Q4 2021 Hydro One Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to the Hydro one limited's fourth 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.
As a reminder, that's being recorded.
I'd now like to introduce your host for today's conference Mr. Omar Javid, Vice President Investor Relations at Hydro one. Please go ahead.
Good morning, everyone and thank you for joining us and hydro one's fourth quarter earnings call.
Joining us today are president and CEO , Mark to Wesco, and our Chief Financial Officer, Chris Lopez.
In our call today, we will go over our fourth quarter results and then spend the most of the call answering as many of your questions as time permits.
They are also several slides that illustrate some of the points, we will address in a moment.
They should be up on the webcast now or if you're dialed into the call. You can also find them on hydro one's website in the events and presentations section in the Investor Relations section.
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 for Western.
Thank you Omar good morning, and thank you for joining us for our fourth quarter earnings call.
This morning, I'll talk briefly about our fourth quarter and annual achievements, then we'll turn it over to Chris to discuss the financial results in greater detail.
2021 was a year in which we accomplished a great amount.
We ended the year with a full year EPS of $1 61, compared to $1 51 in 2020.
Apart from the strong financial results.
It was a year in which we demonstrated our unwavering commitment to our customers and to the communities we serve.
It was a year in which we made a public pledge to focus on sustainability and outlines specific and measurable targets to help people deploy.
Janet and communities.
2021 was the year, where we filed our five year investment plan that will help reduce the impact of power outages enabled the renewal of critical infrastructure prepare for the impacts of climate change, while ensuring our investments at bats building a grid of the future.
I'm very proud of our team for accomplishing all of this and much more.
Facing the continued challenges presented by the COVID-19 pandemic.
I am thankful to our crews who worked to restore power to over 765000 customers. After wind storms resulted in power outages in mid December .
The wind storms faced where some of the most significant since 2018.
This dedication to customers along with investments to improve the grid have enabled us to have record annual reliability in 2021, as we improve the system average interruption duration index, otherwise known as the <unk> of our distribution network by approximately 11% year over year.
This was the best distribution reliability result achieved in 15 years.
We also improved the safety for our transmission network by 9% year over year also a significant accomplishment.
These wind storms are a reminder of harsh climate, which our crews operate and where assets are located.
There are also a reminder of why we need to continue to invest in our assets to harden, our grid and prepare for climate change.
We are very excited about our five year investment plan that we filed with the Ontario Energy Board the OSB in the joint rate application for both our transmission and distribution businesses.
As mentioned in the last call we received thousands of questions through the Interrogatory process.
This was followed by a technical conference in mid December where intervenors and OSB staff asked clarifying questions on our responses to interrogatories.
We are now in the process of updating our evidence to reflect market conditions, and then will likely proceed to a settlement conference and which we will try to settle as many matters as possible prior to entering the oral hearing on the case.
Our expectation of receiving a decision in the second half of this year remains unchanged.
I'm also pleased that we have been meeting our capital investment commitments made in previous read applications.
This year, we deployed $2 125 billion of capital and in serviced $175 7 billion of assets, which is within 1% of our stated goals for both the transmission and distribution businesses.
I am pleased to say that we have done this while being extremely mindful of costs.
Every dollar we invest comes at a cost to our customers and the people of Ontario, which is why we are committed to controlling our costs and improving productivity.
In 2021, we achieved productivity savings of $343 9 million, which represents a 22% increase year over year.
Total productivity savings since 2015, now amount to over $1 billion.
As we look to the future, we see a need to continue to improve customer experiences while controlling costs to that end, we're exploring innovative solutions to complex problems.
We are pleased with piloting several novel initiatives that will help with resilience and reliability.
Cost effective manner.
Following the behind the meter energy storage system pilot, we talked about in the last call. We launched a pilot project with peak power to study the benefits amusing electric vehicle charging technology to improve resiliency and reliability for our customers.
Two way vehicle to home charging technology will be installed at the homes of program participants to test the ability of <unk> to act as batteries and provide backup electricity through stimulated power outages.
In terms of EV charging we've made significant progress.
I V charging recently signed an agreement with on route and its partners Canadian Tire Corporation, and the Ministry of transportation to install fast Chargers at on route locations, along the 400 series highways in Ontario.
We are also partnering with the federal government to develop a pilot project for heavy duty electric truck charging stations.
Stablish and a model that can be used by other utilities and businesses.
These are just some of the ways, we're being innovative and supporting the shift to electrification and a low carbon economy for customers in Ontario.
As one of the largest electric utilities in North America, we are uniquely positioned to support sustainability and electrification of the province.
Our vision for a better and brighter future for all guides us in these endeavors and our leadership with emphasized with the public release of our sustainability priorities and goals in 2021.
I'm happy to report that shortly after the fourth quarter, we put these commitments into action by amending our credit facilities to include a pricing adjustment, which can increase or decrease our cost of funding based on our performance on certain sustainability performance measures that spanned people planet.
And communities.
We are especially proud to be the first organization in Canada to incorporate a sustainability performance measure that is based on increasing indigenous procurement spend.
