Q3 2022 Hydro One Ltd Earnings Call
<unk> conference Stylus pen and press pound when finished.
Risks that could cause our actual results to differ as they all apply to this.
Paul.
With that I turn the call over to our interim President and CEO Bill Sheffield.
Thank you Omar good morning, and thank you for joining us for our third quarter earnings call before we begin it's important for all of us to recognize that today as Remembrance day.
I ask everyone in this room and indeed, everyone at hydro one to take a moment to remember all of those who risked and sacrificing their own futures. So the rest of us could have a better one.
Lest we forget.
It is all too easy to take the freedom, we enjoy for granted.
We pay tribute to those who served and continue to serve our country during times of war.
<unk> and piece, so that we all have a better and brighter future.
Now moving to our business. This has been an eventful quarter with significant developments that will position hugger one for success for years to come.
Our teams have worked very hard to balance the needs of our customers communities and partners, while continuing to deliver good results.
I continue to be extremely impressed by the dedication resilience and generosity of all employees I have met all over Ontario.
Since June I've been somewhere in the field almost weekly some companies hire a consultant to define their purpose at hydro one all you need to do is speak toward people. There is no question that our minds. What our purpose is we have great people at hydro one and wildfire position as temporary needing them. During this time has been a real privilege.
I'll briefly discuss some of our notable achievements this quarter and then pass it over to Chris to discuss the results in greater detail.
As you'll see from this morning's release, our quarterly earnings per share was <unk> 51, compared to 50 cents last year, and we deployed $501 million in capital investments compared to 513 last year the.
The company continues to be honest staple track.
This stability has been further reinforced with the completion of a significant milestone with respect to our transmission and distribution joint greet application or J, rockfish, and we'd like to call. It.
On October 24, us along with the parties that participated in the settlement conference we filed a settlement agreement with the Ontario Energy Board.
The settlement agreement outlines among other things the levels of capital and operating expenditures expenditures that will be incurred over the next five years.
Chris will further discuss these points in greater detail. However, I believe it is a balanced agreement for all stakeholders. The agreement facilitates investment in our infrastructure to meet the needs of our customers to build a grid for the future interest support Ontario's economic growth.
Given the scale of application achieving these type of settlement is a first for hydro one.
Not only doesn't speak to the efforts of our team and the parties in the settlement conference, but also to the constructive regulatory process that has enabled such an outcome. We support the regulators modernization initiatives and look forward to working with them to tackling the challenges of energy transition and electrification, while advancing the sector forward.
<unk> will now review the settlement agreement and a final decision is expected by the end of this year.
And another milestone on September 20, <unk>, we announced our industry, leading equity partnership model with first nations.
As a company we operate in the traditional and treating territories or more than 100 digital as communities indigenous communities as a trusted partner. This unique position comes with an important responsibility to advanced reconciliation through our actions.
The hydro one equity model office originations of 50% equity stake in new capital transmission lines projects with a value exceeding $100 million and will transform the benefits of infrastructure development for first nations.
This approach positions hydro one is a leader in the sector and provides a mutually beneficial pathway to build five new transmission lines in the southwest and the Washington transmission line in the North.
I am so proud of this meaningful step forward towards reconciliation, we are committed to earning relationships and building partnerships to ensure indigenous people and communities realize the economic benefits of development for generations to come.
Being part of the celebration of the Street partnership achieved has been a highlight for many of us.
Being on the right side of history feels very good.
Hydro one has also committed to answering Nicole we're helped by our partners and neighbors in late September you will remember Atlantic Canada was rocked by the impacts of post tropical storm Fiona.
We saw a devastating images and heard heartbreaking stories.
Active.
Normalized our award winning teams to provide our expertise and help with the restoration efforts in Nova Scotia, and Prince Edward Island.
Either one cruise help reconnect upwards of 50 kilometers worth of line and work more than 9000 hours to restore powers.
To the resident in on the East Coast.
Restoring power to residents is reward enough our crews were touched by the outpouring of emotion and supported by members of the community and political leaders.
