Q1 2022 Hydro One Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to the Hydro one limited's first quarter 2022 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.
I ask a question during the session you will need to press star one on your telephone.
The call is being recorded.
I'd like to introduce your host for today's conference Mr. Omar Vice President Investor Relations. Please.
Please go ahead.
Good morning, everyone and thank you for joining us and hydro one's first quarter earnings call joined.
Joining us today are president and CEO Mark <unk>.
And our Chief Financial Officer, Chris Lopez.
In the call today, we will go over our first quarter results and then spend most of the call answering as many of your questions as time permits.
There are also several slides that illustrate some of the points, we will address in a moment.
This 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 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>.
Good morning, and thank you for joining us for our first quarter earnings call.
As you'll see from this morning's release, our teams continue to operate in a very disciplined manner to serve our customers and the communities in which we operate.
I'll briefly discuss some of our notable achievements this quarter and then pass it along to Chris to discuss the financial results in greater detail.
To start with I'm very pleased with the results that our teams have achieved.
Their hard work has enabled us to provide electricity to our customers when and where it's needed.
This dedication to great customer service, along with a track record of top quartile reliability for transmission has been recognized.
Most recently, we were delighted to receive news that our transmission license has been amended to develop for transmission lines to meet the growing electricity demand in southwestern Ontario.
This is in addition to our previous transmission designation for the Chatham delayed short line in 2020.
These five transmission lines will meet the needs of new and growing industries help attract future jobs to the region and ultimately facilitate economic growth in Ontario.
We are proud that the provision of low carbon electricity to the region will drive a more sustainable future for all.
In addition to the positive news on the transmission lines in southwestern Ontario, the independent electricity system operator, the ies. So recently launched an engagement plan for the timing of the Wassa getting transmission line.
As a reminder, the Washington transmission line.
Previously known as the northwest bulk transmission line.
Is the line that will transmit power from Thunder Bay to adequate.
Which is phase one and then from adequate to drive which is phase III.
This line will support economic growth in the northwest region, including the mining sector.
In October of 2018 Hydro one were requested by the ISO to start the development work for the project.
Last week, the ISO held a webinar, where it indicated that there would be a need to have phase one of the line in service as close to the end of 2025 as possible.
We are very pleased with this update that will support the communities and businesses in the north.
Our teams will start working immediately to provide feedback to the ISO engagement process as well as designing plans to meet the desired in service date.
Okay.
The Wassa. Good line also allows us to take progressive steps with first nations communities towards meaningful reconciliation.
I believe is our obligation as members of corporate Canada.
I'm very pleased to announce that yesterday hydro one and first nations communities came to a landmark agreement for the Washington transmission lines.
This industry, leading agreement offers first nations communities the option to invest in our 50% equity stake in the Washington line.
We are committed to partnership opportunities and believe this is the way forward for major capital projects.
We operate on the traditional territory of over 101st Nations across Ontario.
We are committed to building long term relationships with these communities and once again as an example of that.
Last year, we publicly stated that we've <unk>.
Provide significant economic participation opportunities for digital communities and major capital projects.
We also committed to increasing our indigenous procurement spend two 5% of all materials and services by 2026.
And ensuring that 20% of our corporate donations and sponsorship chips.
Port indigenous communities.
This proactive approach to economic participation recognizes our obligation to advancing economic reconciliation by.
By providing investment opportunities on large greenfield projects.
This provides long term and meaningful opportunities for first nations communities, which in turn supports our business strategy.
Hydro one has committed to all communities we serve for.
For the second year, we announced grants for indigenous communities charitable organizations and municipalities from the Energizing life Community Fund.
Given to 'twenty four recipients these grant support initiatives that promote physical psychological and emotional safety across Ontario.
The recipients provide critical local services such as service start training for use with autism.
Interactive technology to foster social engagement for seniors and environmental educational programming for black and ratio racialized families.
Okay.
At Hydro one we feel a responsibility to be present and support local organizations, who are working tirelessly to energize life in their communities.
At a time when more than one third of Canadians know a child or a person who is suffering from mental health problems because of the pandemic.
