Q4 2022 Hydro One Ltd Earnings Call
Speaker 1: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11.
Speaker 2: load.
Speaker 3: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand it's raised. To withdraw your question, please press star 11 again. As a reminder, the call is being recorded.
Speaker 3: I would now like to introduce your host for today's conference, Mr. Omar Javed, Vice President Investor Relations at Hydro One. Please go ahead.
Speaker 4: Good morning and thank you for joining us in Hydro One's quarterly earnings call.
Speaker 4: Joining us today are President and CEO David Lieberter and our Chief Financial Officer Chris Lopez.
Speaker 4: In the call today, we will go over our quarterly and annual results and then spend most of the call answering as many of your questions as time permits.
Speaker 4: There are also several slides that illustrate some of the points we'll 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 HydroOne's website in the Investor Relations section under Events and Presentations.
Speaker 4: Today's discussions will likely touch on estimates and other forward-looking information.
Speaker 4: You should review the cautioning language in today's earnings release and our MDNA, which we filed this morning regarding the various factors, assumptions and risks that could all 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 David Leverer.
Speaker 4: Thank you Omar, good morning and thank you for joining us for our fourth quarter earnings call. This morning I will talk about our fourth quarter, our annual achievements and a look forward. Chris will then take you through the financial results in greater detail. I'm excited to take on the role of the CEO of Hydro One and to continue to work with all our employees across Ontario.
Speaker 4: As many of you know, I've been the COO with Hydro One for the past three years. And I've seen firsthand the hard work and dedication that our teams bring to organizations every day.
Speaker 4: Together we have achieved great success and I'm confident that we will continue to successfully execute our strategy in the years to come. Our top priority as CEO will be to maintain our focus on safety, meet our customers expectations, drive operational excellence, and improve our customer experience.
Speaker 4: and invest in our teams to ensure we have the skills and capabilities to meet the demands of the future. In short, we will continue to focus on executing our strategy.
Speaker 4: As we move into 2023, I want to assure our employees, shareholders, partners, and stakeholders that the transition from Bill Sheffield's leadership to mine is smooth and seamless. Our priority is to maintain the momentum.
Speaker 4: I am proud of the results we have achieved. Our strategy, people, culture and values are what have made Hydro One successful. I'm committed to building upon that foundation, delivering on our promise to our customers and stakeholders.
Speaker 4: In Q4, we built on the momentum of the first three quarters and achieved outstanding safety results. Our focus on and commitment to protecting the wellbeing of our employees has truly paid off, as demonstrated by our record low recordable and serious incidents.
Speaker 4: I am proud of the dedication and hard work that has gone into making our workplace safer. While we have made good progress, we have much more work to do. Safety will always be a priority as we continue to make the workplace safer.
Speaker 4: In 2022, Hydro One achieved our best safety results ever and made significant progress to preventing life-altering injuries and fatalities. Our workplace was safer in 2022 than it has ever been because we had a good plan, the Safety Improvement Plan, which we created with our employees two years ago, and because the entire organization was committed to that plan.
Speaker 4: The results speak for themselves.
Speaker 4: Hydro One's reportable injury of 0.616 for 200,000 hours is well below the world-class benchmark of 1.0.
Speaker 4: Hydro-1-cell significant improvement in the number of high-energy serious injuries over 2021, with only one employee sustained a high-energy serious injury in 2022, compared to the 4 in 2021. This equates to a high-energy serious injury in fatality or each refute c It TB.
Speaker 4: of 0.012 for 200,000 hours, well below our annual target of 0.066. We are well on our way to eliminating all serious injuries and fatalities by 2024.
Speaker 4: Our safety results are even more impressive when considered in relation to the adverse storms of 2022.
Speaker 4: Our crews, who are committed to providing the highest level of service to our customers, restored power to nearly 760,000 customers after the directional storm in May.
Speaker 4: Spent weeks in Maritime Canada rebuilding their system after post-tropical storm Fiona, and then restored power to approximately 550,000 customers during the December holiday season storm.
Speaker 4: While these storms adversely impacted our reliability statistics, I am pleased to report there were no reportable incidents during those events.
Speaker 4: In addition, we are once again recognized by the Edison Electric Institute for our efforts following the May Dorachos. This is our 13th Edison Electric Institute Award.