As part of our commitment to being a trusted partner to indigenous communities. This year, we increased total procurement with indigenous businesses to $58 3 million, our highest spend to date.
We are well on our journey to achieve our procurement target for indigenous businesses up 5% of our purchase of materials and services by 2026.
We have a deep responsibility to help build a better and brighter future for the communities we serve.
Over the year, we proudly supported local organizations that work to keep our community safe and healthy.
We proudly launched hydro one's energizing life community fund, which funds projects that promote physical psychological and emotional safety of Ontario.
By supporting organization to energize life for so many we can build safer and more resilient communities.
Our support of feed Ontario to provide the equivalent of 450000 meals to help Ontario, we're facing hunger was another example of this commitment.
This sense of responsibility goes beyond the corporation and has become a part of our individual identities.
Hydro one employees themselves raised over $790000 to support local organizations last year.
I'm extremely proud to work alongside such engaged colleagues and this effort is reflective of our commitment to create a diverse inclusive and engaged workforce.
It is no wonder that we were once again recognized by Forbes in its list of Canada's best employers for the seventh consecutive year.
Having a caring and engaged workforce is the key to having satisfied customers.
I'm very pleased that our residential and small business customer satisfaction increased to 89% from 87% and our large customer satisfaction increased to 92% from 83%.
These numbers highlight our success in advocating on behalf of our customers and working for their benefit.
Our connected for life initiative is an example of our focus on what matters.
Through various programs since the start of the pandemic, we have helped customers access financial relief programs Reis.
Resulting in approximately 16800 program sign ups.
Allowing those customers to concentrate on staying safe and navigating these challenging times.
We also invested in technology to meet our customers' expectations for more personalized service and more access to real time data to help them make smart choices.
Customers are our priority and again very pleased to report that this year, we shared approximately $24 $5 million with our.
Distribution customers on account of the earning sharing mechanism.
This is again, an example of a constructive regulatory model in which we can and have achieved value for our customers.
Our many successes this year, however are overshadowed by.
By the tragic death of our teammate to an accident involving a third party vehicle.
Nothing is more important than ensuring our employees come home safe at the end of the day.
Though we have reduced our recordable injury rate by 90% since 2004.
And achieved a best in class rate of 0.74 in 2021.
We must continue to do more.
To build a stronger safety culture and eliminate serious injuries at hydro one we will continue to implement recommendations made by the employee led safety improvement team with the goal to eliminate life altering injuries.
Finally, I'm very pleased to announce that hydro one was recently added to the S&P <unk> index.
We're pleased with this recognition and the addition to an index that represents the large cap market segment of the Canadian equity market.
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.
In addition to our results.
This morning, we released our annual report that talks about many of the accomplishments of the company achieved in 2021.
It is on the website now and I encourage everyone to review the report.
In terms of our financial results for the quarter.
Earnings per share was unchanged at 2017 compared to last year.
For the full year EPS and adjusted EPS was $1 61, compared to EPS of $2 96, and adjusted EPS of $1 51 last year.
The significant year over year decline in EPS on a full year basis was mainly due to the receipt of the Ontario Divisional court ruling on the deferred tax asset or DTA in 2020, which led to a tax recovery in that year.
Adjusting the prior year, one time event, we see an increase in adjusted EPS year over year.
The main drivers of the higher adjusted earnings this year were consistent with that experienced throughout the year.
High ratings on account of approved rates, which considers that annual investment in the grid straw.
Strong demand experienced in the first half of the year.
The benefit from the redemption of preferred shares in the prior year and lower COVID-19 related costs.
These drivers were partially offset by higher eliminate on account of increased investment in vegetation management and it initiatives.
High demand for emergency restoration services, and the onetime impacts of higher project write offs in 2021 and insurance proceeds received in 2020.
While our costs were higher this year I did want to echo mikes comments that we continue to be highly productive.
As a result of that with it we were pleased to give back approximately $24 5 million to our customers by the earnings sharing mechanism as the distribution business performed well this year.
On the productivity front, we achieved $343 $9 million in productivity savings in 2021.
Which brings our cumulative productivity gains since the initial public offering to over $1 billion.
We saw meaningful increases in productivity in areas such as operations.
Fleet optimization procurement corporate costs likely contract reductions.
And real estate.
Overall productivity was weighted slightly more to capital then eliminate.
Through these achievements, we were delivering on a multiyear commitment to keep cost as low as possible.
Turning to the fourth quarter earnings per share was unchanged year over year, while there was a marginal decrease in net income.
Our fourth quarter revenue net of purchase power was higher year over year by five 4%.
This was comprised of approve rates for 2021, and the recovery of DTA bounce following the DTA implementation decision by the <unk> in early April 2021.
As a reminder, the DTA recovery is cash flow positive, but net income neutral due to a corresponding offsetting taxes.
For the transmission segment revenues were higher by five 8%, reflecting revenues, resulting from the DTA recovery amounts, we just discussed and approved rates.
You're already at peak demand for the quarter was relatively flat driven by weaker demand in October and December while November was higher year over year.
The year over year revenue increase was partially offset by regulatory adjustments, including those related to external revenues.
For the distribution segment revenues net of purchased power was higher by five 4%.