We teamed up with Jack Dot org to provide adults and educators with mental health strategies to support young people.
We are proud to work alongside Jack Dot Org, and breaking down barriers to get young people the mental health support they need.
In addition to removing barriers, we're also actively connecting people.
In late March the Ontario government Hydro, one and acronym solutions launched a pilot project that will bring high speed Internet access to homes and businesses in the municipality of bright.
The pilot project will allow us to use our existing infrastructure fast track the development of our high speed Internet network in this community.
The past two years underscored how essential internet connectivity is to economic productivity.
And the ability to access work.
Education health and other critical services.
This is just another way in which we are embracing innovative solutions to energize life for our customers.
In addition to this pilot are.
Ah regulation under the Ontario Energy Board will we be act was passed on April 'twenty, one to formalize the important role that all distribution companies play in supporting the government's commitment to connect approximately 700000 homes and businesses in Ontario.
Hydro one welcomes the chance to help enable better access and connectivity for our customers.
Continuing with the regulatory update.
Using our customer centric approach, we filed an evidence update with the OSB on the joint Reeve application J, Rob on March 31.
We updated the cost of <unk> to reflect market conditions and.
And the load forecast to reflect the <unk> most recent annual planning outlook.
The filing preserves our ability to deliver on our commitments to customers without impacting the proposed transmission and distribution rates during the 2023 to 2027 period.
We believe in keeping our commitments to our customers.
We also recognize that our customers in all of Ontario are facing increased pressure due to an exceptional set of economic circumstances.
As such we are proposing a unique deferral mechanisms.
It ensures customers are not burden during this difficult period with cost increases affecting investments that will benefit current and future generations.
<unk> total revenue requirements associated with this evidence update are proposed to be recorded in deferral accounts for recovery commencing in 2028.
As a result, there will be no changes to the proposed transmission or distribution rates for the 2023% to 2027% rate period due to the proposed changes in this evidence update.
Following our evidenced update the OMB issued a procedural order outlining the illustrative hearing schedule.
Per the schedule, we will enter a period of interrogatories, followed by technical and settlement conferences.
The oral b oral hearing is now expected to begin in September 2022.
With a decision expected in the first quarter of 2023.
In our unregulated segment, we continue to make good strides with our IV charging network.
In the first quarter Ivy opened 32 level two charging stations now known as parking charge.
In partnership with various municipalities.
Parking charge provides municipalities and businesses with the opportunity to bring charging to their communities for EV drivers who are not in a rush.
By IV reliable <unk> network and customer service.
Ivy also rebranded its level three network as IV charging goal for drivers who want to quickly get back on the road.
Following the agreement with on route and its partners the Canadian Tire Corporation, and the Ministry of Transportation.
Ivy opened fast Chargers at 10 on route locations.
Once built Ivy charging go network will be one of Ontario's largest and most connected with approximately 60 locations in over 150 level III charges.
Before I pass it over to Chris.
I'd like to take a moment to thank Jessica Mcdonald.
Who is not standing for reelection to the board of directors this year.
Hydro one has benefited from Jessica his leadership experience and forward thinking since 2018.
The governance and regulatory committee on behalf of the board of directors conducted a search to fill vacancy the vacancy created by Jessica his departure.
And its nominating Mark pub lastly for election to the board of directors at the annual meeting of shareholders on June eight 2022.
Youll hear more about mark and the depth of this skill he'll bring to the board after the AGM.
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 terms of our financial results for the first quarter earnings per share was <unk> 52, compared to 45% in 2021.
The key drivers for the change in earnings this quarter with the annual adjustment to OMB approved rates for the transmission and distribution segments as well as higher peak demand and energy consumption driven by favorable weather and reopening of the economy.
Which were partially offset by higher <unk> due to an increased allowance for doubtful accounts.
And higher depreciation amortization and asset removal costs.
Our first quarter revenue net of purchase power was higher year over year by 12, 6%.
This was made up of the recovery of deferred tax asset or DTA amounts as well as the cessation of DTA amount sharing going forward following.