It is no longer than we have received 12 emergency response awards from the Edison Electric Institute for storm recovery efforts.
The spirit of helping is deep rooted in all of our employees and speaks to the values of the organization on how we stand up for people in need.
This past September was our annual power to give months I'm very proud to share that hydro one employees raised almost $1 6 million for.
So over 855 registered Canadian charities. This is.
More than double of what we raised last year.
In addition to the funds raised in September our employees demonstrate regularly their generosity through donations volunteer work throughout the year.
We are passionate about making a difference for the charities in the communities, where we live and work.
Before I turn it over to Chris I know you must be curious about the status of the CEO search process and personnel updates.
Jason Fitzsimmons, Chief Corporate Affairs in customer care Officer has departed hydro one and pursuit of public service.
Jason has accepted the appointment as deputy Minister of energy for the government of Ontario.
Since joining hydro one nearly six years ago, Jason and his team have achieved remarkable results with record high high customer satisfaction significantly improved relationships with all stakeholders and a strong brand.
I Miss him already.
Putting the good of Ontario ahead of my comfort, we know someone who has deep knowledge of the sector and a strong track record will be tackling the critical energy issues that confront all Ontario's Luke.
We look forward to him working with us in a new way to support the needs of our customers build the grid of the future and contribute to economic Ontario's economic growth.
Finally, with respect to the CEO search I know there is a keen desire by many stakeholders to find out about the process and timing of the CEO appointment.
Nothing will give me more drawing them to announce the CEO today. However, the board's confidential process for the CEO selection is ongoing.
As I mentioned on the last call. It's a thorough process that the board takes very seriously it will take time.
I have no doubt in my mind that the board will pick the right candidate to lead hydro one as it did with the previous CEO and.
In the meantime, you're stuck with me and I have the distinct privilege to lead a really strong management team, who are clearly demonstrating excellent progress and delivering outstanding results with that I will turn it over to Chris.
Thank you Bill good morning, everyone and thank you for joining us today.
I'm incredibly proud of our teams for successfully submitting the joint right application settlement agreement.
This milestone took significant effort.
It was truly a collaborative initiative across the entire organization.
I would also like to congratulate Jason on his appointment as Deputy Minister of energy for the government of Ontario.
This marks his return to public service keeping the needs of Ontario on top of his agenda.
In terms of our financial results for the third quarter basic earnings per share was <unk> 51 cents compared to <unk> 50 in 2021.
The main drivers of the change in earnings this quarter were.
The annual adjustment to OMB approved rates for the transmission and distribution segment.
Peak demand driven by favorable weather and reopening of the economy.
Partially offset by higher operating maintenance and administration will M&A expenses, mainly due to highway program expenditures and corporate support costs.
Depreciation amortization and asset legal costs.
Higher income tax expense.
Our third quarter revenue net of purchase power with high year over year by 9%.
For the transmission segment revenues were higher by 10, 8%, reflecting a change in the approved rates as well as higher peak demand in the quarter.
Transmission revenues were also positively impacted by lower regulatory adjustments.
For the distribution segment revenue is net of purchase power were higher by seven 1%. The increase was a result of the change in OSB approved rates and the recovery of storm related costs from third parties.
The recovery of third party storm related costs was net income mutual as there was a corresponding offset in ooma.
Lastly, both segments had revenue adjustments related to the cessation of deferred tax asset or DTA sharing announced following the DTA implementation decision.
As discussed in past calls the additional revenues from the DTA implementation decision on net income neutral due to a corresponding offset in taxes.
On the cost front.
<unk> expenses increased year over year by approximately 13%.
Consistent with expectations outlined last quarter with programs accelerated this quarter for both transmission and distribution.
Third work activities following the storms in May 2022, who are advanced.
The plan work that was deferred following the storms will continue to impact eliminate for the balance of this year.
In addition in distribution there was an increase in <unk>, resulting from third party storm related costs in May which has discussed earlier have been recovered in revenue net income mutual.
We also incurred higher corporate support costs.
The high distribution eliminate was partially offset by lower allowance for doubtful accounts.
