Q2 2021 Hydro One Ltd Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Hydro 1 limited's second quarter 2000.
1 analyst teleconference. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Can I ask a question. During this session you will need to press star 1 on your telephone as a reminder, the call is being recorded.
I would now like to introduce your host for today's conference Mr. Omar job at Vice President Investor Relations at Hydro 1. Please go ahead.
Good morning, everyone and thank you for joining us and hydro one's earnings call joining.
Joining us today are our president and CEO, Mark <unk>, our Chief Financial Officer, Chris Lopez, and our Chief Regulatory Officer, Frank de Andrea.
In the call today, we will go over our recently filed joint rate application, our sustainability goals and accordingly results. We will 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 price will address in a moment. This should be up on the webcast now or if you dialed into the call.
You can find them on hydro one's website in the events and.
On 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'll turn the call over to our President and CEO Mark <unk>.
Thank you Omar.
Before we begin I am sorry to share that in mid June 1 of our employees losses life after being struck by a motor vehicle, while working on the Kapuskasing region.
Our thoughts and prayers are with his family friends and co workers.
Along with all of our employees executives and directors I'm devastated do we have experienced this tragic loss.
Safety remains our top priority and we must eliminate serious injuries in our company.
The investigation on what led to this incident is ongoing and together with the authorities, we're looking to understand the details and the cause of the accident.
We are yet again reminded of the hazards are employee base.
And the extremely tough conditions in which they work to deliver reliable electricity and fulfill our customers' needs.
To operate a safe and resilient grid.
Our assets need investment and.
And our customers are supportive of reinvesting in an electricity system that will provide them with reliable power.
On August 5 we filed a comprehensive 5 year investment plan for both the transmission and distribution segment of our business with the Ontario Energy Board.
Informed by extensive customer engagement. This is our first ever joint rate application.
It is a strategic plan to significantly improve reliability for our distribution customers.
Manage risks.
Prepare for the impacts of climate change.
Support communities and contribute to economic development.
It balances the needs of customers with the impact on bills through our hard work innovation and continuous improvement.
In 2019, and 2020 hydro 1 conducted customer engagement surveys to reflect customer needs and preferences for the transmission and distribution system investment plan.
The engagement was the most comprehensive and hydro one's history.
With nearly 50000 customers participating.
For the first time investment planning and customer customer engagement processes, where integrated over 2 phases and customer feedback was provided as an input into the overall plan.
In addition to hardening the system to withstand the impacts of climate change and to make it more reliable for future generations.
We learned just how important it is not only to a hydro 1 but also to our customers that we 1 proactively replace aging infrastructure to avoid more costly repair maintenance and emergency work.
To make investments to improve reliability.
And 3 make this for.
The more resilient.
We also conducted a systemic review of our asset investment needs.
Driven by asset condition and system requirements.
What we found was a significant portion of transmission distribution and common assets have deteriorated to the point, where they pose a risk to achieving business and customer objectives.
Around safety reliability and the environment.
This needs to be fixed and we are confident that our 5 year plan is the right plan for all on parents.
We are a critical need to modernize our grid to prepare for future integrated distributed energy resources.
To prepare the system for severe weather and the impacts of climate change to prepare for the greater electrification of the economy and enhanced cyber security.
To ultimately develop a modern flexible grid on the future.
We have seen that Ontario has continued to prosper and there is continued economic growth that requires access to safe and reliable power.
Whether it's the agricultural sector in southwest, Ontario for mining in the North.
Electricity is the backbone of the economy and.
And we're committed to connecting new customers and facilitating economic prosperity.
As a result of our robust asset management approach and this significant customer outreach, we are proposing capital expenditures of approximately $12.5 billion over the 2023 to 2027 period.
Of this amount.
Approximately 67% is geared toward system renewal.
The rate the remainder represents a combination of 1.
Non discretionary spend driven by our obligation to connect.
And 2 investments to ensure that we're meeting our operational objectives and addressing future customer requirements.
Some examples of the work that is contemplated under the extensive investment plan are as follows.
For the transmission segment, we will invest approximately $3.5 billion to address station assets, including those which like major generation resources to major load centers.
And those that serve local distribution companies and large industrial facilities.
We've allocated approximately $1.9 billion to address lines assets, which serve smaller towns.
First nations communities and businesses.
Pipeline compressor stations and large load facility such as minds on paper Mills.
For the distribution business.
We will modernize the infrastructure to detect repair and restore power more quickly.
Thereby improving resiliency and reducing the impact of power outages on our customers by up to 25% over the application period.
We will install approximately 1200 remote operable switches and re closers.
Approximately 5000 fault indicators.
We were replaced 51000 wood poles in poor condition and refurbish another 14000 poles.
We will also add 120 distribution station Transformers.
And facilitate new load connections.
And these are just some examples on the extensive work required.
Combined these transmission and distribution capital investments will result in a rate base growth of approximately 6% per annum for the 5 year period 23 to 27.
This is an increase of approximately 1% from our previous rate base growth guidance till 2022, reflecting the need for the system and our customers.
