clarity on where transmission plays into that and what interconnection to look like on that.

So at this point, we're not looking at merchant transmission lines.

We are.

We are happy with the with the directions, we brought from the ISO poor line like loss again like the reinforcements were building and and and southwest, Ontario and those are.

And our regulated business.

Okay. That's very helpful context, and then maybe and maybe continuing on the theme from stimulus from the federal government and to spur and initiatives.

Are there opportunities with your broadband network and your fiber network that you have across transmission towers, and especially the remote community connectivity that you have.

To really expand that business.

And to a greater degree and and really help that unregulated segment on your telecom business.

Yeah, that's great great question.

And Chris alluded to the building broadband pasture Act the government actually passed and April and and there's two parts to that one is how do we remove barriers. So on the operational side, how do we make it easier for attachments and pole replacements to accommodate attachments and things like that and then on the other side the government.

And as committed $2 $8 billion and essentially for poor subsidies for different parts of the province and from my understanding they plan on running a REIT.

First the auction process, where.

And to diesel bid in on how much subsea.

Subsidy do they need to make it economic and there. So we are looking at through our telecom business, how our fiber backbone me help facilitate that and play into that and where there maybe opportunities to grow that business as a result of that.

Okay very helpful. Thank you.

Yeah.

And our next question comes from Julien Dumoulin Smith with Bank of America. Your line is open.

Yeah.

Hey, Good morning. This is Darius on for Julian and Thank you for taking my question.

Just wanted to ask in the context of the J wrap that you'll be filing later in the year. It does cover a five year period, and we're seeing a little bit more talk of potential inflation, maybe just talk about your ability to manage things like Oh, M&A and the context of our five year plan and and how that relates to your expectations too cheap.

Ro.

Sure sure.

We've had a good track record of managing or M&A, and and productivity and we continue to do that and we expect to be able to do that through the next rate period as well. So in general we look to offset about $50 million a year, which is is that essentially a.

And the rate of unplaced and.

Once we get approved for R. J wrap there will be productivity stretch factors as part of that that the <unk> B will will put on us.

But we are we believe that we can that we can achieve those stretch factors and continue to two a.

Drybulk productivity savings through the next rate period, so as as we've experienced through the current rate periods and one of them is five years and one of them are three years, having longer periods.

Better enables us as a as the utility to optimize between years. So that we can drive out those savings over the long run and as I said in my remarks, the benefit to the customers is that the and when we get rebased those improvements that we've driven out go to the benefit and the customer so it further reinforces the.

The overall value of and incentive rate, making process that we have here in Ontario.

And if I could just follow up on direct COVID-19 expenses, I think I heard Chris quantify.

Quantify that number is $64 million to date has there been any update from the OA in terms of how they're thinking about it guidance as far as your ability to.

Recover.

Any others items incurred to date or are you still seeing those is not likely to be recoverable.

Yeah based on the staff opinion that we got in December where we're still seeing it's not probable for future recovery and rates and and we havent recognized any regulatory assets and the on the books. So right now we're we're assuming that that we won't be recovering and then and in rate.

And we still haven't heard back from the OSB, we do the day the guidance. They gave US was spring springtime. So I do expect that the OE B panel will give some guidance on that.

And the near future.

The staff opinion is that it does have opinions about the final decision and we.

We're still awaiting the final decision so but.

To date, we're not.

Not that we're not recognizing and anything is regulatory assets as a result of COVID-19.

Great. That's it for me thank you very much.

Okay.

I can ask a question. Please press Star then one.

Our next question comes from David Quezada with Raymond James Your line is open.

Thanks, Good morning, everyone. My first question here just on the.

The Chatham Lambton line, and I guess, the general potential for future opportunities and southwestern Ontario.

Just interested in does the positioning of that line suggests to you how the ISO is thinking about future investments and and and I believe there was a study of bulk supply needs West of London that was supposed to come out. This spring and just wondering if you have any expectations, there and what that might include.

Yeah. So so you and you're correct. So they did issuance and a letter to move ahead with the Chatham Lampkin.