Year over year.
For clarity the decrease in allowance for doubtful accounts was a result of comparably higher allowance taken last year in the third quarter.
Depreciation expense was higher year over year by 13 million or five 7% due to the increase in capital assets, which is consistent with updated capital investment program.
On financing, we saw a year over year increase financing charges of $4 million or three 4%, primarily due to higher weighted average interest rates on short term notes.
Subsequent to the quarter in late October <unk>, Inc. Raised $750 million of debt to repay annual prepay maturing long term potential attempted and for general corporate purposes.
This issuance consisted of medium term notes at $4 nine 1% during 2028 weeks.
We continue to be pleased with the stability of our balance sheet and robust investment grade credit ratings as we look forward, we will continue to access the debt markets Opportunistically.
Income tax expense was 100 million for the quarter compared to $71 million in the same quarter last year.
Increase in income tax expense was due to the tax expense on account of the DTA implementation decision.
As discussed earlier is net income neutral.
We also had high taxes on account of the large tactical timing differences and higher pre tax earnings.
The effective tax rate or ETR this quarter was 24, 4%.
The effective quarterly tax rate last year of 19%.
On a year to date basis. The ETR is 21, 9% compared to 13, 2% in the prior year.
This is consistent with the annual guidance provided early this year of approximately 14% to 22% over the next five years.
As a reminder, the most significant impact will be over the 2021 to 2023 DPA recovery period.
Moving to investing activities in the third quarter, we placed $401 million of assets in service, which is a 22% decrease compared to the prior year.
Both the transmission and distribution segments contributed to the decreased largely due to the in servicing of the Ontario grid control center located in the city of arena in the third quarter of last year.
Our power from the grid control center, they were timing related differences for various projects and changes in the volume of work that contributed to the negative variance in both segments.
This was largely a result of the lumpy nature of placing assets into service.
Capital investments for the third quarter were $501 million, which is a two 3% decrease from the same quarter in 2021.
In the transmission segment capital investment increased by $7 million, resulting from the high volume of transmission line refurbishment.
Investment in <unk> power line connection and highest spin on spare transformer and modest fixed asset purchases.
These are partially offset by the higher investments in the Ontario grid control center and the Lakeshore transmission station last year.
In the distribution segment capital investments decreased by $21 million year over year.
Was primarily the result of lower storm related asset replacement this quarter and investment in the Ontario grid control center that had <unk>.
Taking place last year.
This lower spend was partially offset by a high volume of work on customer connection and spend a modest fixed asset purchases.
Consistent with past practice, we have updated the future capital investment table to reflect the settlement agreement on the joint rate application that was recently filed with the only bank.
As bill outlined the settlement agreement with Hydro one and are positioned to advance the work program for the benefit of our customers.
We view the agreement is a balanced outcome for all stakeholders. While there are many facets to the agreements I'll discuss the sending at ones.
In terms of modifications to capital the agreed upon total reductions for the five year period, the transmission and distribution of 10% and 12% respectively.
So transmission this represents reductions in our system renewal in general client categories and for distribution the decreases in system renewal and service and general client categories.
Overall, we agreed on 11 8 billion of capital spend over the next five years to strengthen our grid across the transmission and distribution.
In addition.
To be agreed upon capital parties also agreed that this capital should not be impacted by any mean extending treatment project.
As such we agreed to establish new externally driven project variance accounts for the transmission and distribution segments.
The accounting transmission will capture any mandatory work required by governmental authorities such as new transmission stations in lines.
The account in distribution will capture any new initiatives related to joint use and relocation.
U E <unk> initiatives.
Related to the distributed energy resources or the us.
This will ensure that the work while maintaining the great happens without any impact from new projects.
For M&A expenses, the parties agreed to a 2% reduction to eliminate envelope for both segments.
The reductions are consistent with the range as approved by the only be impulse decisions.
The resulting impact of the revenue requirement will be an approximate $483 million of savings.
101 as customers over the five years from the proposed amount.
In addition to cuts on capital and M&A. We also agree that there'll be no further updates to inflation for 2020 as was proposed in the inflationary update in March.
