Q3 2021 Hydro One Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to the Hydro one limited's third quarter 2021 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.
To ask a question. During this session you will need to press star one on your telephone.
The call is being recorded.
I would now like to introduce your host for today's conference Mr. Omar Javaid, Vice President Investor Relations at Hydro one. Please go ahead.
Good morning, everyone and thank you for joining us and hydro one's earnings call.
Joining us today are our president and CEO Mark for Wesco.
And our Chief Financial Officer, Chris Lopez.
The call today, we will go over our third quarter results and then spend the majority of the call answering as many of your questions as time permits.
We're also several slides that illustrate some of the points, we will address in a moment.
It should be up on the webcast now or if you're dialed into the call you can find them on hydro one's website in.
The Investor Relations section under events and presentations.
Today's discussions will likely touch on estimates and other forward looking information.
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 will turn the call over to our president and CEO Mark for Wesco.
Thank you Omar.
Good morning, and thank you for joining us for our third quarter earnings call.
Before we begin I'd like to take a moment to remind everyone that remembrance day the day after tomorrow.
We remember those who have served and continue to serve our country during times of war conflict and peace.
Im very grateful for our freedom and acknowledge all of who have given their lives and those who continue to serve so that we can have a better and brighter future for all.
We forget.
Thank you.
Turning to our business.
I am proud of the hydro one team and what we've accomplished not only this quarter, but throughout the challenges of the past couple of years.
This quarter's earnings per share of <unk> 50.
Demonstrates our resilient business and robust fundamentals.
It's the hard work of our team that allowed us to restore power to our customers after storms hit dips.
Deploy over $500 million of capital investments and further improve the experience for our customers.
At Hydro one we also feel a deep responsibility to the communities in which we operate.
And we continue to support those who are working tirelessly to keep our communities safe and healthy.
Hydro one donated $150000 to support feed Ontario.
The provinces largest collective of hunger relief organizations, providing food banks with fresh food and pantry staples.
At the start of the pandemic Foodbank saw 26% increase in first time visitors.
Hydro one's donation will provide the equivalent of 450000 meals to help Ontario, who are facing hunger.
In addition to our work with the food banks, we help kids sport a provincial charitable organization that helps children and youth, aged 18, and under whose families who are experiencing financial hardship.
Our support will give more than 150 children and use the opportunity to participate in sport programs.
By providing financial assistance for registration fees.
And equipment in their communities.
I'm also proud of our team for their personal giving and support for charitable organizations and I'm pleased to announce that thanks to the generosity and dedication of hydro one employees.
We raised over $725000 for local organizations during our recent power to give month.
Surpassing our fundraising goal of $250000.
These results demonstrate our windows one attitude as we came together to raise much needed funds for the charity and communities, where we live and work.
In support of indigenous owned businesses, we announced a partnership with the Canadian Council for Aboriginal Business' CCA.
To provide 28 grants to businesses that are majority owned and controlled by indigenous Canadians.
We are proud to partner with the CCA be to invest in the success of indigenous owned businesses.
Who play a critical role in our economy and have worked hard to persevere through the pandemic.
We will continue to leverage our unique position in the province, and the reach of our network to advance reconciliation.
And nurture respectful.
Positive and mutually beneficial relationships with indigenous communities.
This partnership is part of the hydro one's commitment to ensure that 20% of our corporate donations and sponsorships are directed to indigenous communities.
Hydro one has also committed to increasing its indigenous procurement spend.
5% of the company's purchases of materials and services by 2026.
These are all examples of how hydro one continues to give back to the communities in which we operate.
For us to succeed we must continue to serve our customers with innovative solutions.
We recognize that the electricity system is the backbone of a strong economy.
It powers, our customers' connects us to our neighbors and plays a vital role in energizing life for all.
Our customers and our industry count on us to provide resilient and reliable power.
Our customers are also expect us to be ready for the future and whatever challenges that may bring.
Therefore, we are investing in new technologies and supporting the shift to increased electrification of our economy.
Hydro one is making strides in improving reliability and customer experience.