And.

Last year the year before they issued a letter from Chatham and Lake Shore. What this study previous studies anyway showed is that there is another piece and phase III required and transmission based on projected load forecast there.

And so it hasn't given us any direction on that on why are they and they are they're going with that but but that's what that previous studies have shown is that there isn't a third phase required for a per support west of London.

Okay, great. Thanks for that that's actually all I had I'll get back in the queue.

Yeah.

And last question comes from Maurice Choy, with RBC capital markets and your line is open.

Thank you and good morning, I, just want to bring it back to the J wrap and touch on the age and condition of your infrastructure and obviously the cost and maintaining reliability will rise with their systems H and so presumably the J wrap will highlight some of the drivers could be replacing aging assets.

And can you characterize I guess, the condition and H b assets, both key ex MTX and how does that factor in to your application.

Sure sure.

So when we look at from an equipment Health index perspective about a third of our assets on both sides are or at end of life and and we.

We don't use base and a life on age we base it on condition and experience and and design.

Design and things like that but about a third of them are at end of life as we prepare our our joint rate application.

We are looking at how do we how do we improve the condition of our assets and overall improve reliability to our to our customers. So so we did as I said before went out to customers.

Through two rounds, we developed and investment plan with why don't we tested that with customers too.

Test their appetite for different spend levels, if it meant different outcomes as far as reliability goes.

And they gave US feedback we adjusted our investment plan and then we went back out again and what both times. We were pleased that our customers are supportive of our need to invest and our assets to improve the reliability and keep our systems safe overall and the other thing. We've we've experienced is as we see additional.

Growth and customer connections within the right period that Werent expected, we've had to reallocate some of our sustaining capital to growth, which has put further pressure on the condition and needs of our assets that we will need to address your and Jay Rob.

Great and since you touched on customer response and customer growth.

And I forgot to the chair at.

And obviously with the ongoing pandemic and with the third wave and Ontario at the moment and how do you approach those forecasts free application and adds.

And to that what measures are there and the regulatory framework that may allow you to use it that these four cats during the next regulatory period.

Okay.

Yeah, So and so we will we will base our application, which we expect to put in in Q3 of this year will base. It on the current load forecast that.

We get from the ISO as well as the studies, we do and independent third Party studies.

And that will be updated during the process before before the OMB rules on it so one what.

What I'm, referring to there is we will gain more experience coming out of COVID-19 on what load and looks like a pro.

And to finalize and what those impacts are look like for J wrap and how would we have set that load expectations through that five year period.

And.

Great. Thank you very much.

Thank you and that does conclude our Q&A session for today I'd like to turn the call back over to Omar Janet for any further remarks.

Great. Thank you, so much and and the management team at Hydro one and thanks, everyone for their time with US. This morning during what is it basically period we.

We appreciate your interest and your ownership if you have any questions that weren't addressed and the call. Please feel free to reach out and we'll get them answered for you. Thank you again and enjoy the rest of your day and continue to be safe. Please.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program and you may all disconnect everyone have a great day.

[music].

Good morning, ladies and gentlemen, and welcome to the Hydro one limited first quarter 2021 analyst teleconference.

At this time all participants are in a listen only mode.

I would now like to introduce your host for today's conference Mr. Omar Java ex Vice President Investor Relations at Hydro one. Please go ahead.

Thank you Sharon good morning, everyone and thank you for joining us and hydro one's first quarter earnings call. Joining us today are our president and CEO Mark for Wesco.

And our Chief Financial Officer, Chris Lopez and Nick.

Call today, we will go over our first 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 illustrate some of the points will address in a moment.

And there shouldn't be on the webcast now or if you're 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.

And you should review the cautionary language in today's earnings release, and our MD&A, which we filed this morning regarding the various factors and assumptions and risks 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 for Wesco.

Good morning, everyone and thanks for joining us this morning.

And we continue to work through the pandemic, we are encouraged by the vaccine rollout and the prospect of returning back to normal and the near future.