Furthermore, there will not be a deferral of recovery of any incremental amount as proposed in the same update.
This will give greater certainty to our customers with regard to the impact of inflation and load on their bills.
For clarity.
<unk> process of inflation adjustment under the customer incentive rate setting framework will be maintained for 2024 through 2027.
With respect to the customer incentive rate setting framework, we agreed on a productivity factor of zero to one 5% for transmission and 0.45% for distribution.
Compared to the counter productivity factors of <unk>, 3% for transmission and 0.45% for distribution.
In addition, we agreed on a supplemental stretch on capital of <unk>, 2% for both segments.
Finally.
Earnings sharing mechanism or Esa is unchanged.
With a 100 basis points that bank and 50 50 sharing thereafter.
The irony of great change with a disposition of any ESN balances for the period 21 to 24 in the 2026 rate update application.
This will allow customers to benefit earlier from any overriding rather than wait for the next rate application.
We are pleased with the overall results and with the <unk> opinion, which states that the settlement is an acceptable outcome from a public interest perspective.
The regulatory news in late October the only be released the cost of capital parameters for 2023.
<unk> was formed you're likely updated to 936%.
This will be the applicable rate for the joint great application and will remain fixed for the duration of the rate period.
In terms of next steps. We are currently updating the evidence for the cost of capital assumptions and will file a draft rate order in the coming weeks.
We anticipate the <unk> will review the settlement agreement and issue a final decision by the end of this year.
Finally on guidance as promised we will provide long term anybody following the approval of the joint Grant application.
That said as it stands today, our rate base growth will increase to approximately 6% through 2027.
In the long term it could be expected that earnings and dividends with following overall rate base growth.
However.
The growth rate described does not consider the full impact of initiatives that have been discussed in prior calls and sit outside the right application such as the.
The new transmission lines broadband and LDC consolidation.
In the short term and for the remainder of the year is increasingly likely that will be slightly above that target of 4% to 7% earnings per share growth through 2022.
This is largely due to the positive demand we have experienced as a result of favorable weather and reopening of the economy experienced in the past few quarters.
I'll stop there and we'd be pleased to take your questions.
Thank you Bill and Chris.
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Our first question comes from the line of Linda <unk> with TD Securities. Your line is now open.
Thank you and thank you for the updated outlook on your growth I'm just wondering.
Maybe at what point we.
We might get something a little bit more crystallized in terms of some of the net effects of.
Augmenting your J rep growth outlook with.
Additional transmission lines broad band now that the municipal elections are over potentially some LDC consolidation can you give us a sense of of how that thinking is evolving and when you might be able to share more with us.
Hi, Linda it's Chris.
I think we can share a little more in the Q4 call.
Transmission lines that are just being allocated.
Practices that once we have a 693, we would provide update there is one line in there.
Yes.
The churn intellectual line, that's fully disclosed at $268 million.
<unk>.
Sidelines for in the South and one in the north.
We'll provide some guidance or guidelines around what they might be but as you can appreciate Linda each line is totally different the way it's allocated to US is to go into the development work first and then come back and apply for what those rates up but we'll give some broad guidelines on what that might mean.
Early in the new year on the new transmission lines on broadband.
Program into demand program. So we're now just starting to receive orders from the various Isps in the province. Once we have further clarity on that we'll give some guidance again I would expect even Q1 next year or Q2.
And then the final one on LDC.
Okay.
Really the elections have just occurred.
Late October .
I can say is that.
Very positive from our perspective in terms of LDC.
Consolidations, so we're going to get straight back into that the first meeting of those new administrations will be seen in late November and then we'll be straight into it. So we can give you in your guidance I think the guidance. We gave previously Linda as we target around 100 billion per year.
Acquisitions that rate base.
I think it will be slightly higher than or higher than that over the next couple of years and we will clarify that in the first quarter of next year.
Thank you and just as a follow up.
Maybe this is as much a financial as well as Ah.
Cultural question.