Modernization of the grid is the gateway to achieve these positive outcomes.
In the distribution segment smart switches installation is a key element to hydro one's modernization initiative.
In 2021, we continued to deploy smart technology on our distribution grid and.
And we are on our way to significantly exceeding 21 <unk> deployment by the end of 2021.
In addition to smart technology installations, we're also piloting several innovative solutions to improve reliability and the experience of those customers impacted by long interruptions.
In one pilot, we've successfully deployed behind the meter battery energy storage systems.
Tesla power walls to customer homes.
The solution is designed to maintain power supply to a household during power interruption.
Which improves reliability and the overall customer experience.
On a different scale.
And as part of our unregulated energy management services business I'm also pleased to announce that we recently partnered with power flex.
A division of EDF renewables, North America to provide distributed energy resources for our commercial and industrial customers.
The two projects in this partnership our battery energy storage systems with Georgia Pacific in Engelhart in Great Lakes copper in London.
These two battery systems will help our customers optimize their energy consumption and reduce their overall energy bills.
They're expected to go into commercial operation by the first quarter in 2022.
These are just some examples of our continued work both on the regulated and unregulated side to innovate and strengthen the grid for the benefit of our customers.
Recently, we announced an important milestone for the hydro one telecom business.
As the business has been evolving.
From a provider of connectivity.
To a full service information and communications technology solutions provider.
We felt that we needed a new brand identity to reflect this transformation.
On October 28, we announced that hydro one telecom would be rebranded to acronym solutions.
The name acronym reflects its sharp agile and simple approach to complex challenges and sends a strong message within the business community that it is the company committed to providing more choices to our customers.
It signals, an easier way to do business as compared to its competitors.
Acronym will continue to innovate by offering a suite of value added services the businesses can rely on.
This important milestone reaffirms our commitment is hydro one to transform the way we do business.
And finally as an update on our joint rate application that covers covers both transmission and distribution.
We received from the regulator to procedure lawyers, the lay out a path for the remainder of the proceeding.
Interrogatory, which is the formal process of asking questions.
Commenced and will run through the end of November.
We've already received over 3000 questions and while the number of questions is as expected the detail requested much greater than what we've seen historically.
This speaks to the thoroughness of the process and the intricacy of the responses required.
And the organization has mobilized to respond to these questions.
This Q&A period will be followed by technical conference in mid December.
Following the conference we expect there will be an oral hearing in early spring with a final decision expected in the back half of 2022.
We are highly confident that we put forward a robust application that will help bring new and modernize our grid.
And ultimately deliver continued prosperity to Ontario.
And with that I'll turn it over to Chris to discuss our financial results this quarter.
Over to you Chris.
Thank you Mark good morning, everyone and thank you for joining US today 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> 50, compared to 47 seven last year.
The main driver of high ratings. This quota was approved right for the transmission and distribution segments as well as the redemption of preferred shares in the prior year, partially offset by lower transmission peak demand and higher depreciation.
<unk> and asset removal costs.
Second quarter revenue net of purchased power was higher year over year by seven 7%.
This was comprised of approved rates for 2021, and the recovery of DTA announced following the detailed implementation decision by the OED on April eight 2021 that we discussed in the Q1 earnings call.
As a reminder, the DTA recovery is net income neutral as there was a corresponding offsetting taxes.
For the transmission segment revenues were higher by 5%, reflecting approve rights from the transmission rate decision received in the second quarter of last year as well as higher revenues, resulting from the recovery of DTA amounts.
However, the year over year revenue increase was partially offset by lower peak demand.
Year over year peak demand for the quarter was lower by seven 4% driven by weaker demand in July August and September.
For the distribution segment revenues net of purchased power higher by 10, 8%.
Listen to approve rates and the recovery of DTA amounts electricity distributed to hydro one customers was also higher by two 8%.
That said nearly 67% of the increase was attributed to the inclusion of demand from the acquired electric local distribution companies or LDC, Peterborough and they really are.
Imagine Eastern utilities was included partially last year as I had closed on August 1st and September 1st 2020.