Speaker 4: In late November , the Ontario Energy Board approved our five-year joint rate application. This was a culmination of years of work for many people and established the Clear Path forward. The rate application was approved because, through the largest customer at Reach Ever, we knew what Ontarians wanted. We demonstrated year-over-year productivity savings.
Speaker 4: We were responsive to the concerns of interveners and had built an investment plan which met the evolving needs of our customers while keeping place of the maintenance and growth needs of the transmission and distribution system.
Speaker 4: We believe this plan will benefit all Ontarians by ensuring we are able to provide safe and reliable electricity for years to come.
Speaker 4: I also want to recognize our regulator, the Antara Energy Board, for their constructive process. It is only because we submitted a strong investment plan into a robust regulatory process in which all participants, interveners, the Antara Energy Board regulators, and Hydro1 display the high level of cooperation that such a complex case was settled so quickly.
Speaker 4: Now let's be proules behind us. It's all hands on deck, executing our best one plan, and delivering on our promises to our customers and stakeholders. I have no doubt that every person, HydroOne will continue to execute their work to the best of their abilities.
Speaker 4: Once again, we met our capital investment commitments. This year we deployed $2.132 billion of capital and in service $2.267 billion of assets.
Speaker 4: I am pleased to say we have done this will be an extremely mindful of process.
Speaker 4: Every dollar we invest comes at a cost to our customers, which is why we are committed to spending wisely and can slowly improve in productivity.
Speaker 4: In 2022, we achieved product service savings of $374 million, which represents an 8.6% increase year-over-year. In 2022, we achieved product service savings of $9.2 million, which represents an 8.6%
Speaker 4: Total productivity savings since 2015 now amounts to almost $1.5 billion. This is a remarkable effort, especially considering inflationary pressure space this past year.
Speaker 4: We operate in the traditional and treaty territories of more than 100 indigenous communities. In 2022, we were proud to announce historic partnership model of First Nations when building new transmission lines. This partnership model reflects our commitment to reconciliation, sustainable development, inclusivity, and being a responsible corporate citizen.
Speaker 4: By working together, we aim to create long-lasting benefits for Indigenous people, Ontarians and Hydra I.
Speaker 4: The Hydro One Equity Model offers First Nations a 50% equity stake in new transmission line projects with a value exceeding $100 million and will transform the benefits of infrastructure development for First Nations.
Speaker 4: We believe that this collaboration sets an example for the industry and demonstrates the power of listening, respect, and seeking YouTube beneficial outcomes in infrastructure development.
Speaker 4: As part of our commitment to be an trusted partner in Indigenous communities, this year we also increased total procurement with Indigenous businesses to 95.9 million, our highest spend to date. This is a significant increase from last year and has this well-on-adjurned purchase by percent of our materials and services from Indigenous businesses by 2026.
Speaker 4: The Indigenous Procurement Target is one of the many goals that are included in our updated sustainability report that was released in August .
Speaker 4: At Hydra One, we take our commitment to people, planet, and community seriously, and we'll continue to keep you informed of our annual progress report. Following the release of the Sustainability Link pricing on our lines of credit in January 2022, we recently published our Sustainability Financing Framework in January 2023.
Speaker 4: The framework, which is a first for a utility in Canada, allows higher one and its subsidiaries issue sustainable financing instruments such as sustainable and green bonds and allocates the net proceeds to investments in eligible green and social project categories.
Speaker 4: The frameworks were so well received that we issued Hydro One's first medium firm notes in accordance with the Sustainability Financing Framework. This was the largest aggregate amount of issuance of sustainable bonds by a corporate issuer to date in Canada.
Speaker 4: looking out for people
Speaker 4: The planet and communities has ingrained in the DNA of our organization. Hydro1 employs personally raised approximately $1.6 million in the annual power to give month last September . More than doubling what was raised year before. Visit commitment to serving others and doing the right thing to make Hydro1 such a special place to work.
Speaker 4: For the eighth consecutive year, Forbes recognized Hydro One as one of Canada's best employers. It's an honor for me to leave this committed and dynamic group of people.
Speaker 4: Looking ahead, I see tremendous opportunities for Hydro One. Ontario and Canada are building an economy more reliant on clean electricity. The Independent Electricity System Operator, or ISO, estimates that attaining a decarbonized electricity sector by 2050 will require a system more than double the size it is today.