<unk> Chief Safety Officer resigned during the quarter as well. So I'm wondering if you could just comment on if youre seeing like a higher than historical run rate of executive and general staff turnover.
Is this part of the great resignation or are there any other trends developing that the organization needs to be mindful of and what can be done to mitigate it. If you are seeing any sort of accelerated staff turnover.
So let me answer it's bill.
Yes, we were sad that left the reality is.
She wanted to some other experience should basically been a hydro one person or whole life.
The kinds of other experienced she she is looking for she probably couldn't get here. So we wish you well and who knows someday she may come back.
I don't we have on our total voluntary resignation level is like 1% so.
I really concerned about that Noah, but we got great executives, yes, we do have we got a lot of other people that what I call. The shadow cabinet, which are ready to step up yes. We do there are some areas, where there is a great demand and so some people.
I'd be surprised if other people were trying to get with people and we have an inventory of a lot of good people. So.
Overall I don't.
Really feel the concern adjacency exit was a bit of a surprise.
Starting on Friday afternoon, but in.
Looking back at it actually it's really good for everybody just a little bit painful for me in the short term, but I would say it would be great for Ontario, he'll do a great job and I hope he is not listening to hear me say that.
Yes.
Thank you.
Thank you.
Our next question comes from the line of Andrew Kuske with Credit Suisse. Your line is now open.
Yeah.
Thank you good morning, now that you've got the J, Ralph Elisa settlements state.
And it is the real focus now on just executing the high probability stuff and the base business over the next I guess till 2020.
And then exploring opportunities for continued upside and growth in sort of other areas.
Hi, Andrew Chris.
Jay Rob gives us certainty on the execution of the wave fragrance program. So you're correct, we're focused on making sure that that.
Execution is flawless as it has been in the past it is a step up from prior amounts. So we are conscious of that and that will happen with other utilities. So we're ensuring we stay ahead of that.
We've gone out either on the energy transition as well so what does that mean.
The reason why we have these various accounts.
It used to allow for that to occur we don't have to wait for the next great application in 2028.
So we're not going to take a while.
Executing the work plan that's been approved through this.
Right application, but now focusing on the energy transition, which Ontario, and the federal government's aim now.
Now aligned on how we are going to move forward. So that's what we'll turn our attention to now.
So when you think about the separate accounts you can set up for sort of new initiatives directed by the government or the ISO.
How big could that be because theres obviously.
So that can be done through electrification.
The battery plants bring a fire or like there is a long laundry list of stocks. So I guess.
Could you help us conceptualize, how big is the potential.
The challenge Andrew is how big is it in the next two to three years, that's a tough one.
If you look out over the long term and you think about the electricity grid required to be net zero by 2035, do you think about the comp and tax accelerating industry in vehicles.
Ill liquid fuels and gas.
And then you got $2050 net zero the estimates two to three times the current electric footprint, it doesn't matter, which province arena was part of the world.
He is no different today the electricity system is 16% one six of all energy consumed in Ontario. So that is going to go up how quick that's the challenge Andrew.
If you assume that that growth stance.
Towards the back end of this decade sort of increases the growth rates up into the high single digits low double digits, but.
But the question is when and how that's that's the part I know you asked me to be clear on that I think it's the same question Linda we will be starting here early in the new year about what we can be and as soon as we know you will note and we'll be as transparent as we can.
6% rate base growth is the minimum.
It is up from here and the question now is it 123% and how fast will that occur.
Okay I appreciate the extra color. Thank you.
Thank you.
Our next question comes from the line of Maurice Choy with RBC capital markets. Your line is now open.
Thank you and good morning.
Wanted to.
It could range a little bit about how the Ontario government, perhaps approaches energy Bill affordability.
If there is any look through from what happened in Nova Scotia with regards to cap on non fuel rate increases.
Okay.
If you're asking whether we expect some sort of.
Our government action, we don't they are pretty happy with what's going on is from what I can see and I think joint radio application helps make sure that people have limit on their on their bills. So we feel we've done a pretty balanced job.
So.
I'm feeling pretty good about it Chris do you have any additional comment.