Well the two ldc's contributed towards higher distribution revenues the impact to net income was not material.
On the cost front operating maintenance and administration expenses were flat year over year.
So while OPEC and vegetation management costs in the transmission business were offset by higher spend on emergency power restoration in the distribution business.
The storm related activity necessitated the parcel deferral, although schedule work as we focused on power restoration this quarter.
For the remainder of the year, we expect robust activity as we complete our 2021 wood plants.
Yeah.
COVID-19 related costs were marginally lower this quarter at $3 million compared to $5 million in the same period last year.
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 an increase in interest expense in the quarter due to higher debt levels.
In September <unk> raised 900 million of debt at competitive rates.
Issuance consisted of a $450 million aggregate principal amount of $2, 33% medium term notes due in 2031, and 450 million aggregate principal amount of three 1% medium term notes during 2051.
The net proceeds of this offering are expected to repay or prepay maturing long term and short term debt and for general corporate purposes.
We continue to be pleased with the stability of our balance sheet and robust investment grade credit ratings.
As we look forward, we will continue to access the debt markets Opportunistically.
Income tax expense was 71 million for the quarter compared to 22 million in the same quarter last year.
The increase in income tax expense was due to the recovery of D C amounts as.
As a result of the detailed implementation decision, which as discussed before is net income neutral.
Lower net timing differences and higher pretax earnings.
The effective tax rate for this quarter was 19% versus the effective tax rate last year of 7%.
This is consistent with the guidance we provided earlier this year of 14% to 22% over the next five years.
As a reminder, the most significant impact will be over the 2021 to 2023 DTA recovery period.
As previously communicated the change in the effective tax rate as a result of the recovery of DTA mouth is and will be net income mutual.
Contributing to the year over year increase in net income attributable common shareholders was the redemption of the series one preferred shares announced in the third quarter of 2020.
Upon announcement of the redemption future dividends in the amount of $5 million were accrued up to the date of redemption lowering net income to common shareholders in the third quarter of last year.
As a reminder, the redemption of the preferred shares.
Makes it to be approximately two cents accretive.
Two shareholders.
Moving to investing activities capital investments for the third quarter with $513 million, which is a two 6% increase from the third quarter in 2020.
The increase was a result of higher investments in the distribution segment due to system capability reinforcement projects and storm related asset replacement, partially offset by the timing of Spain, I'm on a fixed asset.
Year over year investment in the transmission segment declined as a result of lower station refurbishment and replacement.
Spend on Spanish Transformers, and timing of spend on modest success at.
Partially offset by higher multi use development projects and customer contributions.
We are pleased with that progress on capital investment this quarter.
We placed 514 million of assets in service in the third quarter, and 38, 5% 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 the completion of the new Ontario grid control center for the benefit of both the transmission and distribution segments.
In addition for both segments.
Timing related differences for various projects and changes in the volume of work that contributed to the positive variance.
On guidance, we continue to be committed to and have fun at target of 4% to 7% earnings per share growth through 2022.
As a reminder, we expect to provide guidance post 2022, following the approval of the joint rate application.
I'll stop there and we'd be pleased to take your questions.
Thank you Mark and Chris we ask the operator to explain how she'd like to organize the Q&A polling process in case, we aren't able to address your questions. Today My team and I are always available to respond to follow up questions. Please go ahead Sir.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Sorry, Your question press the pound key please stand by while we compile the Q&A roster.
Our first question comes from Linda <unk> with TD Securities. Your line is open.
Thank you.
I'm wondering if you can help us understand just looking out over the next year, obviously, you're very busy with the joint rate application, but I'm wondering if you can give us an update on how your discussions with other <unk>.
I suppose utilities is going.
What might be the outlook for potential acquisitions over the next year given all the benefits you bring to the table or might some of those conversations be deferred.
And decision is delayed until after the provincial off from last year.
Thanks, Thanks for the question Linda It's Mark here. So we have been active speaking with the leaders of the L. D. CS as well as the local mirrors and fiscally its that portfolio. So I'll ask Chris to give you some more details on where we're at.