However, we remain vigilant as we are still in the midst of a third wave of the pandemic and Ontario, and the virus continues to surge globally.

Despite the recent increase in case counts and Ontario, Hydro one and fulfilled its responsibility and then essential service and maintained its field work programs.

Our robust processes and safety measures resulted in a low COVID-19 case and tenant rate compared to the Ontario, and the Canadian National averages.

Safety protocols, good governance, and revised work processes and methods of allowed us to complete our work programs, while keeping our employees safe.

We will continue to be diligent and are following these protocols and look forward to a bright future when we can ease up on the restriction.

I'm very pleased at hydro, one and continues to make progress and working for and with our stakeholders.

As Chris will discuss in detail in his remarks, our financial results remain resilient and stable.

We continue to demonstrate our leadership role and the electricity sector and Ontario.

We continue to execute on our operational plan and progress through our work program.

And most importantly, we continue to support our employees customers and communities.

And the first quarter.

We solidified our position as the provider of choice and the steward of the electricity sector in Ontario.

And the independent electricity system, operator requested us to develop a new transmission line between Chatham and lampkin.

The new 230 kv double circuit transmission line, which if approved by the OSB could be and service by 2028 and will provide electricity can support rapid agricultural growth and the Windsor ethics and Chatham areas.

We see a lot of potential for economic activity, and Ontario, which will result in a sustained strong demand for electricity.

The reward for this new line further demonstrates the trust that is in place and not by the people of Ontario to build a better and brighter future for all.

We also continue to strengthen and operate our existing assets.

Capital investments continue at a pace and is in line with our stated objectives.

And our teams have maintained focus on transmission and distribution reliability.

Ensure family businesses and essential services have the power they need.

Hydro one continues to support its customers and communities as they navigate the pandemic.

As referenced in the last call Hydro one launch connected for life, a promise that helps customers to stay connected to safe and reliable power, while we help them access support.

Since it launched.

Support provided to customers with four times higher than during the previous quarter.

During this quarter more than 32000 customer transactions were processed for various financial assistance and flexible payment options.

Similarly <unk>.

During the quarter, we lots of small business pandemic relief program to provide financial assistance and flexibility to our small business customers.

Combined with the government of Ontario, as COVID-19 energy assistance program for small business, our new relief program helps customers with up to $3000 and financial assistance.

We continue to see our efforts being rewarded with strong customer satisfaction scores.

During the quarter, our residential and small business customer satisfaction came in at 91%.

Versus 87% and the first quarter of 2020.

Last call I spoke about the release of the government to provincial budget, which included a commitment of an additional $1 $3 billion over 27 months to help reduce global adjustment cost for commercial and industrial customers.

And I'm pleased that this has come into effect January one and has resulted in a bill savings of 14% to 16% on average per commercial and industrial customers.

At the same time at.

And at Hydro one and we continue to work hard to reduce long term cost per hour customers.

We've all learned the value of robust IP services, especially during this challenging period.

And I'm pleased to report that we repatriated some of our IP services functionality and welcomed back a number of employees to hydro one.

In addition, we signed a new Master service agreement for the remainder of our information technology services with cap Gemini Canada.

The agreement allows us to further reduce overall cost.

Increased efficiency.

And maintain a high level of service.

Our collective agreement with the society of United professionals expired on March 31.

And we are currently and the bargaining process with both parties remain committed to reaching a resolution.

To respect the process and both sides, we will not be making any specific comments.

Our overall focus on cost control will feed into our upcoming joint rate application and.

And ultimately will benefit all of our customers.

We are close to finalizing our application and expect to pilot sometime in the third quarter of this year.

The application will contain our view of the capital investments required to maintain and improve the quality of infrastructure.

And then Ontario can continue to have safe and reliable electricity to support a brighter economic future.

We undertook extensive customer engagement.

Developed evidenced supported by independent studies.

And leverage our robust asset management approach.

And to develop our application.

Which will meet the long term needs of customers and the system as well as support economic growth in Ontario.