We will do this work, while becoming even more efficient and more productive.
The savings as a result of our combined hard work our efficiency and our productivity to date are already flowing to our customers.
Since the IPO to the end of 2020, we generated over $738 million of productivity savings.
These and future improvements allow us to reduce the rate impact for our customers.
And I'm pleased to say that based on these numbers in the first share of the new investment period customer bills will decrease for the distribution segment by 1.8% and decrease for transmission segment by <unk> 3.
3%.
Over the 5 year period of the application disc.
Distribution and transmission customers will see an average increase that is less than expected inflation.
Distribution and transmission bills will have an average annual increase of 8% and 3% respectively over 5 years.
To put that into context, our typical residential customer's bill will increase by an average of $1.68, each year for the 5 year period.
Again, our work to drive efficiencies and continually improve productivity has helped us to keep our costs as low as possible for our customers.
And as we consider the needs of the grid were also taking the initiative to be mindful of the environment in which we operate.
I am proud to report that we've received a number of accolades on the sustainability front.
We received the environmental Excellence award from the electricity Distributors Association for our Pollinator program.
We're recognized again by corporate Knights as the best 50 corporate citizen in Canada.
And we were designated a sustainable electricity company, yet again by the C E.
So today, we are also excited to share our annual sustainability report.
It highlights the important progress we have taken over the last year and sets out our new sustainability priority centered on people.
Planet and community.
We have further increased our transparency by aligning with Cri and SaaS B standards and are on our way to alignment with the Tcf D standard.
For planet, we are including climate change considerations into decisions and plans to ensure grid resiliency through our adaptation strategies.
We're also making commitments to do our part in mitigating climate change and establishing new targets.
Well, we only account for 2% of Ontario's emissions.
We plan to achieve a 30% reduction of greenhouse gas emissions by 2030.
Furthermore, hydro 1 is committed to achieving net zero ghd emissions by 2050.
This means that along with many other initiatives, we're planning on converting 100 per cent of our fleet of sedans and Suvs to electric vehicles or hybrid by 2030.
For people, we're setting targets and working to identify eliminate and prevent systemic barriers in the workplace.
As signatories to the catalyst for cord, we're committed to achieving in our workplace at least 30 per cent of female executives.
While our board has already at 50 per cent.
We also signed the block North initiative pledge under which we are committed to having 3.5% black executives and board of directors as well as hiring 5% black students and our workforce by 2025.
These steps will renew our promise to identify.
Eliminate and prevent systemic barriers in the workplace.
And build a diverse equitable and inclusive workforce at hydro 1.
And finally for communities.
We realized for the hydro 1 has a critical role to play in helping Ontario emerge stronger from the COVID-19 pandemic.
We are continuing to support the Ontario economy by investing in our communities.
Hiring locally.
Paying taxes, and buying goods and services from local suppliers, including indigenous suppliers.
In 2020, we purchased $1.4 billion of goods and services from Ontario suppliers.
Our shared success depends on our ability to build trust as a reliable partner and good neighbor for communities and the people of Ontario.
We also recognized that we serve approximately 101st nations communities across Ontario.
And we are committed to building long term relationships with these communities.
Well, we spent $42 million with indigenous communities in 2020, we're excited to announce that we will increase spending 2.5 per cent of the company's purchases of materials and services on indigenous procurement by 2026.
In addition, as part of our community investment program, we will ensure that 20% of our corporate donations and sponsorship.
Indigenous communities.
As I've referenced in previous calls I'm pleased to say our union share our overall partnership mind.
Recently, the members of the society of United professionals voted in favor of renewing their collective agreement.
This collective agreement covers approximately 18, 100 employees and frontline supervisory engineering and professional roles across the company's operations.
The agreement reflects our shared commitment to working together.
Notably for the first time wage increases included an equity component.
The agreement also allows for increased productivity enhanced flexibility and a renewed emphasis on diverse and inclusive practices.
We are now in a period of labor stability with this agreement in place for the next couple of years.
And with that I'll turn it over to Chris to discuss our positive financial results for this quarter.
Over to you Chris.
Thank you Mark good morning.
On everyone and thank you for joining us today.
I Hope you and your families are safe and doing well.
I'll take this moment to express my Sincerest condolences to the family friends and coworkers affected by this tragic motor vehicle accident.
My thoughts and prayers are with you all.
With respect for the business. We are excited about the recent filing of a joint write applications that includes the investment plans for both of our transmission and distribution businesses for <unk>.
2023 through to 2027.
Equally I'm energized by the recent release of our sustainability targets and happy to share our sustainability report, which outlines the progress we have made and the impact we've had on people the planet and the communities we serve.
In terms of our financial results for the quarter, we saw a decline in earnings per share to <unk> 40 from $1.84, 1.
Although you've seen dramatic the decline was primarily due to the deferred tax asset for DTA decision 1 of the Ontario Divisional Court that was weighted in Q2 of 2020, which led to an $867 million of income taxes.
February last year.
On an adjusted basis. This quarter, we saw an increase in earnings per share to <unk> 40 cents compared to 39 cents in the same period last year.