Okay.
Chris Thanks for the question, we are quite active at the moment without speaking to interested.
Municipalities in a potential trap.
<unk>. So we are actually up so we're not we're not.
Waiting at this point Youre correctly Theres a provincial election, there's also municipal elections that come up in the same cycle.
But the ones that we're speaking to are quite comfortable with at this point so.
We've given guidance before he said look we'd like to do.
Hundreds to 200 million per year, if we could if.
If those transactions come up would actually be in the market and we do them. So it's not nothing impacted by by the electorate.
Thank you for that context.
And I guess my follow up question with respect to any sort of inflationary pressures that you're seeing.
You have a good relationship with your labor unions, who had some recent.
Decisions on that front, but as it relates to even to capital expenditures I'm wondering if.
What the assumptions are embedded in your application and if actual inflation through 2027 might differ from.
What you have embedded in your application.
Or potentially deferring some projects or might there be merit for some of the more.
Integrity related projects too.
Staying on schedule and might that increase your capital budget.
Hi, Andrew it's Chris.
My question.
Sorry, I was on mute there I'll I'll take a stab at it and then I'll pass it over to you.
So.
So thanks for that question Linda as you point out we do have labor stability as far as labor costs are quite stable out until 2023, having agreements in place with our major Union to society and the PW U.
And I'll also remind you that we do have inflation factors built into our custom <unk>.
Sense of ratemaking construct here. So so we are we do have an annual inflation adjustment of our of our costs.
In our rates so that that's built in and that'll carry us through 2022, we do expect a similar a regulatory construct purchase our joint rate application.
Obviously, we are seeing supply chain costs and implications of that we are we are managing those costs and to date. We are we've been able to deliver our overall programs without without delay. So we are we are somewhat inflation protected in our in our call.
Trucked and Chris do you want to you want to add anything to that.
Thanks, Mike I think he covered it bottomed.
Bottom line is all M&A is inflated by two factors.
Average hourly workers.
Income and the other factor is GDP at Ontario.
We are covered on the M&A side on the capital side, It's also inflated.
If it is more than we anticipate or there are other impacts that are material I think maybe your covenant. We have two choices, we could replace the investments well we could go back to the OE being asked for.
Other assessments.
Right now, we're not seeing that pressure. So we believe that the joint right application covers those pressures.
Thank you all for Bakken Kim.
Yeah.
Thank you. Our next question comes from Rob Hope with Scotiabank. Your line is open.
Good morning, everyone a bit of a broader and longer term question to start with Mark in your prepared remarks, you spent a lot of time and highlighting kind of the future technologies, whether it be kind of switches or batteries as you look into the J wrap in how you manage your business over the next five or 10 years, how do you how do you adjust the rates.
Yes.
The right construct or your business to potentially.
I'll handle that the headwinds and the tailwind associated with <unk>.
Batteries, and potentially lower peak load or on the tailwind side, the electrification of vehicles and whatnot.
Yeah, Yeah, Great question. So I think there's two parts to a rub. One is we are setting the grid up for the future of electrification. So the investments that we're making now and and throat J wrap in things like updating our our advanced metering infrastructure.
Putting more technology on the distribution side really does enable adoption of new technologies and the growth of bvs in behind the meter storage and things like that and so so from a from a preparing for the future. We are making the investments through the period to to be ready for that.
We are seeing Ah.
Increase in demand through the period and you know as we advance towards electrification, we see that even even growing.
Even further so so we are we are looking at where we need to support electrification in the economy in Ontario, and where that May drive new transmission investments over the longer period, so through J wrap, but even beyond GE route because as the country moves towards a net zero.
Yeah.
So so I believe that that in the lines of business.
We are the integrators and we are the enablers of our decarbonization and adopting new technologies, so whether that be new central sources of capacity in Ontario or distributed energy resources.
They will be needing to connect to the grid in one way or another so as the 98% transmission supplier I think we're in a we're in a great position for that for that future.
And if I look at Ontario broadly on the generation side and we aren't.