Speaker 4: at an estimated cost of around $400 billion.
Speaker 4: Hydro One has the unique opportunity to be a leading player in achieving that goal.
Speaker 4: If I take on the leadership role, I'll hide your one. My top priorities are one. I'm sure our state's journey continues.
Speaker 4: to fill the vacancies on our executive team, and three remain disciplined and execute our maintenance and capital investments.
Speaker 4: As I conclude my remarks, I want to thank Bill Sheffield, who stepped in from the board at interim CEO and the company needed him. Bill, I know you're listening to today's call. On behalf of the company, the executive team and myself, I want to thank you for your service to the company that shareholders, partners, customers, and stakeholders. Thank you.
Speaker 4: Your leadership and dedication to ensuring a smooth transition has not gone unnoticed, and I'm truly grateful for your unwavering support.
Speaker 4: Your guidance has been invaluable and has set a strong foundation for my role as incoming CEO . I am confident that your contributions will have a lasting impact on Hydro One and I am eager to build on the progress that you have made. With that, I will turn it over to Chris to discuss our financial results. Over to you, Chris.
Speaker 5: Thank you, David. Good morning, everyone, and thank you for joining us today.
Speaker 5: David, I'd like to extend my sincerest congratulations on your appointment as CEO . Your leadership, strategic vision and passion for excellence have been evident in your previous role and I'm confident that you will bring that same energy to this new role.
Speaker 5: Your unwavering commitment to our mission and values will be instrumental in driving the company to new heights.
Speaker 5: I look forward to working with you and our talented team at Hydro One, as together we continue to strive towards achieving our goals and creating long term value for our stakeholders.
Speaker 5: Once again, congratulations.
Speaker 5: In terms of our financial results for the quarter, earnings per share was 30 cents compared to 27 cents last year. For the full year, EPS was $1.75 compared to EPS to $1.61.
Speaker 5: The main drivers of the higher earnings this year were consistent with our experience throughout the year.
Speaker 5: They were higher revenues on account of approved rates, which considered our annual investment in the grid and power system, strong electricity demand experience throughout the year, and recognition of conservation demand management or CDM revenues, a one-time item in the fourth
Speaker 5: These drivers were partially offset by higher operations, maintenance and administration or OMNA expenses on account of higher work programme expenditures including environmental management, stations and line maintenance and IT initiatives.
Speaker 5: Higher depreciation, amortization and asset removal costs due to the growth of our capital assets, partially offset by the sale of surplus property, a one-time item in the fourth quarter.
Speaker 5: higher year-over-year financing charges due to the recognition of carrying charges for the deferred tax asset or DGA recovery amount last year, and higher interest rates on short-term notes.
Speaker 5: the financing charges due to the recognition of carrying charges for the deferred tax asset or DTA recovery amount last year and higher interest rates on short term notes, as well as higher income tax.
Speaker 5: due to increased pre-text earnings partially offset by higher deductible timing differences.
Speaker 5: As a reminder, we adjusted for the amounts pertaining to the DTA implementation decision in both revenue and income tax, making them net income neutral.
Speaker 5: Similarly, we had a tax recovery relating to the capital overhead tax variance. In both transmission and distribution, following the joint rate application or J-BAT decision, which resulted in a reduction in both revenue and income tax. Once again, making this net income neutral.
Speaker 5: While our costs were higher this year, I did want to echo David's comments that we continue to be highly productive. As a result of our efforts, we were pleased to give back approximately $23.5 million to our customers via the earnings sharing mechanism.
Speaker 5: as both our transmission and distribution businesses performed very well this year.
Speaker 5: On the productivity front, we achieved $374 million in productivity savings in 2022, which brings our cumulative productivity gain since the initial public offering to approximately $1.5 billion.
Speaker 5: We saw meaningful increases in productivity in areas such as operations and forestry.
Speaker 5: Overall, productivity was weighted evenly between capital and OMB.
Speaker 5: Through these achievements, we are delivering on our multi-year commitment to keep costs as low as possible.
Speaker 5: Turning to the fourth quarter, net income to common shareholders was higher year over year by 11.9%.
Speaker 5: Key drivers of the quarter were higher revenues due to approved rates.