In addition to approve rate and the recovery of DTA amount electricity distributed to hydro one customers was also higher by two 5%.
These revenues were partially offset by regulatory adjustments, including the annual earnings sharing outlined earlier, which gets recorded in the fourth quarter result.
On the cost front operating maintenance and administration expenses were higher year over year by approximately three 2%.
Oh M&A was higher in the transmission segment due to higher project write offs.
Lower insurance proceeds received in 'twenty, one 'twenty one.
Higher corporate support costs.
And high volume of work on vegetation management.
This was partially offset by declining eliminate in the distribution segment due to lower bad debt expenses, primarily related to COVID-19 cost last year and.
And lower costs within our Quad L D C Peterborough and really are.
As a reminder, in the fourth quarter of 2020, we reversed the regulatory assets associated with the incremental bad debt provision recognized in the first quarter of 2020.
This led to a bad debt expense in the fourth quarter of 2020 that is not present this year.
Excluding the bad debt expense from last year, COVID-19 related costs were flat for the fourth quarter year over year.
Depreciation expense was higher year over year by three 3% due to the increase in capital assets, which is consistent with our stated capital investment program.
On financing, we saw an increase of three 4% in interest expense in the quarter due to higher debt levels.
As Mark mentioned in January 2022, as part of that commitment to sustainability, we announced amendments to our credit facilities for Hydro One Inc. At Hydro one limited to include a pricing adjustment, which can increase or decrease the cost of funding based on our performance on three sustainability performance measures.
For community to increasing <unk> procurement spend to 5% apologize purchases of materials and services by 2026.
For planet to convert all lot Judy gasoline powered vehicles sedans, and Suvs to electric vehicles and hybrids by 2030.
And for people to achieve at least 30% female executives and board members.
By linking these measures to our credit facility, we are demonstrating our commitment to our environmental social and corporate governance goals.
We continue to be pleased with the stability of our balance sheet and robust investment grade credit ratings.
We've already last year to fund the 600 million debt maturity in January 2022.
As we look forward, we will continue to access the debt markets Opportunistically.
Income tax expense was 55 million for the quarter compared to $27 million in the same quarter last year.
The increase in income tax expense was due to the recovery of DTA amounts on account of the DTA implementation Division, which as discussed before is net income neutral.
In addition to the DTA recovery amounts. We also had high taxes on account of higher pre tax earnings.
The effective tax rate this quarter was 25, 5% versus the effective tax rate last year of 14, 2%.
On a full year basis income tax expense for 2021 was $178 million compared to a tax recovery of 785 million in 2020.
The increase in income taxes, primarily due to the 867 million income tax recovery recognized in 2020 following the DTA decision.
When adjusted for this income tax for the full year 2020 was $82 million.
The effective tax rate for 2021 was 15, 5% versus negative 77, 6% when adjusted for the income tax recovery eight 1% in 2020.
Yeah.
This is consistent with annual 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.
Moving to investing activities.
Capital investments for the fourth quarter with $532 million, which is a 7.8% decrease from the fourth quarter in 2020.
The decrease came primarily from the transmission segment, which had amongst other items.
A lower volume of station refurbishment and replacement.
<unk> investment in the Ontario grid control center as it was substantially completed in the third quarter of this year and lower spend on facility Sustainment.
This was partially offset by an increase in capital investment in the distribution segment the.
The increase in the distribution segment resulted from our investment in system capability reinforcement project high volume of work on customer connections and high volume of storm related asset replacement, which was partially offset by lower investment in the Ontario grid control Center I mentioned earlier, I see project and minus fixed asset purchases.
For the full year 2021 capital investments were up 13, 2% compared to the full year of 2020.
You'll also note that the future capital investment profile for both segments had been adjusted since our last call.
The primary reason was to reflect the acceleration of work from 2022 into 2021, another tiny difference of projects not related to the joint application.
These modest differences project planning do not impact our projected rate base growth.
As a reminder, the capital investment numbers for future use remains subject to OMB approval.
Despite the lumpiness nature of placing assets into service. We are very pleased to have come within 1% of our stated annual objectives for both transmission and distribution segments.
In the fourth quarter, we placed 796 million of assets into service.
Which is a 10, 5% decrease compared to the prior year.
The decrease related primarily to a lower volume of ICT project and the completion of the Woodstock Operation Center in the fourth quarter of 2020 in the distribution segment.
In addition, there was a low volume of assets placed into service the overhead lines and component replacement and all.
Projects.
As well as timing of assets placed in service in the transmission segment.
These declines were partially offset by a high volume of effort being put into service to maintain the North American electric reliability Corporation or Nook standards in the transmission segment.
The high volume of work on storm related asset replacement in the distribution segment.
On a full year basis assets placed into service were higher by seven 2%.
On guidance, we continue to be committed to and a firm target of 4% to 7% earnings per share growth through 2022.
As a reminder, we expect to provide updated guidance post 2022, following the approval of the joint right 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 arent able to address your questions today My team and I are always available to respond to follow up questions. We ask that you limit your questions to one question and one follow up please.