The main drivers of higher adjusted earnings this quarter 1.
Ontario Energy Board will only be approved rates for the transmission and distribution segments.
1 of demand and low of COVID-19 related expenses.
Partially offset by 1 time revenues for the transmission segment in the second quarter of 2020.
Higher operation and maintenance administration costs, and higher depreciation and asset removal costs.
Our second quarter revenue net of purchased power was higher year over year by 2.6%.
This was comprised of only be approved rates for 2021, as well as stronger demand in both the transmission and distribution segment.
Transmission revenues were lower by $2.4 per cent.
Distribution revenue net of purchase power for higher by $8.1 per cent.
For the transmission segment. The revenue reflects 1 we'd be approve rates, resulting from the transmission rate filing.
In the second quarter of last year as well as strong peak demand this quarter.
However, the year over year revenue increase was offset by the 1 time impact on the only be decision last year, which included the catch up revenue for the first quarter of 2020, and the recognition of conservation and demand management revenues, both of which drove last year's revenues higher.
You have your peak demand for the quarter was higher by 1.8% driven by strong demand in April and June partially offset by lower demand in may.
For the distribution segment. In addition to the OLED approved rates electricity distributed to hydro 1 customers was higher by 8.6% that's it.
<unk> 48 per cent of the increase was attributed to the inclusion of demand from the acquired electric local distribution companies on L. D C Peterborough and really on which they closed in the third quarter of 2020 and as such when not included last year.
While these 2 all of these contributed towards higher distribution revenues.
Impact on net income was not material.
On the cost front operating maintenance and administration expenses were higher by 7% year over year.
The year over year comparability as challenging as last year, we incurred higher COVID-19 related costs due to the temporary stand down of our workforce in the face of the pandemic.
At the time. These COVID-19 costs were largely offset by lower program costs as programs, where the food.
This year the relationship of COVID-19 costs and with program cost has reversed we.
We incurred minimal COVID-19 costs, but higher with program costs.
The highway program costs are driven by timing of vegetation management work.
<unk> restoration efforts and customer programs in the distribution segment.
As referenced earlier 1.
<unk> was also higher due to the acquisition of Peterborough and really on.
Consistent with previous quarters, the financial impact of the measures taken by hydro 1 to support our customers, including the pandemic relief fund.
Financial assistance and increased payment flexibility.
Stemming the winter relief program and the small business pandemic relief program launched in January 2021 were not material.
Depreciation expense was higher year over year due to the increase in capital assets, which is consistent with our stated capital investment program as well as higher asset removal costs and environmental spend.
On financing we saw a decrease in interest expense in the quarter due primarily to the recognition of carrying charges associated with the recovery of the DTA amounts previously shared with ratepayers.
The carrying charges will be minimal going forward.
Financing costs also declined due to higher capitalized interest as compared to last year due to a higher average balance of assets under construction in the second quarter of this year.
Income tax expense was $26 million for the quarter compared to an income tax recovery of 849 million in this day.
1 quarter last year.
The increase in income tax expense was primarily due to $867 million income tax recovery recognized last year. Following the Ontario Divisional court decision on the deferred tax asset.
When adjusted for these 1 time items the adjusted income tax expense for the second quarter last year was $18 million.
The $8 million increase in adjusted income taxes due to low end net deductible timing differences and higher pre tax earnings.
The effective rate.
This quarter was 9.8% versus 6.9% last year.
And consistent with our previous guidance of 6% to 13% for periods prior to the implementation of the deferred tax asset decision.
With the implementation of the DTA decision on July 1st 2021, and as communicated last quarter. The effective tax rate guidance will now change to 14% to 22% on.
Over the next 5 years with the most significant impact over the 21% to 2023 DTA recovery period.
As a reminder, the change in effective tax rate will be net income neutral.
On June 17th 2021, Youll have issued their final guidance on the rules and operation of the deferral accounts established for utilities to track the impacts arising from COVID-19.
The only be determined that eligibility for recovery of most balances will be subject to a means to based on utilities achieved regulatory relief.
Given this guidance, we have not recognized any amounts related to COVID-19 costs as regulatory assets.
As a reminder, we had reversed the recognition of regulatory assets associated with bad debt in the fourth quarter of 2020 and had recognize the expense in the same period.
As a result, there was no net income impact from this guidance.
Moving to investing activities capital investments for the second quarter was $553 million.
Which is a 28, 9% increase from the second quarter of 2020.
The increase was mainly due to a high volume of refurbishment and replacement for station lines and wood Poles, along with higher investments in most of your development projects for the transmission business.
On a volume of work on customer connections in both the transmission and distribution businesses and the construction of our new Ontario grid control center in there really are.
We placed $300 million of assets in service in the second quarter.
And 81, 8% increase compared to the prior year.
This was largely a result of the lumpy nature of placing assets into service.
The year over year increase related primarily to transmission segment.
Which had substantial completion and highest spin on lines and component replacement in 2021.
In the distribution segment, we saw a year over year increase of 42% due mainly to a high volume of work on customer connections and assets placed into service for system capability reinforcement projects.