Following the DTA implementation decision by the <unk> in April of 2021.
As a reminder, the impacts from the DTA implementation decision are cash flow positive.
Net income neutral due to a corresponding offset in Texas.
In addition revenues for the transmission and distribution segments reflected the annual adjustment of OSB approved rates for 2022.
Colder weather and reopening of the economy drove up peak demand in all months of the quarter compared to the same period last year.
The average monthly peak demand for the quarter was up three 7%, while the energy distributed to hydro one customers also increased by nine 1%.
On the cost front operating maintenance and administration expenses were higher year over year by approximately two 1%.
The increase in <unk> was primarily a result of higher allowance for doubtful accounts or bad debt expense due to the aging receivables in the distribution segment.
As a reminder, in the first quarter of last year, we had accelerated certain work programs such as vegetation management Stacy.
Station maintenance information technology and customer programs spend.
Oh M&A on these programs remain largely consistent with last year's levels.
That said, we are beginning to experience the impacts of the current economic environment.
Especially as it relates to materials and services in both segments.
Impacts such as essential commodities, including copper aluminum and steel have undergone price increases and supply shortages.
<unk> demand and limited supply have led to price increases for freight based shipping.
And rising fuel costs have impacted most categories of materials and services purchases.
Including hydro one's vehicle fleet fuel costs, which are expected to increase by 30% to 35% in 2022.
Due to these market changes hydro one is experiencing price escalation that many materials and services that will manifest themselves in the upcoming quarters.
Depreciation expense was higher year over year by six 3% due to the increase in capital assets, which is consistent with our stated capital investment program.
On financing, we saw no change year over year.
Ensign charges, however, financing charges decrease from last quarter by 6 million due to the $600 million repayment of long term debt, which had matured in January .
As a reminder, we had borrowed late last year to fund this debt maturity.
We continue to be pleased with the stability of our balance sheet and robust investment grade credit ratings.
Income tax expense was $79 million for the quarter compared to $26 million in the same quarter last year.
The increase in income tax expense was due to the tax expense on accounts of the DTA implementation decision, which as discussed earlier these net income neutral.
In addition to the DTA recovery amounts. We also had higher taxes on account of higher pre tax earnings, which were partially offset by timing differences.
The effective tax rate this quarter was 22% versus the effective tax rate last year of eight 8%.
This is consistent with the annual guidance, we provided earlier this year of 2014% to 22% over the next five years.
As a reminder, the most significant impacts will be over the 2021 to 2023 DTA recovery period.
Moving to investing activities in the first quarter, we placed $229 million of assets in service, which is a 45, 9% increase compared to the prior year.
The year over year increase related primarily to the transmission segment in which a significant portion of the east with Thai project was placed in service.
In addition, we had higher spend on station refurbishment and replacement work as well as higher volume of assets being put into service to maintain North American Electric reliability Corporation will nook standards.
Capital investments for the first quarter were $449 million, which is a 14, 8% decrease from the first quarter of 2021.
The decrease can primarily from the transmission segment due to the completion of the Ontario grid control center in the city of <unk> in 2021.
Lower volume of station Refurbishments and replacements.
And the lower volume of wood pole replacements.
The capital investments in the distribution segment were also lower due to the completion of the barilla grid control Center.
And I just mentioned.
In addition, we had a lower volume of wood pole replacements and the lowest spend on initiatives.
These are partially offset by reinforcement projects and a higher volume of work to connect customers.
You'll also note that future capital investment profiles for both segments have been adjusted since our last call.
This was done to reflect given this update for the joint rate application, which was filed in March.
The new transmission lines, the developments surrounding the Washington transmission project and the broadband regulatory initiatives have not been reflected in these numbers due to the current stage of development.
That said any amounts on these initiatives will not be part of <unk> and will be additive to future capital investments.
As a reminder, the capital investment numbers, a few t's remained subject to OMB approval.
The evidence update we filed has a modest impact on our projected rate base growth for both segments.
On guidance, we continue to be committed to and deferring our target of 4% to 7% earnings per share growth through 2022.