We are also pleased that our efforts to control Oh, M&A cost and our business since our last filing will be shared with our customers in the upcoming rate filing.

Further ensuring affordability.

Okay.

Subsequent to the quarter, we were pleased that the OSB render their decision regarding the implementation of the deferred tax asset recovery.

This decision puts to rest the regulatory back and forth over the past few years on the matter.

We value our constructive relationship with our regulator and are pleased with this outcome.

Chris will deal with the financial impact of the decision and his comments.

And finally I'm pleased to report and the board has approved an increase to the dividend by 5%, reflecting a resilient and stable performance last year.

This continues to track record of an annual dividend increase since the initial public offering and 2015.

Chris over to you.

Thank you Mark good morning, everyone and thank you for joining us today.

And I hope you and your families are safe and doing well.

In terms of our financial results for the quarter, we saw an increase in earnings per share to <unk> 45, compared to 38 since last year.

The main drivers of higher earnings this quarter would only be approved rates for the transmission and distribution segment and favorable weather, which positively affected peak demand and the transmission segment.

This was offset by a modest increase in operating costs, resulting from higher growth program spend as well as higher depreciation and higher taxes.

Our first quarter revenue net of purchase power was higher year over year by one 8%.

This was reflective of one you'd be approved rates to 2021, and both the transmission and distribution segments, specifically for the transmission segment the rates with like the approved transmission rate filing received and the second quarter of last year.

We also experienced colder weather during the quarter with year over year peak demand up one 1% and generally three 5% in February and six 4% in March.

These stable without resulted in an increase and year over year peak demand during the quarter, all three 6% and.

Interest to be distributed to hydro one customers was also $9, 1% higher however, net.

The 45% of that increase was attributed to the inclusion of the acquired local distribution companies and L. D. CS Peter Barra and <unk>, which were not included last year.

As a result transmission revenues were up by 12% and distribution revenues net of purchased power was $6, 5% higher.

On the cost front operating maintenance and administration expenses were higher by six 4% year over year.

Hi, Rob eliminate resulted from the acceleration of certain work programs this quarter, including vegetation management station maintenance information technology and customer programs.

Oh, and then I was also higher due to the acquisitions of Peterborough and really which closed in the third quarter of 2020.

These were partially offset by lower corporate support costs.

And extending the winter release program and the small business pandemic relief program, which was launched in January 2021 were not material.

And personal protective equipment this quarter.

With the inclusion of this $4 million.

The company is now tracking approximately 64 million and COVID-19 related costs.

Depreciation expense was higher year over year due to the increase in capital assets, which is consistent with our stated capital investment program.

On financing, we saw a slight decrease in interest expense and a quarter due to lower weighted average interest rates on short term notes and long term debt.

We also capitalize more interest as compared to last year due to a higher amount of assets under construction and the first quarter of this year.

Income tax expense was $26 million per quarter compared to $15 million last year.

The increase and income tax expense was primarily due to higher income before taxes.

The effective tax rate for this quarter was eight 8% versus $6 one per cent last year and consistent with our previous guidance of 6% to 13%.

Subsequent to the quarter the OLED render its decision.

And all of that regarding the recovery of the deferred tax assets or DTA amounts allocated to ratepayers and for the 2017 to 2022 period.

And the decision to only be approve recovery of the DTA announced plus carrying charges over two year period, starting on July one and 2021 and ending June 32023.

Per the decision the amount of proved to be recovered totaled approximately $257 million of which one.

And and 65 million is attributable to the transmission segment and $92 million to the distribution segment.

The recovery portion of the decision is expected to result, and an annual increase in funds from operations or <unk>.

Approximately $65 million 135 million and $65 million in the years 2021 2020, two and 2023, respectively.

The ongoing impact is expected to further increase funds from operations by approximately $50 million and 2022 and will decline over time.

With the only be decision on the DTA and effective tax rate guidance changes to 14% to 22% over the next five years with the most significant impacts over the 2021 2020 three recovery period.

As a reminder, the change and the effective tax rate will be net income neutral.