Speaker 5: Two one-time items, one in revenue and one in depreciation, as mentioned previously, and upon which I will elaborate further during this call, as well as lower taxes.
Speaker 5: which was partially offset by higher O&M.
Speaker 5: Our fourth quarter revenue net of purchase power was higher year over year by 11.8%.
Speaker 5: The increase is mainly due to revenues resulting from the Ontario Energy Board, or OEB, approved 2022 rates, as well as regulatory adjustments, including the recognition of CDM revenues, following the receipt of the J-RAP decision, net-up earnings sharing.
Speaker 5: For the transmission segment, revenues were higher by 14%.
Speaker 5: This increase reflected the recognition of the one-time CDM revenues arising from the J-RAP decision on account of the disposition of the variance account associated with CDM revenues from 2018 and 2019.
Speaker 5: Going forward, we did not expect there to be any material amounts for CDM revenues from prior years as this account is now closed.
Speaker 5: The CM revenue's
Speaker 5: were partially offset by a higher earnings sharing adjustment for 2022 that is recorded in the fourth quarter. Additionally, we had higher transmission revenues due to OEB-approved rates for 2022. Year over year peak demand for the quarter was relatively flat, driven by marginally weaker demand in all three months compared to the same period last year.
Speaker 5: For the distribution segment, revenues net of purchase power were higher by 9.9%.
Speaker 5: The main drivers were the OEB approved rates and positive regulatory adjustments net of earnings sharing for 2022 compared to last year.
Speaker 5: Consistent with the annual analysis, both the transmission and distribution segments had net income neutral items included in revenue resulting from the DTA implementation decision and the capital overhead tax variance.
Speaker 5: The corresponding offsets are in tax expense making them net income neutral.
Speaker 5: On the cost front, operating, maintenance and administration expenses were higher year over year by approximately 39%.
Speaker 5: This represents approximately 75% of the annual increase in Oaminates.
Speaker 5: Ulmanay was high in the transmission segments due to higher work program expenditures which included maintenance on stations and lines.
Speaker 5: higher corporate support costs and higher property taxes.
Speaker 5: which were partially offset by lower project rados.
Speaker 5: In the distribution segments, OMNA was hired due to higher work programming to enable development better and affordable lookin for overhead work,
Speaker 5: a higher volume of emergency restoration and environmental management, higher spend on IT and customer programs, as well as higher corporate support costs and project write-offs in comparison to last year.
Speaker 5: The level of OMNA expense is consistent with our expectations that have been outlined in previous calls as we caught up with our work programs that were deferred on accounted storms earlier in the year.
Speaker 5: Depreciation expense for the fourth quarter was lower year over year by 6.5%.
Speaker 5: due to a one-time gain realized on the sale of surplus property to the City of Toronto to facilitate transit.
Speaker 5: This was partially offset by higher depreciation from the increase in capital assets, which is consistent with our state of capital investment program and higher asset removal costs.
Speaker 5: On financing, we saw an increase of 4.1% in interest expense in the quarter due to a high weighted average rates on short term notes, partially assessed by gains on interest rates
Speaker 5: As I said mentioned, on January 12, 2023, we announced that the Stateable Finance in Framework. Under this framework, we can issue green, social or sustainable bonds, loans or commercial paper for several purposes.
Speaker 5: The use of proceeds allows us to raise financing for initiatives including the transmission distribution of clean energy.
Speaker 5: Smart grid technology and other uses that promote energy efficiency.
Speaker 5: Facilitation of clean transportation, including EVs.
Speaker 5: biodiversity conservation
Speaker 5: climate change adaptation
Speaker 5: social economic advancement of indigenous peoples, and access to essential services like broadband.
Speaker 5: On 27 January 2023, Hydroland Inc. issued an inaugural offering of $1.05 billion of medium-term notes under the Sustainable Financing Framework.
Speaker 5: This consisted of 300 million maturing in 2029 with a coupon rate of 3.93%.
Speaker 5: 450 mm during in 2033 with a coupon rate of 4.16%, and 300 mm during in 2053 with a coupon rate of 4.46%.
Speaker 5: This was the largest aggregate corporate sustainable bond issuance in Canada and a further demonstration of our strong commitment to sustainability.
Speaker 5: We continue to be pleased with the stability of our balance sheet and robust investment credit rate.
Speaker 5: As we look forward, we will continue to access the debt markets opportunistically.