On guidance, we continue to be committed to and dependent on target of 4% to 7% earnings per share growth through 2022.
We expect to provide guidance post 2022 after the approval other joined right application.
As promised we have updated the future capital investment tables for the period 2021, 3 years to 2027 for all segments.
We have also provided the annual expected rate base numbers and corresponding revenue requirements for the announced included in the joint application.
Between the funding of the joint rate application and re estimation on that guidance Hydro 1 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 financial results.
I'll stop there and we'd be pleased to take your questions.
Thank you Mark and Chris.
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Our first question comes from Mark Jarvi CIBC capital markets. Your line is open.
Thanks, Good morning, everyone on the.
The first 1 just if I look at the updated capex, putting aside from current rate application looks like for 2021, and 2022 and has gone a little higher community as part of other drivers and I think also on the joint revenue.
Location at 1 is how you are allowed to be above a little bit the forecast for rate basis, and you can get it from contact in terms of where you think you'll end up at the end of 'twenty 2.
In terms of how much and how much you're allowed to be off from the original forecast because the rate base growth.
Yeah, Christy you do you mind, taking up.
So thanks a lot.
Thanks for the question Mark Jarvi.
So we did increase 21, I think it went up by $140 million approximately and really what's driving that mark is the increased demand works.
Customer connections and growth from the distribution business from others.
Transmission side as you know.
On long term projects on lumpy in nature and what we're doing there is just moving capex between use it doesn't have a material impact on on rate base.
And then on the distribution side does it have a sort of a small favorable impact on us on where you will trend and rate base for the next couple of years.
It will be as I said, it was $40 million of of additional spend on distribution and the nitro distributions trains changing a little bit.
Now is a combination of it's still mostly sort of in year and when you spend the capex. It's in service within 12 months, but there are some longer term projects now.
<unk> connect up stations and so on that don't fall on the transmission. So on the business. So it has a little bit of lumpiness to it but the majority of that 40 million will translate into increased rate base.
And as a reminder, we can beat that dead band of plus or -2%.
Got it.
And then we can.
Go through some of your materials for some talk of like on the primary application impacts of climate change on physical infrastructure.
You may have seen anything in terms of increased aging or they more wear and tear in terms of strain on for reliability and now how does that sort of play into like the sort of net incremental investments you've seen us over the next sort of 5 year window.
Yeah, It's mark here, we did build in the impacts of climate change into our investment plan, particularly into 1 dealing with our poor condition, Paul but also our vegetation management and in a big way investing in technology to help us with reliability on our assets. So I talked about <unk>.
Closers and fault finders and things like that and so are we.
We have built in a fairly significant.
Best meant to reduce or improve our reliability by about 25% on the distribution side and and a lot of those are our.
Reflected in.
Adapting to climate change.
So for us on that Mark is not technology improvements is that.
1 of a little bit of an opex to Capex, which where you can put back.
On what we normally do on maintenance spending more on just on some capital investment.
So I guess just kicked off.
No fair to stable here.
Yes. It does he says here on <unk>.
Yes, that's a great point.
We're investing in technology, which will reduce things like truck rolls and things like that in the event of outages, because we'll be able to restore the system using our central control Center.
In a more efficient way.
Okay, Great I'll leave it there thanks guys.
Thank you. Our next question comes from Maurice Choy with RBC capital markets. Your line is open.
Thanks, and good morning, My first question I wanted to just pick up on.
On a bit too early for us, but you follow the application of Friday have you received any early feedback from stakeholders, including those in government as well as other political parties as well you mentioned, obviously you've done a few rounds of feedback with other stakeholders in preparation for this application how significantly different as this application for.
From those rounds of feedback.
I would say our approach to 2 consulting with stakeholders. In this round is is is widening significant we also did a a.
Technical briefing for media for the media understands what we're asking for in our application.
The feedback we've received is very similar to what we received from our customers people understand our need to invest in the system. They understand what the drivers are and and the approach. We're taking is to be open and transparent right upfront on on what we are asking for and why and that's why we did a proactive technical briefing with.
Media from the day after we filed the application.
And our customer engagement really showed a robust support from our customers, which helps with with stakeholders such as government and others that are that we did that work. So that we can demonstrate that that our.
Our customers are supportive of what this investment plan is.
And just a follow up on that for you had an engagement with them since Friday.
With customers or no, that's especially those with the government as well as other political parties.
No not not not since Friday, we haven't we did do that that media technical briefing on Friday like I talked about.
We did brief.
Stakeholders are.
Some of them the night before like government and they're supportive of our investment and understand why we need to do it.
Great and just to finish off my second question.
The company has always had a simple and easy to 170.555 strategy in this regulatory period as you look at the J wrap.
There anything in the debt would cause you to believe that your EPS and dividend growth wouldn't also March in line with your rate base CAGR.
Yeah.
So we've given guidance out for the end of 'twenty, 2 and we will update that guidance. After the approval of J wrap from I think it's too premature for us to speculate on that we need to go through the process with the OMB.