Moving to investing activities the company placed a 157 million of assets and service in the first quarter.

A 32 per cent decrease compared to the prior year.

This was largely a result of the lumpy nature of placing assets into service.

The year over year decrease related primarily to the transmission segment, which had substantial completions in 2020.

And the distribution segment, we saw a year over year increase of 11, 6% due mainly to higher one.

High volume of work on customer connections and high volume of wood pulp placements.

Capital investment for the quarter was 527 million, which is a 41, 7% increase from the first quarter of 2020.

The increase was mainly due to a higher volume of refurbishment and replacement and stations line and wood Poles.

Our investment and multi year development projects for the transmission business.

The construction of the new Ontario grid control center, and <unk> and higher investment and information technology projects further contributed to the increased spend.

As Mike mentioned earlier, the board approved a 5% increase and our quarterly dividend to <unk> 20, 663 cents per share.

Lastly, we continue to be committed to and affluent and our guidance of 47% earnings per share growth through 2022.

Between the increasing our dividends and reaffirmation of our guidance Hydro one has and continues to demonstrate and resilient business strategy and stable fundamentals.

Together, they allow us to support our customers and communities, while delivering positive result financial results.

I'll stop there and.

And we'd be pleased to take your questions.

Thank you Mark and Chris.

Shannon could you explain how you'd like to organize the Q&A polling 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.

As a reminder to ask a question. Please press Star then one.

And for your questions asked and answered and you'd like to leave yourself and the queue. Please press the pound key.

Our first question comes from Linda as a Dallas with TD Securities. Your line is now.

Thanks.

Thank you.

And congratulations on a strong start to the year.

I'm wondering if you can help us understand a little bit more context around.

And other aspects of your joint transmission and distribution filing that you're preparing them and some of that the capital plans that you mentioned in your prepared remarks related to some.

And some sort of economic stimulus.

And the expectation and the province in Canada, and how might we think of the evolving regulatory framework.

And process.

As it relates to the filing as well.

Okay.

Thanks, pencil and it's Mark here.

So so as we prepare for our J wrap we are looking at updated and our investment plan to reflect both the the growth debt.

What we're seeing in the province, as well as the needs of our assets. So we've gone through several rounds of investment planning and we'd come back from current customers twice two to test that with them and test their appetite for different levels of spend and we've gotten good positive feedback from our customers.

In addition, we've developed evidence through third party.

Dependent studies that are that we will help to support our position on that.

And as economic stimulus and federal or provincial stimulus and the way we see the impact on us is.

Stimulus is driving the economic growth in the province, and that and part of what went.

And when I announced with.

And additional line down and the Leamington area is part of that so we do see the positive impacts on hydro one as far as.

The economy grows and as and people.

People need more electricity that drive that mix more assets that we need to put it into service.

So.

On the regulatory framework.

The process is unchanged.

And the regulator and a.

New leadership.

Is focused on actually becoming a top quartile regulator and they just released a.

Their strategic plan, which we were really pleased to see because it actually.

<unk>.

And.

And on the OE beef for their performance as well as per utilities. So so.

It's a positive outcome from the new leadership and aligns with the OSB modernization report that the actually the chair of the OE be helped to Orcher. So.

We're not seeing changes in that regulatory process.

That's helpful contacts growth here.

And.

You have a recently announced a collaboration with <unk> Electra and Hamilton and.

Interesting to see your evolving relationship with the L. D. CS I'm wondering if you can give any sort of update on the potential for other sorts of collaborations and maybe.

And then outright amalgamation and.

And consolidation as a result of some of the.

Discussions youre, having and how might any sort of future acquisitions be accommodated and your transmission and distribution filing if at all.

Great.

Yes, so as we.

And the past that the LDC as are our customers. So we are supporting them through that.

But we have through previous acquisitions and true Peter Rural and really and we are demonstrating that we can drive benefits and efficiencies for our customers. So we have started to engage with <unk> on their willingness to to transact.