If you have any additional questions. We request you to rejoin the queue. Please go ahead.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question is from Maurice Choy with RBC capital Your line is open.
Thank you and good morning, My question relates to the political climate as we hate had closer to June one.
Feedback have you received from the various political parties on their views of the electricity Bill.
Yeah.
Yes.
Mark here so.
As we all know electricity is an important part of life and the economy.
As we get into elections, it's often something that's discussed with chart, which is that it makes a lot of sense.
Really the policy platforms of the of the individual parties is its really that its policy platform.
The governments I think our role at Hydro one is to continue to do the things, we're doing which is to support our customers.
To make prudent investments in the system and continuing to drive out cost of that system and that gets to your question around around di Bill.
Bills in the cost of electricity.
Tim 2015, we've driven out almost $1 billion.
Cumulative productivity savings in 2021 alone.
We achieved $343 million of productivity.
Savings in the sector or in our business alone and so we'll continue to focus on that and we'll let the policymakers.
Focus on discussing the old policies around overall electricity prices.
Thanks, and maybe just a follow up on that you would have probably seen the <unk> report that was published last week and in particular, the comments from the Ontario Ministry of energy relating to the promise of reduced <unk> by 12% as you look at that and as you look at your productivity savings.
You know what type of messaging.
Do you foresee yourself framing.
It's not just your REIT peers, but also to the leaders how about your achievements and contributing to this reduction.
Yes, it really goes back to when we launched our strategy, which is in Ontario focused strategy are focused on our customers here and running a safe efficient reliable business driving all cross sell that and so we have been sharing that with our with our customers with governments with.
Regional Chambers of Commerce for the last few years.
We've gotten good support for our strategy and our focus and we're seeing the results of that but we reached a record high customer satisfaction of 89% in the distribution customers segment. This year, we've improved reliability.
In both transmission and distribution and as I said, we've driven.
Uh huh.
Costs in the system.
In the neighborhood of almost $1 billion since 2015, so we've been getting good feedback over the last couple of years from from from stakeholders, including governments on on the work we've been doing in hydro one so that really has been our messaging and we're going to continue to focus on doing those things and continue due to <unk>.
Great service and drive out cost to the system.
Great. Thank you very much.
Thank you. Our next question from Andrew <unk> with Credit Suisse. Your line is open.
Thanks, Good morning.
The press release, you had the storm response and the third bullet point, you know thereabouts.
If you could just maybe give us a bit of a perspective on the quantifiable improvements you've seen in the last few years as far as.
The ability to dispatch proactive maintenance activities, there customer satisfaction I'd really just to give us a snapshot on how things have improved.
Sure sure Great question. So so we have been working on many fronts of improving our response and our reliability to our customers and until there's a few areas where several areas, we do that either through investments in our system and in improving our.
Our system hardening the grid and that includes things like innovation on the distribution side to allow us to sectionalize the.
System to minimize the impacts of storms and outages. It includes our forestry program, where we changed the approach so that were going back and clearing the troubled trees every three years rather than every.
Every.
10 years, as well as procedural and storm response.
We've made several changes over the last couple of years, including.
Victor technologies.
All of these to understand not only where storms are going to hit but what the predicted damage will be in those areas and pre deploying crews to those areas. So that we can respond in a timely manner. So there's been a lot of improvements over the last few years on all.
All of those fronts and it is something as I said, resulting in improvements both to to reliability, which then translates into customer satisfaction.
That's helpful and then.
I know you highlighted the productivity savings on an annual basis I mean as you know.
Nearly 315 Oems.
For a pretty significant increase if if you didn't have COVID-19 related impacts, which really affect costs and then also productivity of workforce.
How much more do you think that number would have been I think maybe that's a better question for Chris.
Yeah, Yeah. It is a good question I think it's hard to dissect it.
You know the COVID-19 implications on that.
Covid has had an impact broadly obviously on the economy and.
The way, we operated and delivered our business.
But.
We were able to to deliver all of our work programs and as we said in her opening comments to within 1% of our in service addition goals for the year.
And and at the same time.
Continue to drive up productivity improvements so Chris do you have any kind of comments you want to add onto that.
Yeah, Andrew do any I mean, they the most measurable items what were spending directly one on COVID-19, and in 2020, we spent $36 million excludes bad debts.
And then she was 15, so there was a reduction of $20 million base.
Clearly that would not be days and then we wouldn't have the <unk> data. So there was an improvement year over year and it'd be another few staying on top of that so.
So that would be a direct measure.
And then as Mark said in terms of how much more productive could you be thats a difficult question to answer.
We certainly benefited.
Ways of working when you work on a combination of.
Yeah on site and remotely.
So there are some advantages to that but it's a tough question to answer like I said, if we didn't have COVID-19 . This year our results would be about.
$22 million better than you'd otherwise today.
I appreciate that and then if I could sneak just one more and then that productivity savings with a 20% improvement year on year.
How do you benchmark that versus the other municipal province.
Yes, what we see as a benchmark to I'm sorry go ahead, Chris go.
Go ahead.
So I guess, just quite well laid out and you you know evidence to the <unk> and really we benchmark across North America, not just munis hearing.