The other thing I would add.
Bill.
Thanks for the question <unk>.
The unique circumstances in Nova Scotia.
Around their exposure to commodity prices.
We don't have that answer at least in the electricity system. It's it's largely decarbonize already nuclear and hydro is the main ones. So we don't have that variability or volatility.
Have good relationships with the regulator in a really good example, here is how we've gone through the joint right application process here and got to a settlement agreement that's broadly in line with the.
The last.
Right applications, the six new transmission lines really getting ahead of that and.
And then we've got a good process in there that actually sort of ifs.
Effectively caps.
Increases in the build to residential customers at or around inflation around a 2% rate. This year that particular subsidy goes down effects.
The when I say goes down it's a lower cost to the government, but it's the same price effectively to the right place and that's because the costs are being shared across more megawatt hours or more kilowatt hours of consumption.
I think it's a really good outcome here in Ontario is very different to Nova Scotia, So I wouldn't expect those issues to transfer here.
Thanks, and my second question is about if there is any.
If you could give us a range about what type of Capex, we should expect in terms of the high speed Internet rollout brought been like is it something that is still TBD and if it's still TBD what are the variables that give you.
The contents of the high and low end of that range.
So I think again, that's the same question Hudson Linda I like how you all come up with different ways to ask the same question.
Michael.
I will I will come back in the first half of next year. So really the answer is yes. Maurice is that we are starting to receive it.
Demand program, so I think of it this way.
We've now got a various account this is what we need to spend on our infrastructure to facilitate the broadband rollout will be put into rate base and recovered.
Under the normal terms.
What we're now starting to receive those orders from the independent service providers or Internet service providers sorry.
As I come in and we get a better understanding we will give you a range.
Our estimate our early estimate it's not small, but it's not in the billions of dollars Ada So give us some time to work that out and we will come back to you with a high and low end of the range. The good news is that the program needs to be completed by 2025. So I would expect us to have very good visibility in the next six months.
Magic. Thank you very much.
Thank you as a reminder to ask a question at this time. Please press star one one on your Touchstone telephone.
Our next question comes from the line of Matthew Weekes with Industrial Alliance. Your line is now open.
Good morning, Thanks for taking my question. So just looking at the J wrap that in some of the other tailwind that to kind of augment growth in thinking about dividend growth and are expected to be in line with rate base over time. It sounds like there's some upside for for the dividend growth rates may be increase I'm, just wondering conceptually how.
Youre thinking about that.
Other capital allocation.
Maintaining flexibility for some of this started increasing the growth rate that is expected or potentially share buybacks or anything like that thanks.
Hi, Matthew Thanks for the question I think the very short answer is I would expect in the near term for the.
Dividend to follow all right.
Income growth, which will be 6%, so I'd say that in my.
Earlier comments.
As we start to think about the questions. We've had on this call about how fast will the energy transition occurring how much investment would be required. We will look at just how quickly we will match the dividend to the <unk>.
Rate base growth. So if we end up at 789, 10% something like that.
I don't believe the dividend will follow it up that high we will we will use the dividend at that point potentially to reinvest.
But what I will do and I've said this to investors in the past is will consult.
<unk> talked about in this debate about what's important to them.
And we will look at what the right mix is dividend policy versus.
Raising new capital.
I am told by most of my investors that have no objection to raising a significant amount of capital for the purpose of investing at one times rate base. So we're going to proceed on that basis, but we'll work out the right dividend policy as we come up with those high growth rates, but I would assume that next year. When we go to 6% rate base growth to a dividend will be in there.
That's a decision for the board, but Thats certainly a recommendation that argument.
Okay. Thank you for the comments I'll turn it back thanks.
Thank you and that does conclude our Q&A session for today I'd like to turn the call back over to Omar <unk> for any further remarks.
Thank you Shannon the management team at Hydro one thanks, everyone for their time with US. This morning. During what is a busy period. We appreciate your interest and your ownership. If you have any questions that we're addressing the call. Please feel free to reach out and we'll get them answered for you.
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.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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The conference.