This year, we are still and the process of integrating both Peterborough and Arabia and.

And those will be fully transferred over with.

Within the next quarter, when and when I say that that means that our customers will see hydro one on top of their bill.

And that point.

So and so we're continuing to focus on that.

Any LDC tuck ins or acquisitions will not be part of <unk>, because they will be outside of the J REIT and process.

Our giant rate application and we will have to file for separate applications for any future acquisitions.

Thank you I'll jump back and Nokia.

Our next question comes from Rob Hope with Scotiabank. Your line is open.

Good morning, everyone and.

A question on capital allocation. So if we go back hydro one has always had a very strong balance sheet and a strong funding plan and the DTA decision further enhances that so.

When you were taking a look at the uses of your capital and the potential incremental capital from the DTA decision and like how are you thinking about.

The investing and growth buyback dividends and how do you kind of weigh all of those.

Yes, it's a great question. So so yes, the DTA gives us more and more cash and particularly and in the front and couple of years as we collect the past amounts.

And so our F a poll.

And it does look the cracker and the next couple of years and then it drops down but there is a ongoing benefit on cash flow from that from the DTA really the way. We're looking at it right. Now is is using that cash flow to help support our organic growth and our in our business and and helped us on that.

And so at this point I don't see a large change and capital allocation, but.

But Chris if you want to weigh in and Oh go ahead.

And I think your covenant might and I think really what it does.

And Rob is it gives us greater flexibility on organic growth.

And you know who use that that's bathhouse, we'll look at.

And flexibility with with regards to Jay Rep with regards to flow the transmission and the province, and LDC acquisition. We have always stated that we could.

And grow rate base of 5% and depart the tenant even if the share of 5% for the foreseeable future with no need for equity. This really shows that it's taken up and.

And provides additional room for further growth.

And that next period up to 2027.

Mainly LDC consolidation.

If there is any additional capacity we look at this in the past, but it hasn't been hasn't been the preferred option up to this point, but we're looking at the non course issue would be and so there's excess capital we want to keep it.

Certainly we would we would make our first priority.

Expanding organic growth, where we could.

Without the need for new equity.

Alright, that's helpful and just one follow up question. There. So you know the buckets of capital that you you kind of mentioned there were largely on the regulated side. So how are you thinking about your <unk>.

Potential that do some unregulated or quasi regulated investments, whether that's electric chargers or the telecom business or other kind of value extension opportunities.

Okay.

Yes.

Yeah go ahead, Chris you run the unregulated business.

Okay. Thanks, Mike.

Yeah, So rod I think at Investor Day, We said look.

And of course, and the last year is that regulators are going to continue to be the main part about businesses and no doubt about that.

We would absolutely not go below 90%, which is a bright line tests with S&P before you change your ratings and.

Right now, it's 1% of our cash flow and almost a month of symptoms on regulated so the areas. We are going to continue to growing needs.

Energy management services, which is really around things like batteries and helping some of our larger industrial customers manage their electricity consumption needs.

And the secondary is telecom and we continuing to do that and we're seeing that.

Progressing.

We will continue to invest and in that so I know you've recently heard that debt.

Announcements on growth broadband faster that means a lot of things it could mean growth regulatory side, it could be and a combination of regulatory and growth and that telecom business. There's a number of different aspects to that but we'll be looking to participate wherever we can and and ensure the governments and successful enrolling broadband adds.

But really the focus is going to be.

Keeping that rig.

<unk> unregulated side to less and less than 10% more likely five Rob and it will be focused on CNS energy management services Telecom and you might have got IV is the EV charging business, but I'll just remind you. They are very small today say, even if they double every yet and we wouldn't get to five per.

And until three years to five years out so it's still very very small.

And I'll jump back in the queue. Thank you for your answers.

Our next question comes from Andrew Pesky with Credit Suisse. Your line is open.

Thank you good morning, I guess the question really revolves around the others and the market and and asked the question and part just with what the Canada infrastructure bank with non whereas planning or is there like a lake Erie connector that was the Florida project and.