Speaker 5: Income tax expense was 41 million for the quarter compared to 55 million in the same quarter last year.
Speaker 5: The decrease in income tax expense was due to high deductible timing differences.
Speaker 5: and net income mutual items that are also capturing revenues.
Speaker 5: These are partially assessed by taxes on higher earnings for the quarter.
Speaker 5: The effective tax rate this quarter was 18.6% versus the effective tax rate last year of 25.5%.
Speaker 5: On a full year basis, income tax expense for 2022 was $288 million compared to $178 million in 2021.
Speaker 5: The increase in income taxes primarily due to the net income neutral items discussed earlier. And higher pretext earnings partially offstead by higher deductible timing differences.
Speaker 5: The effective tax rate for 2022 was 21.4%, versus 15.5% in 2021.
Speaker 5: This is consistent with the annual guidance with the VITA last year of 14 to 22% over the next five years.
Speaker 5: Following the approval of the Joint Great Application and the Corresponding Capital Plan, we are now updating the ETI guidance to 13 to 16% over the next five years.
Speaker 5: with the most significant impact occurring in 2023 due to the recovery of the previously shared DTA amounts.
Speaker 5: Moving to investing activities, capital investments for the fourth quarter were 570 million, which is a 7.1% increase from the fourth quarter in 2021.
Speaker 5: The increase came primarily from the distribution segment which had a higher spend on storm related asset replacements and higher volume of work on customer connections.
Speaker 5: There was an marginal increase in the transmission segment which had a higher volume of refurbishment and replacement work on transmission stations and lines and a higher volume of work on wood poles.
Speaker 5: This was partially a state by a lower volume of work on health and the connections.
Speaker 5: For the full year 2022, capital investments were relatively flat with a 0.3% increase compared to the full year 2021.
Speaker 5: You'll also notice the future cabinet investment profile for both segments have been updated since LHR's call.
Speaker 5: The primary reason being to reflect the adjusted timing and pacing of future capital investments and reprioritization of work.
Speaker 5: The overall increase in transmission capital reflects the projects that are outside of the joint grade application.
Speaker 5: In the fourth quarter we place over billion dollars of asset in service for our customers.
Speaker 5: A 38.7% increase compared to the prior year.
Speaker 5: The year-over-year increase in the transmission segment of 44.7% related to completion of large replacements for end-of-life air blast circuit breakers, higher customer connections, timing of IT initiatives, and refurbishment and replacement of transmission lines.
Speaker 5: In the distribution segment, the 26.8% increase was on the count of the partial in-servicing of a feeder development project.
Speaker 5: storm related assets replacement, and miscellaneous assets placement service for IT initiatives and customer connections.
Speaker 5: On a full year basis, assets placement service were higher by 29%.
Speaker 5: On guidance, as most of you know, we are unique in the Canadian utility sector because we provide earnings guidance along with projected rate base and targeted dividend growth estimates.
Speaker 5: This not only demonstrates the confidence we have in our ability to execute, but also the stability and predictability of our earnings in our business.
Speaker 5: As promised, we updated our own guidance to reflect our view of the next five years. We have also provided normalised earnings for 2022, which can be used as a waypoint for our gardens.
Speaker 5: The update is slightly available in the investor presentation that is posted on the website.
Speaker 5: Our view of normalised basic EPS is $1.61, after adjusting for items that we view as non-recurring, and for rebasing due to the new rate period commencing in 2023.
Speaker 5: Starting at the 2022 report at EPS of $1.75, we make two adjustments for one-time items that we discussed earlier on this call.
Speaker 5: The gain on sale of surplus property sold to the city of Toronto.
Speaker 5: and the recognition of the disposition of the CDM revenues that were approved as part of the joint rate application.
Speaker 5: The resulting figure is an EPS for $1.67 that has been normalized for one-time items.
Speaker 5: This is slightly above the target of 47% EPS growth. A possibility we communicated in last quarter's call.
Speaker 5: We then normalise earnings to factor in the allow return on equity or RLE for both segments, as well as 100 basis points of potential overrun.
Speaker 5: This step is necessary to rebase for all the productivity savings, favorable demand, and an effective low interest rate that will now benefit customers in the next rate period.