In the generation business directly, but but there you know right now its 96% D carbonated, but pickering metis shutting down in 2024, which will put some capacity a strain on the system and the ISO right now is going through their planning on how well they can meet that future capacity in the province, and so where we are.
Looking closely with them on.
On identifying where there may be transmission opportunities to meet those future capacity. So we are looking now setting the grid up for the future, but also looking at where are the right opportunities for hydro one enough.
I appreciate the fulsome response.
And then maybe something a little bit shorter term in nature of the 3000.
Comments that have been received on J wrap so far anything surprising in terms of pushback and kind of or is it just largely as expected maybe a little bit of pushback on the capital plan as well as the Opex plan.
Yeah, I'd say I think you've got it.
The largest area is around questions around our capital program, which is the basis of our joint rate applications. So that's not a big surprise.
There are some clarifying questions have been asked around how we are proposing to to.
To look at.
Our capital factor and and modifications because I remind you that in the last applications, we've built in productivity into our individual project portfolios.
And this time, we're following the regulatory construct which has a product.
Really stretch factor on top of it so until we've changed out a bit around with some questions on why we're doing that and really we're doing it to follow the regulatory construct.
I think a couple of the positive things. We're finding is that there's very few questions on or eliminate cost so far which really I think demonstrates our strong.
Control and productivity gains since the IPO.
And intervenors have shown that.
You know our evidence is really strong in the areas of productivity framework transmission project execution and customer engagement in particular, which we've talked about in the past. So I don't think anything really surprising in that than the highest area of focus is absolutely around our our capital investment program.
Thank you I'll hop back in the queue.
Thank you. Our next question comes from Michael <unk> with RBC capital markets. Your line is open.
Thanks Ann.
Good morning. The first question is just a follow up on the last one on <unk>. So if everything appears to be in line with your expectations is there.
Possibly we're not.
Notwithstanding you forgot to procedural orders already but is there a possibility that you might doing getter.
And I'll come more decision sooner than than than expected.
I would I would say that we will be going through the overall process, which will take us to the second half of next year before we get a decision I don't see anything so far in the procedural order sums that would vary our expectations on when we'll get the get a decision we.
We are in the Interrogatory process, we will be having a technical conference December 13th to 17th which is the opportunity to for intervenors to dig more into our technical details, we'll have an oral hearing in the new year.
And in the process should wrap up sometime next spring and then the regulator will need some time to to put together their decision. So I don't see so far a change in what our expected timing is which is really the back half of next year.
Thank you. Our next question comes from getting lost me with Bank of America. Your line is open.
Hi, Good morning, and thank you for taking my question.
Wondering maybe at the outset could you give an update sort of on load trends that you're seeing across the service territory.
Perhaps a longer term growth drivers I know.
You've spoken at length about the opportunities in Leamington from greenhouses in the past.
Just curious.
Curious maybe could you potentially talk about sort of like if you're seeing any other levers for growth.
In the years ahead.
Across the province or otherwise.
Sure Great Great question, absolutely the Leamington area of southwest I'm, we're continuing to see even more growth in that area.
The northwest.
Recently or earlier this week actually the the province released its Paul economic statement, which has a focus on mining and the ring of fire in the northwest and partnering with nations in the prior north to to reduce some of the barriers to developing in the northwest. So you know I think that's a positive sign.
The government's desire to.
Stimulate the economy and the resource sector and the northwest switch, which comes along with required infrastructure to do that so we're seeing that as as I said before we're also seeing that with with Pickering coming off there is a there is a bit of a capacity crunch where.
<unk>, where we will need new resources within the province or rely on imports from from our neighbors.
And the ISO is going through that process right now to decide on what that might look like depending on where that lands. There is there's opportunities for us in each of those scenarios.
Or for future infrastructure. So we're we're definitely seeing load growth. The other thing. We're seeing is that companies are starting to to transition and decarbonize themselves. We've had announcements in the province with several still steel mills announcing that they will be going to electric arc furnaces.