Ontario, because there's not a lot of data available to.
Benchmark programs.
And if you look at that evidence it shows hydro one as being a top quartile performer in productivity, so I would assume that to be.
The same outcome, if you didn't specifically for Ontario.
But we're very pleased with it we set those targets.
At the beginning of the IPO and we've achieved them every year.
I know there were questions every year can you keep doing it how does that work in.
The company has found new and innovative ways to achieve that every year and I don't see that stopping.
That's great. Thank you.
Thank you. Our next question comes from Rob Hope with Scotiabank. Your line is open.
Good morning, everyone just a first question.
Regarding the Muni is there.
Kind of Covid continuing to drag on.
Some stress on municipalities financing them.
Any acceleration in talks with the consolidation in Ontario or is this just a kind of a and ongoing assay.
Maybe I'll, maybe I'll start with just some general comments on an LDC and consolidation and then I'll allow Chris to.
Speak to it more specifically because he leads that portfolio.
So as you know as we've said in the past really are we are open to opportunities that are in the best interest of customers of the company and its shareholders and we do evaluate the opportunities as they come along.
There haven't been a lot of opportunity through Covid, there's been some mergers we have seen but you really kind of adjacent municipalities, but we continue to monitor that really our overall focus on our on our strategy is is to concentrate on our existing assets and making prudent.
Investments in our existing assets.
That said, we do believe that there is a there is opportunities for consolidation in the distribution sector, which is in the interests of customers as it does drive up cost of the overall system.
Particularly where our where we are where we coincide with the service territories.
We've proven and shown that we can drive out 50% of the cost. So we continue to.
To advocate for that and to promote the fact that it is in the customers' interest to do that and that and then Chris can you talk specifically about the about the progress we're making to consumables.
Sure sure. Thanks, a lot I think you've covered quite a bit of it.
The most recent once Peter Bauer and there really are a really good examples of what Mike just spoke about.
The cost have already started to come out.
We're able to integrate them and two of them actually.
Same time, we see.
Eight months it usually took 12 months to do that.
So we've become more effective at getting those benefits not just in terms of cost, but also in terms of customer satisfaction quick.
Quicker. So so that's a good news story.
In terms of the balance sheets to municipalities that really hasnt shown up yet.
Well.
I know everybody thought at the beginning does that would occur I think the provincial government and the federal government did a good job of supporting municipalities through that so that really hasn't been a big driver and as Mark said really the ones that have occurred have been mergers between municipalities rather than any kind of.
Sale.
We are well placed we have conversations with all of them 50, LDC or something that really want to go the wrong way for the next foreseeable future and then they are about 15 or a handful that are open to a transaction of some sort and they're thinking about that so we'll keep having those conversations.
I don't expect anything to be honest to be announced in the near term just as a reminder, the municipal elections coming up in the third quarter of this year.
I would expect that if you are going to see a transaction it will be after the municipal elections.
Thanks for that.
And then as a follow up Jay wrapped it looks like Theres been a lot of back and forth. There. So what are the key points of contention right now and as you move into settlement kind of what are the.
Key areas of common ground that you think you'll be able to settle before the area.
Yeah, maybe maybe I'll start with with with what I said on the on the opening is we we are updating the evidence before we get into the channels have been comp trends and there's kind of two pieces to that one is the cost of delivering the program, we put together our investment plan.
In in 'twenty, and 'twenty late 2020, and piled in 'twenty one.
Obviously, the cost of delivering the program that we put forward have gone up since that time more than what we had assumed when we put the puts our application and so as part of the.
Rules and practices of procedure, we are required to.
Update our evidence when there are changes that we've become aware of and so so.
We all know that the cost of goods and services have gone up and so we're going to update our evidence to reflect that we do still stand behind our work program.
It is the prudent and correct work program to deliver results for our customers and ensure that the system stays reliable.
So so we're going through the process of that right now and and we are we will be updating you on that the second part of the evidence that we will be updating it to reflect the ISO updates to C. D M, which is conservation demand management program and this is really a mechanistic update an adjustment based on the.
<unk> members from the <unk>.
So so we're going to take some time in the next couple of weeks two to.
Update that evident.
Before we get into the settlement conference.
I am hopeful and optimistic that there are areas of the application once we get into settlement conference that we will be able to agree on and and just to remind you that the settlement conference is with intervenors in and hydro one where we get together and look for areas, where there is a.
Alignment in agreement and that we made.
Kozol to the OMB to consider settling parts before we moved to an oral hearing so far.
First step is updating the evidence to make sure. It's reflective of the current conditions in the markets and then and then we will move to entitlement after that will it if we can settle all aspects tour or aspects. So we haven't settled will move to oral hearing and then.
And then we will Oh wait for B or B decision, we do expect them.
Two to get a decision.
In this fiscal year, so likely in Q4 of this year that hasn't changed our expectation around that but we are going to take some time now to update the evidence.
Just sorry, just to confirm when you're updating your evidence on costs with inflation and that's on the Opex and the Capex side.
That's correct.
Yes.
Thank you. Our next question comes from Linda ASIC Atlas with TD Securities. Your line is open.