Speaker 5: The rebasing is a great example of a constructive regulatory incentive rate-making model that has worked as intended to deliver positive outcomes for the long-term benefit of the customer.
Speaker 5: The resulting normalize VPS for 22 is $1.61.
Speaker 5: With that waypoint in hand, we move to the future.
Speaker 5: We are updating our guidance and introducing a range of EPS for 2027 of $2.5 to $2.26.
Speaker 5: This range translates into a compound annual growth rate of 5% to 7% over the period 2022 to 2027 on normalised DPS of $1.61 in 2022.
Speaker 5: The long-term projection rate-based growth currently stands at 6%. It could be expected that dividends with the approval of the Board of Directors would follow this level of rate-based growth.
Speaker 5: Finally, we anticipate funding this growth through internally generated cash.
Speaker 5: with no need for external equity insurance.
Speaker 5: As important as it is to know the growth figures, it is equally important to know what is not included in this forecast and how we intend to update it.
Speaker 5: The UPS growth range does not factor in growth from broad bands.
Speaker 5: That will be seeking distillation.
Speaker 5: and five of the six transmission lines that have been previously watered to us, but only have preliminary estimates.
Speaker 5: as well as any amounts from externally driven variants accounts.
Speaker 5: We will update silence if there is a material change to the growth range when we have further clarity and concrete estimates on these specific initiatives.
Speaker 5: Furthermore, we will not provide quarterly or annual reconciliation going forward unless a material event that impacts the guidance discussed here.
Speaker 5: We also don't expect to provide rolling guidance. Future guidance is expected to mirror the term of the RAID pilot.
Speaker 5: This is an exciting time for Hydro1. We have a strong culture of performance. This has proven to our historical ability to deliver on our predictable capital plan and our ability to realize significant operational efficiency year over year.
Speaker 5: We have plans to grow our business through investment in our aging assets and in support of the growing Ontario economy.
Speaker 5: Lastly, we have a strong balance sheet that provides stability and underpins our growth plans.
Speaker 5: Also there, and we'd be pleased to take your questions.
Speaker 4: Thank you, David and Chris. We asked the operator to explain how they'd like to organize the Q&A polling process. In case we can address your questions today, my team and I are always available to respond to all of questions.
Speaker 4: 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.
Speaker 4: question and one follow up. If you have any additional questions, we request you to rejoin the queue. Please go ahead.
Speaker 6: Thank you.
Speaker 3: As a reminder, to ask the question, please press star 11 or your telephone and wait for your name to be announced.
Speaker 3: To withdraw your question, please press star 111 again.
Speaker 3: Please stand by while we compile the Q&A roster.
Speaker 3: First question comes from the line of Robert Hope with the Scotiabank you on his note.
Speaker 4: Good morning, everyone. David, the question for you, what has been your focus in the first few days as CEO ? As you look for, they do appreciate kind of the priorities that you did lay out in your prepared remarks. But diving into that a little bit deeper, any areas where you want to focus on more than has been a focus in the past?
Speaker 7: Good morning, Robert. Thank you for joining us on the call today.
Speaker 7: Clearly, my focus on the first few days, weeks in this role has been reestablishing the executive team. Fill in the vacancies that we do have, and I'm very confident we're going to build a fill. Then from internal, we have a strong bench strength that people come in up within the organization as was evidenced by my promotion into the CEO role.
Speaker 7: In terms of the other priorities, there's not much more detail I'd like to actually provide. Safety continues to be paramount focus for us. It's been a long-term goal of ours to reduce all fatalities and serious injuries, and one which I indicated in my prepared remarks that we're well on our way to. And then maintaining our focus on delivering...
Speaker 7: or execute on our maintenance and capital programs. That is really our priority. And that's how we live up to our promise to our shareholders, our stakeholders, and our customers.
Speaker 4: Thanks for that. And then maybe a little bit more of a detailed question. On the broadband opportunity, you spoke quite a bit about that with your last quarter results. When you take a look at the opportunity set in front of you, how are the opportunities coalescing and when would you expect to see meaningful capital being put to work?
Speaker 7: So the bad extent of the program is really driven by their pace. We started to see some ramp up in the back half of 2022. We're continuing to see some increased activity right now. We expect that to accelerate through 2023 and onward towards that completion date of 2025.
Speaker 8: Appreciate the color. Thank you.