So so we are seeing the industrial sector, starting to starting to Decarbonize and we're seeing growth in the E beam battery manufacturing in Ontario, So a lot of good growth science a lot of it's underpinned by the fact that we are over.
Over 96% 94 to 96, depending on the year.
Decarbonize on the electricity supply side, so we're in a position to decarbonize industry in downstream.
Okay, great. Thank you very much for that color and maybe just one more quick one on the.
The rebranding of the telecom business is there anything to read into that perhaps.
Hum.
Are you, maybe taking a more active role as far as growing that business should we be on the lookout for potentially additional data point in the near future as far as that segment is concerned.
Yeah, it's definitely one of the areas that we've said all along that we are looking at growing in the unregulated sector.
Along with our energy management services company, which as I said in my opening remarks, we've we've announced a couple outside of joint ventures on on that side.
Really the rebranding of our telecom business is to reflect that when they started out as hydro one telecom they were really selling dark fiber services and connectivity.
Now they are a full service provider of digital services for companies until the name you can imagine knocking on the door of customers, saying, Hey, I'm from hydro and I'm going to tell you digital services really didn't match the business and where that business is where the bulk too. So we felt it was important that we gave them.
Our branded an entity, which reflects what they do and really sets them up to grow that unregulated business.
Okay, great. Thank you very much I'll turn it back here.
Thank you as a reminder, passing you wouldn't need to press star one on you touched on the telephone.
Our next question comes from Mark Jarvi CIBC capital markets. Your line is open.
Thanks, Good morning, everyone. There's questions for Chris your balance sheet is in great shape and you have to that I've had the deferred tax asset. Just you know we are still a lot of questions around where rates are going in bond yields next year. So just any updated views on.
Debt financing plans over the balance of the next year maybe.
Hi, Mike Thanks for the question.
It's pretty much business as usual for us we borrowed about one to one 5 billion per year, so that will be.
On the cards for next year, we've completed borrowing for this year. We said we would still look at opportunistically entering the market at the rates where they are.
Q1 to $1 5 billion.
And the balance sheet is in great shape, it's in great shape too.
To provide for the growth that we see coming through the J REIT period. So there is further investment coming in and just as a reminder, our balance sheet allows us to grow that.
That investment over the <unk> period without the need for any new equity.
So that's the reason why there and it's doing extremely well.
So maybe Chris you just maybe help define what you would say is opportunistic would be that if rates rolled over here a little bit they could do it more in the first half of next year or maybe you can kind of give us a bit more detail on what you would see as all participant.
The right opportunity to kind of do something a bit different car off plan.
Yes, so much it would be exactly like you said if there was a dip in interest rates, we would look at it as an opportunity to enter and do some early borrowing for next year. So we wouldn't borrow the whole one 5 billion at the backend of this year, but we may enter it in and borrow a small amount.
Thats the opportunistic part, but each year, it's roughly the same about one to $1 5 billion of borrowings.
Got it and then.
Honestly not a big part of your business, but you guys have the IV partnership with LPG. They also came out with their own I guess, that's more of a fleet a charging thing with power on.
You guys are involved in and not if not why not and then just what are you guys seeing and sort of the first early days of the IV partnership.
It's mark here Mark so so we arent involved in that one there were some carve outs in our in our joint agreement with <unk>.
Toby G on I D. So we are doing some things together, we're doing something separate.
They they've gotten their own direction on some pieces and we're actually growing.
Growing outside of IV as well in the EV charging, particularly the large truck charging facilities. So.
We had envisioned right at the beginning with Ivy we carved a few areas out that we agreed that we would individually go after as company. So so that is in alignment with our strategy Chris runs that business as well do you have anything you want to add to that Chris.
No I think you've covered it.
Great. Thanks.
Yeah.
Yeah.
Yeah.
Yeah.
Operator are you there.
Yeah.
I think there are probably no further questions until.
Until the operator confirms that.
Ofer.
Sure.
In light of that.
Does conclude our Q&A session for today.
We.
We would like to thank everyone for their time with US. This morning. 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 you again and enjoy the rest of your day.
Okay.