As a reminder, we expect to provide updated guidance for the post 2022 period. Following the approval of the joined rate application.
I'll stop there and we would 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 and 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.
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 comes from Maurice Choy with RBC capital markets. Your line is open.
Thank you and good morning, My first question's on the J wrap just wanted to get.
Bit more understanding about cost updates.
Specifically can you just discussed and makes the team what is inflation slash pricing updates and how much of it is just shifting of projects between different regulatory periods.
Morten Maurice it's Mark here.
As you know we developed an investment plan based on the engagement with our customers when we put that investment plan together, so over 50000 customers.
Engaged in that.
And we still believe in the investment plan and we still believe that that is what our customers asked us to do and so the the evidentiary update that we filed is to reflect the increase in costs on delivering that program, but the program itself has stayed intact for for the <unk> period.
Understood and.
And just as a follow up to one of your comments in prepared remarks about using <unk>.
Deferrals instead of increasing.
The cost of customer rates.
<unk> speaking.
It's been something that you've thought it with despite the consolidation or is something that you had early thoughts from the regulator about.
Their view about this approach.
Yes, so as part of <unk> rules of practice, we're required to update evidence when theres, a matured material change to our filing.
And given the economic situation and the increased costs due to inflation and we were required to update that evidence. So that's what we've done.
We believe in the commitments, we made to our customers and and we wanted to hold to those commitments, which are the briefs that we committed to when we filed our evidence and so we propose the regulatory mechanism, which will help us to to deliver on that commitment and and not put those <unk>.
Cost pressures on our customers at this time when they are facing pressures in other aspects of our lives and we will we will look to collect those costs in future periods.
Thanks, and if I could just finish off with.
Boston the election now that the campaigning is underway.
Thoughts of the tone from the leaders with regards to energy policy.
As well as.
Billy and Pepsico.
Yes, as you point out the election is officially underway as of yesterday.
<unk>.
The risk is dropped so we know that electric electric and elections going on we do expect to hear various points of view from from parties and several people on that what we're focused on at hydro one is to continue executing on our strategy to serve our customers to facilitate economic.
Through the the things like the new transmission lines, where I talked about on my opening and to continue to drive costs out of our business and we've been successful in that effort as you know many years.
Consistently.
Finding at least $50 million cost improvements each year, and we will continue to focus on doing that.
Got it thank you very much.
Okay.
Thank you. Our next question comes from Rob Hope with Scotiabank. Your line is open.
Good morning, everyone I wanted to follow up on the on the deferral.
The incremental J rock costs so.
When you evaluated all the different opportunities in front of view connect can you maybe give us some puts and takes on why you thought deferral mechanisms would have been in the past.
Path forward I understand there'll be net income neutral but.
But it will be a headwind in terms of cash flow.
Of what you could have gotten.
Our strong balance sheet and kind of credit metrics, where you are right now.
Give you that willingness to give up some cash flow in the near term.
Yes, Rob I think you nailed it.
Before we made a commitment to our customers when we filed this and it was based on that input to those customers we feel.
Deep obligations to meeting those commitments to their customers and and we do have a strong balance sheet and we can support.
During the <unk> period. So we thought it was the right thing to do as an organization.
Two two.
Support our customers through.
The timed over there over the <unk> period and look to collect those costs later.
Okay. Appreciate that and then maybe just more of a longer targeting and conceptual for years, we didn't see any real demand growth out of Ontario, and then moving forward. We are seeing a relatively good amount of transmission build out whether it be too.
Southwestern Ontario, and some load there whether that be greenhouses or battery manufacturer or the kind of that the mining up north.
When you take a look at the ISO load forecasting kind of see some of the puts and takes do you have a bias upwards in terms of load growth in Ontario, and I guess as an extension further transmission growth.
Yes, so we did see in the latest annual planning outlook from the ISO that they are forecasting an increase in load, which as you point total load in Ontario was relatively flat for quite a period of time started to creep up a bit but the latest annual planning outlook, which looks 10 years and beyond.