And obviously and federal government.

Statements about transmission and connectivity across the country and not directly and Ontario, but things like the Atlantic.

So how do you think about federal government involvement and.

And projects, whether in Ontario as well.

Erie connector or anything prospectively to try to spur things along.

Yes, we do see transmission is one of the key aspects of achieving long term climate goals for the country and and for North America, and quite frankly, and I think you're seeing that and some of them and stimulus and with the federal government.

Stated goals around net zero by 2050, and so we are looking at and and considering and working with the Ias, one and others and the sector on on how do how does transmission interconnections with other provinces play into the long term planning for the system and Ontario.

It's early days on and Andrew.

And the government has kicked off a long term energy planning process, where were they at the industry on what type of governance and what that should look like and we fed back into that I would foresee coming out of that process more clarity on on how.

Ontario is kind of tied together climate plan, along with energy plan, which which leads into a long term energy plan with more clarity on where transmission plays into that and what interconnection to look like on that.

And so at this point, we're not looking at at merchant transmission lines.

We are.

We are happy with the with the directions, we brought from the <unk>. So poor lines like loss again like the reinforcements were building and and.

Southwest, Ontario, and those are.

And our regulated business.

Okay. That's very helpful context, and then maybe continuing on the theme from stimulus from the federal government and to spur and initiatives are there opportunities with your broadband and that work and your fiber network that you have across transmission towers, and especially the remote community connectivity that you have.

To really expand that business.

To a greater degree and and really help that unregulated segment on your telecom business.

Yeah, that's a great great question.

Chris alluded to the building broadband pasture act the government actually passed and April and and there's two parts to that one is how do we remove barriers. So on the operational side, how do we make it easier for attachments and pole replacements to accommodate attachments and things like that and then on the other side and the government.

And is committed to $8 billion and essentially for poor subsidies for different parts of the province and from my understanding they plan on running Uh huh.

Reverse auction process, where.

Entities will bid in on how much sub.

Subsidy do they need to make it economic and there. So we are looking at through our telecom business, how our fiber backbone may help facilitate that and play into that and where there maybe opportunities to grow that business as a result of that.

Okay very helpful. Thank you.

Yeah.

And our next question comes from Julian email and Smith with Bank of America. Your line is open.

Hey, Good morning. This is very sad for Julia and thank you for taking my question.

Just wanted to ask in the context of the J wrap that you'll be filing later in the year since it does cover a five year period, and we're seeing a little bit more talk of potential inflation, maybe just talk about your ability to manage things like Oh, M&A and the context of our five year plan and and how that relates to your expectations to achieve your <unk>.

Ro.

Sure sure.

And we've had a good track record of managing or M&A, and and productivity and we continue to do that and we expect to be able to do that through the next rate period as well. So in general we look to offset about $50 million a year, which is is essentially a.

And the rate of inflation.

Once we get approved for R. J wrap there will be productivity stretch factors as part of that that the <unk> B will will put on us.

But we are we believe that we cannot we can achieve those stretch factors and continue to to drybulk productivity savings and it's through the next rate period. So as as we've experienced through the current rate periods and one of them and five years and one of them are three years I'm having longer periods.

Better enables us as a as a utility to optimize between years. So that we can drive out those savings over the long run and as I said in my remarks, the benefit to the customers is that the and when we get rebased those improvements that we've driven out go to the benefit of the customer. So it further reinforces the b.

The overall value of and incentive rate, making process that we have here in Ontario.

And if I could just follow up on direct COVID-19 expenses, I think I heard Chris.

Quantify that number is 64 million to date has there been any update from the OA in terms of how they're thinking about it guidance as far as your ability to.

Recover any others items incurred to date or are you still seeing those is not likely to be recoverable.

Yeah based on the staff opinion, and we got into December where we're still seeing it's not probable for future recovery and rates and and we havent recognized any regulatory assets and the on the books. So the right now we're we're assuming that that we won't be recovering and then and in rate.