Thank you maybe just a follow up question on your and inflationary pressures obviously.
The capex side steel component.
They are becoming more expensive.
Also on any shift you're seeing in your labor costs potentially and.
If you've noticed any acceleration of attrition and if you're.
Refresh any thoughts around.
Retaining and attracting the talent.
On your plan and navigating this energy transition.
Great great questions, Linda bunch aspects to that so so maybe I'll start with are we seeing.
The great resignation, which has talked about in North America.
And we're not seeing it in the way that kind of others or Sandra talked.
<unk> talked about.
But that being said we are we do.
Keep an eye on making sure that our hydro one is an attractive place to work and that we offer good.
Good.
It's work like for people and that goes to some of the things we're doing around the future work and some flexibility for a bunch of our of our employees. We were also named one of the best employers again by Forbes, which which looks at a bunch of different aspects that gives us confidence in our overall programs.
And the work workplace.
In hydro one so so we will continue to focus on making sure that we were able to attract and retain employees.
As far as shifts in labor cost as you know a large percentage of our labor force is unionized and.
Over 90% is unionized.
And through several different unions, one of the largest being the PW and then the second largest being <unk>.
The United professionals.
And both of BOE.
Both of those unions, we have Uh huh.
Agreements until 'twenty three so we have labor stability labor cost stability out until 'twenty three there.
Both of those we are.
Going into negotiations with their construction Union.
This year and so that'll be a.
Obviously, an active negotiation that we'll go through this year, but a large part of our workforce.
We do have late labor profitability out until 'twenty three and then we'll we'll go back to the table with those that those unions that workforce. So I'm I'm feeling that we're in a good position right now.
We've got a good plan going forward on ensuring that we're being fair to our employees and we're able to attract and retain the right people at the same time, we're being conscious of cost to our customers.
Yeah. That's helpful. Thank you and in terms of looking forward to 2022.
At this point as you are aware obviously subject.
Weather, including.
The snowstorm, Ontario is experiencing today I'm just wondering if you can help us understand if you're if you expect any.
Change in seasonality of your expenses this year as it might relate.
Management et cetera, just to help us shape, what the year looks.
Looks like potentially.
Yeah. Good good question I'll, let Chris talk about that.
<unk> expenditures throughout the throughout the year and whether you should expect to see similar to like previous years or whether you should see any changes.
Thanks, Hi, Linda seasonality questions, a tough one I cant predict the weather.
You know what I might do this year.
In terms of the overall level of expenditure in the program.
It should be slightly less than this year.
When we get the opportunity as you know we.
When the weather is good.
We will advance some of our programs to ensure that we can get them done within the.
Again this year, we will look at that but I would expect the cost to be slightly lower.
I suppose it's basically not answer it and then what I'd point you to Linda.
Our guidance our guidance overall.
47% as a $1 65 by the end of this year. This year at <unk> 61. So you can you can get a sense of when the results will be this year.
Thank you.
Just.
Another more conceptual question.
You announced some.
Ability commitments last year.
And making some progress on that in terms of shrinking your credit facility to that are you seeing a shift in.
Kind of a marginal investor on the equity side, maybe expanding as a result of that or do you expect maybe prospectively more of a shift.
In your Investor base potentially as a result of some of the initiatives that you're taking.
Yeah, I'll start and then I'll ask Chris or RMR, if they want to weigh in.
We view our sustainability program is the right thing to do as a company.
We've done our materiality assessment and that's how we landed on defined kind of the areas of focus for US which is as we've said before around people planet and <unk>.
And community.
You know where where that lands.
Lands with investors and investors that are attracted by that maybe I'll ask either Chris or all mark to comment on whether we're seeing a shift in investor.
Profiles as a result of that.
Thanks, Mike I'll comment noticed significant shift at this point Linda I think the way to approach. It is the right thing to do it is the way I see it as a cost of entry. These days every meeting we go through.
You get asked a question on ESG.
So I look at it more that way.
And if you pick up the sustainability linked loan for example, that's not driven by an economic benefit it's driven by us telegraphing to the market that we are serious about these measures.
There's not a big or.
Or material impact financially from from that decision.
Just holding us accountable.
And sending the message that we are serious about those three measures like everything in our sustainability report. So I look at it that way, we do make concerted efforts to reach out to specialized investors.
Prior to Covid, we were out visiting.
Conscientious investors in Europe , Japan, and so on where ESG potentially had been Ah.
More sharp focus for those investors and we'll continue to do that so we'll continue sending that message, but it's not that it's the right thing to do and we'll continue to do it.
Thank you.
Thank you. Our next question comes from Darius <unk> with Bank of America. Your line is open.
Hey, good morning, guys. Thank you for taking my question I just wanted to.
Maybe I'll pick up on sort of the theme of the last one which was.
In your release in your opening remarks, you discussed.
Seeing some sustainability components to your financing pricing of your financing I'm. Just curious if you can talk about is there an opportunity there to reduce your already fairly low borrowing costs, if you're potentially exceed any of the metrics that are embedded in there just curious if you could speak to that at all.
Chris sure Derik.