Is showing some increase in load we are actually seeing that on the ground and that's why we in southwest, Ontario, We've talked in the past about agriculture and the load increases.
Required for meeting the agricultural loan, but now we're seeing manufacturing the.
The announcements on EV and EV battery of Remanufacturing.
Other sectors of the economy or start to electrify and that's why we went with the.
With our partners to the ISO and advocated they need this electricity, but they are making commitments to best in Ontario, and we need to supply the power. So that was part of the impetus around these new lines and then when I look at the northwest we are seeing a lot more action in that.
In mining and a lot of those minerals are actually to support the manufacturing or the EV battery manufacturing so.
Earlier this.
This month.
So it was actually asked us to see if we could put what's again in by the end of as close to the end of 2005 2025, because we can so that's accelerating and thats driven bye bye.
<unk> and requirements in the northwest. So we are seeing that people are recognizing that Ontario has a place to set up business with the low carbon electricity, we have here and and thats starting to happen and that with real commitment and analysis of the company. So we're pleased to see that.
Thank you I'll hop back in the queue.
Our next question comes from Darren <unk> with Bank of America. Your line is open.
Derrick Your line is open please check your mute button.
Hi, good morning, and thanks for the time.
I just wanted to maybe continue going down that similar line of questioning about the specifically about the four transmission projects that were announced that are potentially incremental to GE rap just wanted to.
Maybe ask you.
At what point do you see yourselves, having enough confidence in those projects going forward that they would be added to your formal investment plan and just wanted to confirm on the financing part of that it sounds like you wouldn't meet external equity, but if you could just confirm that up please.
Hi, Darren it's Chris Thanks for that question, so our process usually use.
<unk> awarded.
We've just had we will now talk like those development costs development costing we would put the actual construction cost team when we do what's called a <unk> hundred 92 definitely comfortable around.
How the cost of the project would move forward under the regulatory construct.
It has been allocated to hydro one now we need to do the development work and then we need to.
Putting the construction costs, so you're still a ways off there'll be a couple of those lines like this five entitled wanted to chat intellectual we'd expect 692 on that fairly soon so it would be to put that money, so you'd see them going into our forecast progressively over the next 12 to 18 months is my guess Youll start to see development costs going in the next six months.
So that's what that's how I would see Darius in terms of your question on equity.
I love, having the challenge of more growth.
This particular announcement will not require new equity, but the more announcements that <unk> talked about the further growth in the northwest and so on there may come a point when we look at it but we will actually communicated that very clearly to all stakeholders, if and when that moment comes this particular announcement will not cause that.
Okay. Thank you that's very helpful.
The next one maybe more more long term, maybe a little bit more conceptual seems like you guys are making more of an effort to highlight.
Unregulated.
<unk>, including IV charging and the telecom piece, so perhaps as we look ahead to your cutting guidance update which will be on the other side of the <unk> process.
Are you considering perhaps putting maybe some formal growth targets around that segment, whether it be the charging or some of the other.
Unregulated businesses that youre involved with.
Derek just again, yes. Good question we would.
I'd remind you that IV is more we.
We say this a number of times it really is about supporting our customers. Our customers have asked for it is not a high growth business right now.
So I wouldn't want to read too much into that but it's really about supporting evs in that whole industry here in Ontario, we talked about manufacturing we talked about the battery you need a good market here in Ontario to support that as well. So that's what that's about it may develop into a growth business.
But right now it's more of a developing business.
Other areas, you're talking about around LDC potentially that's two regulated but dms absolutely will put some guidelines around that when we come out with guidance, which will be after.
The next level of guidance, we gave will be after the the joint right application decision.
Okay. Thank you very much I'll leave it here.
Thank you. Our next question comes from Linda <unk> with TD Securities. Your line is open.
Thank you Jim.
I'm wondering if you could maybe talk a little bit more about them.
How management and the board thinks about.
Balancing incremental growth with.
Incremental marginal call.
Cost of capital specifically.
As you look at potentially.
Firing LDC or adding more growth projects.
Might there be a point, where some of the transmission opportunities that have just been awarded to you could potentially displace.