And finalize our radar there and then we will update that guidance going forward.
At least on the funding plan I suppose that you would you be reconfirming debt no equity issuance would be required.
Yeah.
That's correct with the plan that we put forward, we will not need equity to support the the investment plan.
Perfect. Thank you very much.
Thank you. Our next question comes from Rob Hope with Scotiabank. Your line is open.
Good morning, everyone on to kind of a longer term conceptual questions. The K Rob's got a placeholder on ROE of 834 per cent. How are you thinking about kind of you know do.
Do you get that ROE relative to your cost of capital as well as you know could you.
Would you be open to the OMB revising how it is looking at our cost of capital and would you try this for that.
Yes, her for Rob I'll start and maybe I'll ask them, Chris for Frank to weigh in because we do have a frank or to Craig's literary officer on line, but the 8.3 for is is what the ROE would be based on the interest rate. If we were to sell it today, we will be updating that in Q.
For 'twenty 2 based on the actual.
On a formulaic approach for ROE based on the interest rates at that time. So so as I said the 8.3 port percentage is essentially a placeholder for today.
And that will get updated to reflect the differences Frank do you do you have anything you want to weigh in on that.
No you've got that correct mark it as a placeholder for an hour and we will look at it when we file our final draft rate order from the ODP.
So that'll be determined in the fourth quarter of 2022.
Okay.
1 moment.
Rob It's Chris here just.
But that is a formulaic process. So it's based on the movement in the Canadian non bonds the non.
Do you see there at 8.3 full was the number that was set for the OUP.
In Q4 of last year. So it just is a matter of process, we use the rates that they got out there in the public debt.
That again this year and have updated the 1 that will apply to this application will be in Q4 of 'twenty 'twenty..2 so it will depend on your view on interest rates at that point in time.
If you were to update it today it would be.
8.7% or approximately 1 that number but if you look forward to what you think it might be in 2022, that's what we get factored into the <unk>.
Okay, and then just to confirm Youre happy with the formulaic on ROE calculation, you wouldn't look to kind of spur.
Revision of debt cost of capital parameters.
At this time, Rob we're very happy with the we think it balances risk and opportunity together now.
Again, if you were set at a certain point in time say the economy was in a very unusual place like right at the beginning of Covid, that's might be something we'd look on it to say look how do we.
Rebalance from adjusted given it's a 5 year application, but we think there's sufficient time for that to play through for the end of 2022.
Alright. Thank you and then kind of on another longer term question, you're just going to the load forecast and the J REIT.
Looking for what kind of you know just a little bit of load here, but you know as we're in seeing the potential electrification of the economy, how does that for now its way into your thinking about potential upside for the demand forecast and I guess from the outside would be offset would be increased embedded generation. So how are you thinking about kind of the puts and takes on and Ben.
The.
Additional generate additional demand.
Yeah. We are load forecast is based on historical load and then forward looking consensus forecast on things like economic drivers are.
Electricity consumption, which includes GDP housing starts population and those types of things. It also includes our views on our EV pickup and as far as on overall electrification, we are seeing already a transition to <unk>.
Reputation, which is built into our historic low.
Pork or historic loans, which will carry through to 2 to the forecast. So example would be the.
The agriculture sector has already been transitioning over to electric city.
And as far as that trend continues where it is built into our forecast.
Okay.
Your next question comes from Andrew Kuske with Credit Suisse. Your line is 1 thing.
Thanks, Good morning, I guess, 1 question for Mark on its a bit of a philosophical question on how you thought about the Jay Roberts from a positioning standpoint.
What effectively are you trying to solve for is it a capital.
Lloyd amount that generates a certain amount of rate base growth.
Or is it from a benchmarking standpoint on where you really want to stand from transmission reliability.
Distribution reliability of avoiding rate shocks and between those 2 concepts.
Yeah. It really is balancing the need for investment in our on.
In our asset based on condition of our assets with with with rates and the impact on on the customers and that's really why we did such an extensive outreach with customers and and we did a test with them.
Different investment levels, and what it would mean to their bills in and ask them.
What they would support we did we did it both for the transmission customers and the distribution customers and an overall, we had support from our customers on our level on the investment with about half of them are.
Actually saying that we should be investing more in haps and we should be at where we are for lower so we think it's good support for our investment plan because it does balance.
We are the customers needs and views with that with bill impacts.
And in that 1 of the 1 of the big areas that customers were concerned about is reliability, particularly our rural customers and this investment plan does improve reliability for them by about 25 per cent. So I think we've found that balance Andrew in this investment plan and that's what we'll be putting forward as our <unk>.
Evidenced to the to the AAV.
That's helpful. And then just to go back to the 2 thirds of the capital is really system renewal oriented, but clearly renewing a system that has facility H b accorded 50 years plus in some cases, we get a lot of productivity benefits of the capital deployment.
Could you give some of it so that you expect theres there are ways to quantify that from a financial standpoint, whether it's for.
<unk> declines.
Shoot for maintenance capital.
There's something you can give us on that front.