And we still haven't heard back from the OSB, we do the day the guidance. They gave US was spring springtime. So I do expect that the OE B panel will give some guidance on that.

And the near future.

The staff opinion is is that it's the SAP opinions about the final decision and more.

We're still awaiting the final decision so but.

To date, we're not.

Not that were not recognized and then they opinions regulatory assets as a result of COVID-19.

Great. That's it for me thank you very much.

Okay.

I can't ask a question. Please press Star then one.

Our next question comes from David Quezada with Raymond James Your line is open.

Thanks, Good morning, everyone.

My first question here just on the.

And the Chatham Lambton line, and I guess, the general potential for future opportunities and southwestern Ontario and.

I'm just interested in does the positioning of that line suggests to you how the ISO is thinking about future investments and and and I believe there was a study of bulk supply needs West of London that was supposed to come out. This spring and just wondering if you have any expectations, there and what that might include.

Yes, so youre correct. So they did issuance.

Letter to move ahead with the chat and collab often.

Last year the year before they issued a letter from them and Chatham and Lake shore. What this study previous studies and anyway. It showed is that.

And there is another phase I phase III required and transmission based on projected loan forecast there on the items.

And so it hasn't given us any direction on that on why are they and they are they're going with that but that's what that previous studies have shown is that there isn't a third phase required for for support west of London.

Okay, great. Thanks for that that's actually all I had I'll get back in the queue.

Yeah.

And last question comes from Maurice Choy, with RBC capital markets and your line.

And there's nothing.

Thank you and good morning, I, just wanted to bring it back to the J wrap and touch on the age and condition of your infrastructure and obviously the cost and maintaining reliability will rise with their systems H.

Presumably you had share at will highlight some of the drivers could be replacing aging assets.

And can you characterize I guess, the condition and HIV assets, both TX MTX and how does that factor in to your application.

Sure sure.

And when we look at from an equipment Health Index perspective about a third of our assets on both sides are our and.

And of life and.

And and we.

We don't use base and a life on age we base it on condition and experience and and design and things like that but about a third of them are at end of life as we prepare our our joint rate application.

We are looking at how do we.

How do we improve the condition of our assets and overall improve reliability to our customers. So so we did as I said before went out to customers.

And through two rounds, we developed and investment plan with why don't we tested that with customers too.

Test their appetite for different spend levels, if it meant different outcomes as far as reliability goes.

And they gave US feedback we adjusted our investment plan and then we went back out again and what both times. We were pleased that our customers are supportive of a bar and need to invest and our assets to improve the reliability and keep our systems safe overall and the other thing. We've we've experienced is as we see additional.

Growth and customer connections within the rate periods that weren't expected we've had to reallocate some of our sustaining capital to growth, which has put further pressure on the condition and the age of our assets that we will need to address your and Jay Rob.

Great and since you touched on customer response and customer growth.

And I forgot to the chair at.

And obviously with the ongoing pandemic and with the third wave and Ontario at the moment, how do you approach those forecasts, we application and adds.

To that what measures are there and the regulatory framework that may allow you to use it that these four cats during the next regulatory period.

Okay.

Yeah. So so we will we will be our application, which we expect to put in in Q3 of this year will base. It on the current load forecast that.

And we get from the ISO as well as the studies, we do and independent third Party studies.

And that will be updated during the process before.

Before the OMB rules on it so one.

What I'm, referring to there is we will gain more experience coming out of COVID-19 on what load and looks like.

Higher to finalize and what those impacts are looked like for J wrap and how would we have set that load expectations through that five year period.

Great. Thank you very much.

Thank you and that does conclude our Q&A session for today I'd like to turn the call back over to Omar Janet for any further remarks.

Great. Thank you so much Shannon the management team at Hydro one and thanks, everyone for their time with US. This morning during what is it basically a period we.

We appreciate your interest and your ownership if you have any questions that weren't addressed and Nicole please feel free to reach out and we'll get them answered for you.

And you again and enjoy the rest of your day and continue to be safe. Please.

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.

Q1 2021 Hydro One Ltd Earnings Call

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