Certain LCD alright delay certain LTC.
LDC consolidation.
Hi, Chris Good question, I think youre talking about the speed at which we do these transactions today, but a fair bit of balance sheet capacity. So we don't have that challenge today, even if that challenge came in to say, we had a number of transmission lines and a number of LDC opportunity to come up at the same time the economics on them.
Very similar.
It works out that effectively going at one times rate base for us ultimately so we pay a premium on the LDC, we get a chance to earn back some of the premium in the first five to 10 years of ownership. So the economics are identical for us so.
Thats a tough one to choose we will do them all and we look for the right way to finance that I don't think it would be an incremental well.
You're talking about the next.
<unk>.
Cost of that dollar of financing like I said, they are effectively both regulated businesses I don't see a higher cost as a result of that it becomes a larger business, but not a lot.
Thanks, Paul it doesn't cost us more up to.
Two o'clock.
Okay. Thank you maybe.
Just switching gears a little bit.
As you progress in your sustainability efforts can you help us understand which programs.
With are included in the <unk>, what programs are outside of that and how that might evolve over time, and how you make that decision.
We will be updating our materiality assessment when we issue our next sustainability report.
R R.
<unk> initiated so which which we've been focusing on.
So far in our sustainability report, our diversity equity and inclusions, we've made commitments there and there is no incremental cost.
That is embedded in our base business.
There is commitments to greenhouse gas reductions.
Through things like the Greening, our fleet again, no incremental costs that as part of our GE wrapped in that as we replace vehicles due to end of life, we will replace them with lower carbon vehicles.
We will continue to to support communities and that and that is part of our space business budget and.
Included in <unk>, So I don't see our ESG metrics, adding.
Additional pressures towards cost overall.
Sure.
So.
But we will be updating our materiality assessment and youll see that in not yet.
In August <unk> globally, it's shortened a sustainability report.
Great. Thank you I'll jump back in the queue.
Thank you. Our next question comes from Ben Pham with BMO. Your line is open.
Hi, Thanks, I'm wondering are you able to attach any.
Capex what's that.
And third party projects that are announced.
We've been I think I think you're talking about the recent transmission lines and dairy costs, assuming a similar question.
We expect to put to put some development costs.
A couple of quarters with regard to those projects and then when we do a section 92, which is a regulatory application to go and construct.
We would put the full cost of construction at that time. So I would expect that we would do that for one of those lines in the near term and the other four fairly new so that will come over the next 12 to 18 months.
And in Washington, given that we've been working on several years. So we will be filing that application core section I had to leave to construct.
Relatively soon.
You'll get visibility into the cost of that one as well so.
So just two separate.
<unk> said one was the southwest pipelines one we've been working on for a while for fairly new and then Theres a once again one that the ASO said they want it in in service by 2025, we haven't had the directive on that yet, but we know what's coming now.
That comes we would put the construction posting.
Okay, great. Thank you for that.
Oh.
These projects that.
<unk> reference and in some some of those take facilitate greenhouse another once per day.
The battery.
Manufacturing facility.
My question is this.
It's very tough to figure out.
The penetration rates in electrification lie to you.
Do you anticipate.
Holding transmission.
In a way that you.
The overbuilding.
Michelle.
Vacation.
You have to be mindful of the consumer costs or is it more going to be more of that.
Snail, situation, where you see here.
Battery facility battery plant come up and you felt that and then wait to axon com.
So we worked with the ISO to look at the load forecast, where it would be expected growth may come.
The ones that we're building now.
We do like I said earlier have have really good.
Visibility into the load is actually going to come to fruition.
Are those and so for example, the first line that we announced in 2019.
Sure.
West is already oversubscribed, and so so I <unk>.
Wouldn't see this as a building and they will come approach, we actually have the load and customers waiting to get connected. So so we'll continue to do that ultimately the ISO it makes the decision on whether we go forward with these but we work with our customers to to ensure that.
The commitment from them to connect it creates there and then we advocate with with the ISO or the need.
Ben I'll, just add to that to say that.