Well, maybe I'll talk for the condition and Chris can weigh in on on the economics for the impacts on that so so we've often talked about a third of our assets for end of life. We don't replace assets just because of the age we replace them because of the condition. So at the end of life assessment gives us a general assessment, but then.
We've done a.
On condition asset assessments from what we've found is is about 10% of our transmission assets are in poor condition today.
And that means for about 27 per cent of our Transformers 11 per cent of our breakthroughs 14 per cent of our conductors and in this investment plan.
We're not even dealing with all of those are that are in poor condition, where we're dealing with with a lot of them, but but we don't have to deal with all of those so so I believe that there is good.
Good evidence as to why we need to be investing in those in that 67 per cent of our of our overall investment plan Christy 1 take the second part of Andrew's question.
So Andrew I think it's the same program, we had from 2015 to 2020.
Through that period and Mike's comments. This morning, he talked about achieving approximately $738 million on productivity savings over those 5 years and that's really the.
The benefit on the target of offsetting inflation every year. So that's translated into about 50 million per year that will continue on it gets roughly split over the longer term between capital and operating programs.
Up to this point capitals be more like 65, 70% of that program.
On Opex as being the remainder so I would see that continuing over the longer term I'll.
I'll just remind you Andrew that's been a big benefit to rate payers and where they see that as they see it when we if we over earned we share 50% of net benefit with great players and part of that first year.
Re basing that on the.
The rate payers have seen that 1.8% reduction in build on $3.20.
Per build across the year.
A chunk of debt is due to the benefits of productivity. So that's us being rebased at the end of this period too.
To those productivity benefits, so I see that continuing Andrew it'll be roughly the same as what you saw on the past.
Okay very helpful. Thank you.
Thank you. Our next question comes from Ben Pham with BMO. Your line is open.
Hi, Thanks, Good morning, I wanted to go back on.
Debt financing funding uplift for that day Rep from you mentioned no need for equity I'm I'm wondering.
It's a pretty big step up in Capex per year.
Your comments on no equity need is that.
Is that just taking your cash flow from operations plus the dividends on on your financing.
<unk> debt at 60% of debt is that what's driving that conclusion.
Christy on our responses.
Thanks for the question Ben.
Got.
There's 2 things.
At this point in time, we are slight net we have some balance sheet flexibility that will take this up to well.
On a 60.40 debt equity maybe slightly higher than that over this period.
But we also have a large deferred tax assets.
On our balance sheet, and what you might consider and that sits around $2 billion. So we are monetizing net as well so as we do that.
You don't need any additional borrowing to do that.
And you see the deferred tax asset decision you saw the return of over 200 million.
$50 million of that amount in the next 2 to 3 years and then after that it's about $50 million per year. So that's part of it.
And then the uplift in earnings.
We hold that payout ratio constant so we retained part of that to fund our growth. So we don't see a need for equity when we moved from 5% to 6%.
Through to 2027.
Okay.
Would you would you say that.
Okay.
Give me your sources of capital.
This new Capex program does it.
Is it restricted to some extent on.
Smaller LDC acquisitions, I know, it's small but does this and you're at a point where youre picking on restricted on what you can do outside of a day.
Your base plan.
No no.
From from that point of view.
We understood the asset condition for for longer than just this right application. So we have been seeing this this need for awhile now absolutely supported through customer consultation so on but that just allows us to plan.
I know some other questions from from from analysts in the past have been.
With the decision of the DTA would you look at returning capital to invest.
We said, we would if we didn't see a need for it but this is when the need comes so we do not see it impacting 1 our ability to finance. The application you have in front of heat for L. D season in the past 1 of cities. The LDC consolidation should continue at approximately 1 to 200 billion per year.
If we did something large vein.
Beyond that then yes, we would look at how we would finance that but.
1 to 200 million per year through this free period.
See no need for additional equity.
Okay, Great and then.
And then on to J wrap any.
Any sense of that.
Timing on on a day session you yeah.
But I'd like to time your credit.
1 in 'twenty 2.
And do you anticipate net 10 minute net passed or not.
The conversations you've had so far and yet you had a couple of months beyond just because of the joint application like but any thoughts initial thoughts on on a decision.
Yeah, we expect a decision in the fourth quarter of 2022, the the only be processed for application of this size bigger than $500 million is 355 days from the date of notice of application.
Which we expect will be around.
August 9th.
Next year. If you go on that 355 days, but we really are expecting by 2 for 2022.
Yes.
Okay. That's great. Thank you.
Thank you. Our next question comes from Linda as a gearless with TD Securities. Your line is open.
Hmm.
I'm I'm wondering if I can get a sense of some of the aspects of your Union agreement that was just reach those are already reflected in your <unk> and also how might we think of the expiry of U R. I T.
E cap Gemini agreement.
At the end of 2020 for.
Is it reasonable to assume a renewal similar to what's in place currently any sort of context on those 2.
<unk> agreement would be helpful.
Sure Linda maybe I'll take the society agreement per switches, 1 that we recently signed.
And it will take us 2 to 2023.