Derek.
Maybe I wasn't clear enough on the last answer but what it is that is that the sustainability linked loan is around our credit facilities, which we.
We've never drawn effectively so when that I'm drawing the impact is very very module, there was no material impact to our financing costs.
Well you may be going dairies around over time is there an opportunity to enter the green or sustainable bond market that is continuing to develop them. We do believe hydro one is a very.
It's an opportune company that could take advantage of that win win win that framework is complete.
So we continue to monitor that and if we can.
We will look at issuing into those kind of tunes there may be some advantages to that that are more material, but at this point just to say sustainability linked loan. These marginal it's not a it's not a financial decision it was more of a.
Question of showing our commitment.
Okay, great. Thank you for that detail I appreciate it.
I'm going to pass it along here thanks again.
Thank you. Our next question comes from Mark John Steve CIBC capital markets.
Line is open.
Thanks, Good morning, everyone Mark I wanted to come back to your comments around the update that you'll be doing for the J code application coming maybe you said and we stand behind our work program can you just clarify whether that means you would take up investment dollars or would you be thinking of a deferral of some spending.
No what I meant by that is is the earned.
Our investments in the needs of the system haven't changed.
Or just really what's changed is our cost to deliver on that program. So we're not changing.
What we're planning.
Core investments in the in the system.
Updating the cost of executing on those investments over the over the period. So that's really what I was I was trying to get that I'm, sorry, if I wasn't clear on that.
And then.
More recently and just if you look at sort of filing for the revenue cap index inflation north of 3% just wondering how you actually expect cost option track relative to that that inflation number that goes into your revenue requirement step up for next year.
Yes, maybe I'll start and then I'll ask Chris to dive in on the details on that but you know theres kind of two two periods. One is when we're in a rate period.
There is an inflationary factor that the OE b publishes every year.
We applied to to our costs on the M&A side, and then there's unemployed chenier aspect in our original application that gets applied to capital and so during the period.
Inflation gets treated one way really what we're talking about here on the evidence is we we assume certain inflationary numbers when we put in our application last year and as we've all seen.
The inflationary numbers are quite a bit higher than that so we essentially assumed of 2% over 'twenty, one 'twenty, two and 'twenty three and what we're seeing is is obviously.
Quite a bit different than that and so that has triggered.
And the rules of procedure, what is considered a material change that requires us to update our evidence and so that's what we're doing.
Now as we're updating the evidence for the changes that have happened since we applied for this rate period.
Uh huh.
To make sure they're accurate to today.
Chris do you have anything to add to that.
No I think to the question just a clarifying question to you Mark are you talking about 2022 or 2023, yes, I would think about 'twenty two that the current rate construct where you'll be taking this year's number reflecting inflation for 2019 rate and the revenue requirement correct, yes. Thanks Mark.
So based on that the short answer is yes, because the prices were in the current period.
The way Mike described we're currently even the prior period.
I mean, the revenues are indexed to inflation in the numbers around 3%.
I guess my question was when you look at that number I think it's three three then the productivity factor like how do you actually think about the value that goes into the revenue requirement versus what you're actually seeing on your costs like are you closer to that $3 three or are you actually tracking below that number that go who.
The revenue adjustment.
So you're saying all the input costs are now close to two that revenue adjustment. So the way it would work because right now I think we answered the question earlier about labor cost for example, or Andre.
Ah contract today, so we're not seeing that labor cost pressure, but on the materials side, we're seeing cost pressure. So it's probably doesn't all flow through in this period and to the extent that we do have a ruling so part of issues over and there's no doubt a benefit of that.
And then we end up sharing that benefit with rate payers through the earning sharing mechanism. So that's what you saw this year I would expect that to continue next year.
Mark answered the question earlier on labor, we haven't seen that cost pressure because we are under contract today.
But on the material side, we are seeing.
Got it that's what kind of is that in cases, where they're training on achieved early so that was helpful. Thanks, Chris.
Okay.
Thank you answer I'm going to ask a question at this time. Please press Star then one next question comes from Matthew Weekes with <unk> capital markets.
Your line is open.
Hi, Good morning. Thanks for taking my question I was just wondering looking out to 2023, a little bit and I know, it's still it's still early days.
The J wrap and working through.
Redoing some of some of the evidence, but I was wondering if you could comment given the rate Rebating and cost of service and then looking at things like.
Labor cost being renegotiated in 2023, if you can comment on the outlook for 2023 earnings and maybe what hydro one can do or what it has done in the past based on history to keep earnings.
Flat on a year on year.
Basis.
Hi, Hi, Matthew So we've said several times and we will do this as we will update our guidance post approval of the giant rate application to give you better clarity on what we foresee earnings growth through the next rate period, and so I don't want to speculate on that until we're through the <unk>.
The rate period than that and we have the.
Final decision can the Ontario Energy Board.
That said, we do have levers that we tried to poll.
Two to make sure that that.
Where we are.
Making sure that our earnings are in alignment with that guidance and.
And there's things on the on the financing side, we can do those things on work programs and you know what.