Perhaps what you're referring to is things like <unk>. We've worked on that for the last few years and that's the reason why we can bring into service very quickly now.
Same in the southwest Mark just highlighted that first line we've been working on for a number of these even though they announced Paul have wanted.
Pretty much ready to construct.
So really what we're talking about is we've got and the whole industry is getting greater certainty around.
Environmental targets Evs policies from the federal government the provincial government, it's that certainty that's allowing these large investments in infrastructure to move forward. So we see that a lot, but the environment is right today, the economic environment the <unk>.
Environmental targets are all being supported federally and provincially, that's what's allowing leasing to move forward rather quickly they've been on the board for a number of years, but certainty more recently that has helped us progress.
Excellent Thanks Brendan.
Another question you mentioned.
Our balance sheet in good shape, but you also it sounds like with the higher Capex deferral accounts out there.
And more pressure on on your balance sheet in other years, you may need to look at equity I think that's what I heard.
When you look at Holdco debt first crops.
These forward looking at that and what are your thoughts about.
Drip programs.
Yes, so Ben I'll just clarify.
My statement earlier as I said based on what's been announced today.
The Washington lineup in the North.
Five lines in the South there is no need for equity.
Over that joint rate application period, so that's three to 2027.
If additional lines came along in that timeframe.
We would look at what does that mean I would not turn away any growth, we would make sure that powers to all of our customers, where they where and when they need it. So we would absolutely do that.
That supply we have 99% of transmission in Ontario, So we would not turn that away at that point I would look at how do you finance that next dollar you've made one suggestion, which I agree with is we would look at holdco debt certainly at that point.
Just to ensure that the business stays on the right footing, 60% debt, 40% equity at the regulated level and then we would look at the Holdco as to what makes sense in terms of bringing that additional funding.
Okay. That's great. Thank you.
Yes.
Thank you as a reminder to ask a question at this time. Please press Star then one our next question comes from Mark Jarvi with CIBC capital markets. Your line is open.
Thanks, Good morning, everyone.
Just on the transmission lines, you know, obviously, you saw or seeing some accelerated timelines on Washington is there the chance for that to play out on the southwest lines and then is it right way to think about it sort of three to five years 10 service. Once you do the section nine two filing.
Yes, Mark Mark here.
So obviously I can't make commitments on that that's up to the ISO when they want us to go forward for those and it is dependent on that sizable.
Sizeable backlog, how long it takes us construct but the upfront development work in the environmental assessments and the permitting and all those things does take.
Two to three years on a major transmission line and Thats. The work that we're doing right now.
A bunch of the ones that we announced southwest so that really enables us that as soon as we get notice on win in.
In service needs to be it enables us to meet those timelines. So so I think your timeline two to three years to construct an average is accurate.
But the upfront work on these as you know logins linear infrastructures.
A lot of consultation environmental permit David it checks and balances that also take the upfront work our time and that's what we're working on a bunch of these alright.
Got it and then would you guys assume maybe 100% owners or would there be first nation partners on this like what are you guys envisage in terms of your ultimate ownership on these transmission lines.
Yes.
You may have seen yesterday, we announced an.
And equity partnership with first nations and the northwest on the elastic in line, where we're 50% equity partners. So we're equal partners on on that line. We do see that that is the model going forward for linear infrastructure in Ontario is through partnerships like.
So we do see on new Greenfield large transmission lines that that it will be done through partnerships.
I'll remind you as well.
That.
The OE has has.
Set out a separate regulatory process for those types of projects, where we are doing them through through through partnerships with first nation. So that is not included in our <unk> application those will flow through separate regulatory processes.
Okay, and then just coming back to the deferral under the refiled. The application have you been able to get any feedback from stakeholders and I believe there is a precedent for it. So is the assumption there that the deal would be as comfortable with this construct and maybe you can share some initial thoughts on any feedback.
It is one of the mechanisms that is available it's used in other other jurisdictions I don't think we've used sit here as far as my knowledge it at hydro one.
We proposed it ultimately there'll be up to the OMB to decide on whether they want to.