It was a successful bargaining with the with the savvy and resulted in a number of enhancements to lend our strategic goals, namely.
<unk> created a path to ensuring labor costs are better aligned to the market for society represent a growth.
And the agreement also helps us move towards our corporate DNA and sustainability goals as.
As well as as I said in my opening comments on portion of the increases in the society agreement on.
Our equity base, which which ties more of our employees to the performance of the company, which we think is a positive outcome.
It also it also maintains our existing contract flexibility so as we see our capital plan on growing that gives us some flexibility there as well too to contract on some of that work. So.
We think it was.
That is good a good agreement for both on our employees and for the company overall.
And then the I T cap Gemini, which was the second part of that.
We we have.
In sourced.
A lot of the.
From from an index or sorry energy to 2.2.
Hydro on a bunch of the I T. And then we have the outsourcing agreement with Capgemini for the remainder of those.
Services are used to be provided by energy, we do see that debt that is giving us an overall cost benefit by by.
That new arrangement with Capgemini directly.
I can't speculate on whether we will extend that contract at this point, but we are seeing that we are getting benefits out of that and the new arrangements with directly with capgemini buy instead of through energy and and by in sourcing the critical things that we wanted to have within the company.
Okay. Thank you and as a follow up just on I'm trying to understand what's embedded in your J wrap them. How can we think of the inflation assumptions in your capital expenditures.
And you have a.
From a capital factor as well.
Trying to get an understanding of them.
Whether on these kind of productivity factor is embedded in your capital factor on your formula from.
Yeah, maybe I'll ask Frank to to speak to how we've we've bettered the.
Productivity into the capital factor So Frank can you maybe explain that to Linda.
Sure.
Thank you Mark Linda last time, we did our application for transmission and distribution, we had put a bottom line reduction.
Into our application and that seemed to cause confusion at the hearings. So what we've done now.
Is we've built it into the Formula and it's just the standard formula from deal would be so there is of course your stretch factor.
But in the capital factor, there's assumed additional stretch there as well.
So it's that debt that productivity factors now captured through the formula in terms of the inflation is the standard on inflation assumptions that followed the Ontario, CPI, so in or around 2%.
Thank you.
Thank you. Our next question comes from David Quezada with Raymond James Your line is open.
Thanks, Good morning, everyone.
My first question just a just in light of the contemplated increase in Capex, which is pretty meaningful in the J wrap on I'm curious how you'll go about.
Or what Youre acquirements will be in terms of adding staff and and I guess, how do you think about the availability of third party contractors.
If you look to increase the pace of Capex.
Yeah, David it's Mark here, so as I talked about on the Society agreement, we do have the ability to to contract out in society covers a lot of our engineering and project management that type of.
Support we also do have the ability on a on new stations in Greenfield to contract that 1 into a transmission to to Oh tide.
Contractors and construction companies. So we have been building a plan within our execution groups to to ramp up our a R.
Our ability to deliver on this increased capital.
Without actually increasing a lot of head count increases within hydro 1 so we have been negotiated into our agreements that flexibility knowing that we are looking at ramping up our capital and I think we're in good shape to do that.
Okay, great. Thank you for that and then maybe just 1 more for me among the parts of your business that are not covered by the J wrap I. Appreciate the debt you will be putting out an updated capital plan next year, but are you able to comment on just the.
The pace of Capex and rate base growth that you expect for those other parts of the business do you think it's going to be roughly consistent with our 1.
With what's outlined on the J REIT.
Yeah.
A large part of our spend is is is within the <unk>. There are some projects, which are outside of J wrap in there and in other filings that we will be having so as part of J Rockford proposing to regulatory accounts with the OE b to allow us to execute on new externally driven.
Worked without materially impacting the <unk> capex and.
Some examples of that are the development work for Wassa again, Chatham delayed shortly thereafter.
B, we do expect these new transmission.
Projects can be in license partnerships like we did for <unk> and <unk>.
L P and there'll be subject to their own rate applications outside of J round. So some of some of our of our new lines, which are outside of this investment balance you're showing you today.
Okay, great thanks for that and I'll get back in the queue.
Yeah.
Thank you and as a reminder to ask a question at this time. Please press Star then 1 on your Touchstone telephone.
Our next question comes from Darius Lazenby with Bank of America. Your line is open.
Hi, Good morning. Thank you for taking my questions just wanted to come back to the.
<unk> spending in the J rack specifically the.
On the division between distribution and transmission it looks like the step up in distribution is a little bit more of a step change then in transmission.
You've touched on it a little bit but can you just talk about what drove that particular step up is it more just the <unk>.
Factor of the distribution rates being a little bit.
More on a day, then transmission comparably or just a greater need for refurbish aging equipment for any other factors.
Okay.
I would say that the biggest difference between TX and Dx why it is more of a step up is because in TX our reliability of T. X is first quartile where their reliability on the Dx side. This is third or fourth quartile and in order to to improve the reliability, which is 1 other thing for customers.
Commented on and as our customer outreach.
Need to step up the spending there and part of that is on on things like a poor condition polls, but it's also the technology investments I talked about before which is the.