We talked about the productivity on how we can we can drive up productivity numbers. So there are levers that we pull to to make sure that we're meeting that guidance, which we will give out or are we do have the final decision, Chris do you want to add anything to that.
Okay.
I think I think the covenant Mark.
Again, Matthew we will provide guidance on what 2023 and beyond so we provided you guidance before so once the decision comes out we will show you.
When I go out to Sir for the foreseeable future, but as Mark said once you're in a rate period, we do have some leaders to to execute them.
Between the east side.
'twenty three 'twenty four 'twenty five at the beginning of a rate period, clearly you have been rebased. So the benefit to our rate payers as they get the benefit of our productivity. So I think that's the question you're asking.
So he's buildup of productivity over five years from distribution and why you're seeing some good results in great, earning sharing that's the result of five years of sustained effort.
We give that back and then we started game, but we still have we still have some.
Some flexibility they like Mark said through financing through execution of our work programs that we.
We can make it a fair agreements and contracts between customers shareholders and all stakeholders and that's.
That's really what we're looking for.
Okay. Thank you I appreciate the commentary on that I'll pass the call back.
Thank you our last question comes from Patrick with National Bank financial.
Your line is open.
Good morning.
Just had a question on your unregulated BD opportunities just curious if you could.
If I had an update on customer demand for EV charging.
Behind the meter battery storage.
Say today versus your prior expectations.
Maybe how you're seeing these initiatives developed through the year and into 2023.
Yes.
A few areas, obviously that we've we've talked about in the past and around additional growth outside of our regulated business. One of those is the energy management services.
Business and we did sign.
Deal with EDF.
Our or one of the company's two two to install some behind the meter battery storage in our large industrial customers and Thats really did take advantage of.
The ICI program here in Ontario, and two to help support those customers on on reducing their overall rate. So.
How that works really as is.
US and our partner.
At power serve we will we.
We do the installation of that and then we share with customer or our savings on that.
On on their their bills. So we do see that there is opportunity there there's over 3700 ICI eligible class eight customers in Ontario, and so there is an opportunity to grow that business.
At the right level.
Hi.
Think about the EV charging.
Our biggest area is in in our IV business, there, where we're building out the charging network.
Ross, Ontario, and we signed a partnership.
Late last year with on route so that we were installing chargers at the on road stations and for those who are from Ontario, where they on root our major service stations on the major 400 highway across Ontario, and so they offer multiple services. So it's a good location for us to to make sure that those charges get high usage rate. So.
At the show at the front end of that business in <unk>.
Stalling the Chargers as we've said before really that that business is around promoting the adoption of <unk>, which we think has a broader benefit for the for the larger grid overall.
Our regulated business.
Make better use of the overall grid. So we'll continue to to build.
Build that out we do expect by the end of this year that we will have most of the charges we committed to do so.
And then.
If I think about.
E beam and he'd be charges from the regulated business perspective, there are some things we're doing there, which I think are innovative.
And you know are in alignment with what the oil assets, we do as well as the ISO to look for non wires alternatives to two supply and services to our customers. So so we have been.
Stalling Tesla power walls behind the meter in People's houses to support grid reliability, we're now doing that you'd be home charging.
Pilot to test using <unk> to support the system, both from a rival reliability as well as the system quality perspective.
So I am.
I'm excited about those opportunities because they are starting to look at the grid differently from a regulated perspective to say theres different ways of us meeting the reliability for our customers than the traditional wire solution. So so there is no.
Opportunities both in the unregulated business driving but also in the regulated business through somebody's pilots, we're doing but we're hoping that we'll see good success of those pilots that will become one of the tools in our tool kit.
In the regulated business to meet our customers' needs in the future.
Great. Thanks, Mark and maybe just a related follow up question.
Given we've seen a trend.
A recent trend here in the gas distribution world of linking Newbuild customers to 100% renewable energy I'm wondering if there's an opportunity to replicate this type of offering for your electric customers and what this could mean from an overall growth or same market share perspective within the <unk>.
S business.
Yeah. Good question Mats.
I think there's some things.
Government are looking at for identifying for customers, who want to be able to claim that their their business comes from 100% non carbon electricity and so the government is looking at.
Carbon credit type program, where where a customer can can do that that's that's really in the in the market construct design, which is out of our purview.
We'll continue to promote.
Tying to the grid, because we are 94% non carbon.
Electricity supply in Ontario supplied by others, but we transmit and connect customers for that so I.
I believe that there will be a trend, where we're big businesses and customers do.
Do do make commitments to two non carbon power. We're at a good starting place in Ontario at 90, Corporate center already and I think through some of the programs that the government is starting to look at with with carbon credits and things like that that they can get there the rest of the way. It is the other 6% I'm not sure if I answered your question because I'm not as per.
Amir with with what's going on in the guest with that with the newbuild, but you're pointing to but hopefully that answered it.
Yeah, that's great. Thanks, Mark I appreciate it.
Thank you and that does conclude our Q&A session for today I'd like to turn the call back over to Omar Jonathan for any further remarks.
Thank you and the management team at Hydro one thanks, everyone for their time with US. This morning during what is definitely a busy period.
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.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect everyone have a great day.
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