Allow us to use an account like that or not.
And again.
We believe it's the right thing to do for our customers, but ultimately the <unk> will decide.
Okay. Thanks, Ron.
Thank you our last question comes from Andrew Kuske with Credit Suisse. Your line is open.
Thanks, Good morning, I guess, that's a question probably starts with Chris and then maybe also transitions into Mark and its really just on the <unk> and I know, there's a commentary in the MD&A that said something to the effect of lower spend on lines maintenance.
Is this more of a timing issue or is there something structural given just the performance improvements that you've seen across the portfolio over the last few years.
Hi, Andrew.
For the quarter I would tell you it's.
We have we do have productivity, but I don't think that would be material in terms of lower quarter over quarter. So when that analysis is really comparing this quarter to the same quarter last year. So we further said the overall what program hasn't changed.
Dramatically in terms of the.
The volume of work being done so I would not say that that is.
Ongoing part, we definitely become more productive, but we also have an aging system that we need to prepay. So so I wouldnt say it that way.
Okay that is helpful and then.
You know, maybe if you'd just give us a bit of a refresher on your views on inflationary pressures and how philosophically you've dealt with them at our historical fashion and then how you think about dealing the Monaco auto with them on a go forward basis.
That's a good question.
So in the past our productivity program, we think to offset $50 million per year.
And it just happened to be that that 50 million was roughly 2%. It's roughly the long term inflation rate that we'd been seeing since the 19 nineties.
So that was working really well so in this new environment that we're in today over the last two years, we have seen inflation above that we still continue to perform our productivity program and we are still targeting 50 million per year. So roughly two to two 5% of ethane, but was inflation above that we're not able to fully offset it at this point in time.
So that that was the main driver behind us, bringing forward out joining my application evidentiary update and it also will provide a little bit of additional pressure. This year. So we're now in the third year of Covid, you've seen the disruption in Europe .
We've seen it.
Commodities increase we've seen price increase we have really we've had really good strategies around locking in cost over a longer period of time and thats worked well, but the longer. This goes on and you renegotiate contracts that start to come through our cost structure. It somewhat particularly in <unk>, because we go through and do that work with them. This.
She will need to manage that and offset that in the best way. We can we had a good first quarter, we highlighted that and then I reiterated that earnings guidance will be at the top end of that range. So that gives you a hint that we have put some cost pressure in the current year.
<unk> had some good results here in Q1 that will allow us to meet the top end of that range.
I appreciate the context and then maybe just one final question.
And just a bigger broader strategy and <unk> got $50 million of effectively productivity savings to counteract the inflation as you bring in some.
Some of the capital and replacing aged infrastructure with brand new does that productivity savings effectively widen and enhance itself.
Yes, Andrew it's Mark here actually when we bring in new equipment. It does have some effect on on our R&R for M&A, but not as big as you would think new equipment doesn't necessarily means that you reduce your maintenance or future maintenance costs.
So so there isn't a one to one offset that we do we do.
See that as we increase our capital. We're also putting a lot more assets in the ground that needs to be maintained over the longer period. So that does offset some of the kind of savings that you may get by replacing old assets with new if that's the question you're asking.
I think I'll just add Andrew is that program has expanded so the next five years, we're preparing.
Our systems for the future.
The investment plan as is.
These great.
The investment plan the greater the opportunity is to achieve productivity savings could you will you actually investing a higher volume so we get it from that.
In terms of the offsets.
As Mark said, it's not one to one but the greater the program.
And the more transmission lines were doing we have higher purchasing power. So we actually end up with a better outcome overall.
For all consumers.
Okay. That's great. Thank you.
Thank you.
That does conclude our Q&A session for today I'd like to turn the call back over to Omar Chavez for any further remarks.
Yeah.
Thank you so much for joining us today and if there are any follow up questions. Please feel free to reach out we thank you for your ownership and for your time today. Thank you.
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.
[music].
Yes.
Yes.
[music].
Hi.
Yes.
Okay.
[music].
Okay.
Yeah.
Yes.
[music].
Yes.
And then.
[music].