Re closers and fault finders and things like that on the system to tell thats improved the reliability.
So the drivers are different with transmission and distribution and we do see debt that we need to improve the reliability on the distribution side more so than on transmission.
Okay excellent. Thank you 1 more if I can in terms of your 4 to 7 per cent EPS guidance range through 'twenty 2 now that were.
Presumably there is some visibility into 2022 have you given any consideration for potentially narrowing that range.
Hi, Jeremy it's Chris I can take this 1.
We believe that that guidance in place and I think I've said in the past.
We have more confidence of being at the upper end of that range on that.
It was provided.
Previously.
So it will stay consistent.
On the joint right application is approved.
We will update on guidance beyond 2022.
Okay. Thank you I'll leave it there.
Thank you. Our next question comes Patrick Kenny with National Bank Financial Your line is 1 thing.
Yeah. Good morning, guys just back to your sustainability targets.
I know your carbon footprint is already quite modest relative to other utilities in North America, but.
Just curious on your target to reduce G. H T emissions by 30% by 2030, just curious if you have any opportunities to move debt reduction target more in line with.
The federal government's new target of $40.45 per cent.
If you did accelerate that cool what that might mean for the 5 year capital plan.
Yes.
We just released our goal of 30 by 30% and we pick the strike oil for US irrespective of the pack for the government has accelerated isn't it.
And to your point, we're our carbon footprint.
Is is relatively small and we think our role actually is to help decarbonize the economy through connecting the 96% Decarbonize electricity in Ontario to customers.
So the.
The other thing is our target include scope, 1 and scope 2 so the scope to is tied to the 2 how green the grid is in in Ontario at which we don't directly control and so so we wanted to make sure that we set a target which was achievable by the actions we can take and we will also.
With the with the suppliers on the ISO and the OE be on looking at.
The mix of our carbon versus non carbon generating electricity in Ontario, So we're comfortable with that.
R. J wrap includes investments to get there and they're not incremental to what we were looking for it and so the primary areas around <unk>.
Converting our fleets.
Building automation into our building to reduce our carbon footprint of our of our building.
Reducing the diesel in a remote community, that's probably our biggest single footprint.
As a remote communities in and some of those will be coming off of diesel as they're connected to the grid and we'll look at renewable opportunities for other so we're comfortable with the debt targets, we've said Seth.
And that they're achievable.
Thanks for that Mark and as a follow on maybe for Chris too, but just perhaps you can confirm what amounts if any.
Within the capital plan.
Our earmarks for innovation in some of your Green Tech Jv's I believe you.
You're basically accelerating so that's a charging station initiatives quite rapidly. So just curious if there's any upside to the capital plan related to some of those joint ventures.
Thanks Pat.
So there will be at this point in time on what you're referring to there is.
Joint venture IV, the charging network and it's in its very early stages, so that has not sort of.
There is upside to kept on investments in there. That's not included in this plant will be fully updated for today is really the joint great application.
So to the extent that our EV penetration happens quicker.
Or even more broader that would be reflected in the next update and we do those updates pet normally around our business plan.
So sort of the end of the year going into the new year.
So there's definitely upside day and that the EV charging stations is is we'd be outside the joint right application in any case, it's not regulated.
But we do see upside day, and we will update that normally once a year as part of our business planning process.
Okay, that's perfect I'll leave it there thanks guys.
Thank you and our last question comes from Matthew Weekes with Industrial Alliance. Your line is open.
Hi, Good morning, Thank you for taking my question.
I was just noticing that when you look at it.
Capex in the way that it's trending it seems like a greater.
1 is generally for them.
Directed towards sustaining capex, so over the years.
Is it too early to tell or would you say that this trend would continue or level off if it does level off you know over the long term would you see it leveling off at around 1 maybe 75 per cent or something like that sustaining capex as a percentage of total capex.
Yes, it's mark here.
So it is based on condition that sustaining investments are primarily based on on condition and as I said before we do can dish and assessments of our asset and and even at the investment that Youre seeing today, we don't deal with all of our poor condition assets by the end of the 27 period and so.
If you if you assume which group, which we need to that they.
The existing assets will continue to age.
We're not moving with all the poor condition assets in this investment plan, others will get into that poor condition zone by the end of the investment period that debt will continually update and look at those conditions going forward as we as we develop our.
Application beyond 'twenty 7.
So short answer is.
There is a long term kind of.
Need to invest in our age assets in Ontario.
Okay. Thank you that's it for me I'll get back from Q.
Thank you and that does conclude our Q&A session for today I'd like to turn the call back over to Omar job. It for any further remarks.
Thank you Shannon management team on hydro 1 thanks, everyone for their time with US. This morning during what is a busy period. We appreciate your interest and your ownership.
If you have any questions that weren't addressed on the call. Please feel free to reach out and we'll get them answered for you. Thank.
Thank you again and enjoy the rest of your day and continue to be safe.
Yeah.
Ladies and gentlemen, thank you for participating on today's conference. This does conclude today's program you may all disconnect everyone have a great day.
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