Speaker 6: Thank you.
Speaker 3: Our next question comes from the line of Linda Ezegales with PD Security, she'll let us know.
Speaker 9: Thank you. I'm wondering if you could help us understand some of the elements or potential opportunities that are not embedded in your guidance. What could that add potentially to your earnings growth outlook? What's the magnitude?
Speaker 5: Hi, I'm Dr. Chris. Thanks for that. So what we attempted to do here in the Guides is...
Speaker 5: So, you stay consistent to what we know previously for 2019 to 2022, which is show the base growth rate, which is what we're showing you here, 5 to 7%, which really tracks the 6% in the joint rate application effectively. So that's the midpoint. Things I can force that up, or can help us go above that would be...
Speaker 5: you know, earning the above 100 basis point over a home, which is good for everybody if we get there by 2027, because it means that we can give more back to our customers. Savings off interest rates, for example, if we can secure rates that are lower than what was previously secured. A good example was the reason when we just did have some benefit on that, so if we continue to do that in time, those...
Speaker 5: allocations that would be useful. But I think what you're asking is what additional investments could come in. So broadband was already asked and I think what the question that Robert had was you know when could be expected some guidance on that number. The more insight we get into the demand program broadband that's going to have confidence in bringing that forward.
Speaker 5: I've said in the past, it could be anywhere from, it's in the hundreds of millions, it's not in the billions, it could be half a billion to a billion dollars. We won't know that until we see more of this demand coming through you. So that's one example. The other one is the transmission lines. We said five of the six are not included. So the only one that's in here right now is Chatham Telector of 268 million.
Speaker 5: Again, I don't have an estimate for you today of what each transmission line is worth. You can have an assessment yourself, but again, that can be in the hundreds of millions. And then the final one is the acquisition of LBCs. And it's set out on the slide on the website. And that one there, we target 100 to 200 billion per year.
Speaker 5: So they can add another certain amount. I've said that one in the past for every hundred million that we acquire of rate base, it's about one cent per credit. So those items are not in this guidance range. So if they came through in any material way, it would cause us to re-usure guidance and it would push us above that range.
Speaker 9: Thank you. And just as a follow-up, in your core business, you've got an approved joint rate application. Clearly some opportunities there to benefit all stakeholders as you execute and implement your plans around that.
Speaker 9: What are the priorities in the milestones of putting things in place to pivot to that new regime, and where do you see the challenges in executing that?
Speaker 7: morning, Linda, Steve, it all on that question.
Speaker 7: The joint rate application is very consistent with our previous strategy. We're focusing on our investments, maintaining our assets and new builds as Chris outlined. So there's really no change and there won't be a pivot as we move forward.
Speaker 9: And where do you see the biggest challenges like continued inflationary pressures or attracting and retaining the right talent to execute that?
Speaker 7: Yeah, my apologies for about the second half of your question, so thank you for reminding me. The challenges are it's actually going to be the inflationary pressure.
Speaker 7: So far we've experienced about 6%. It is different by category. I'm really pleased that the way our team has responded that inflationary pressure. We've looked at alternative sources of supply. We've purchased long lead times in ahead of purchase long lead time items. A lot of our procurement has locked in rates that are formulately driven based on the price.
Speaker 7: to come work for us. Now there are a few sectors that are a bit more challenging for us, IT, cyber security being too, and they come to mind. But today we've been very successful in filling the vacances we have in acquiring the talent that we need to continue to deliver on our strategy.
Speaker 9: Thank you and congratulations on your promotional jump back in the queue. Thank you.
Speaker 3: Thank you. Our next question comes from the line of Darius Lozni with Think of America. You'll let us know.
Speaker 10: Hey guys, good morning and thank you for taking my questions. First one is I just wanted to maybe reconcile a couple of the statements made in the opening remarks and in your presentation. So I understand that over the long term you're targeting a 70 to 80% dividend payout range. I think
Speaker 10: with the dividend update this morning, you're tracking a little bit below that. So curious if you could maybe speak to those dynamics a little bit, as far as relative growth rate of the dividend payouts over this five-year time frame that you laid out the new EPS gig or four.
Speaker 5: Thanks, Daris. It's Chris, you're correct. So we didn't have an increase this morning. We've traditionally done that in May and you can expect that to occur in May of this year. We have not changed the target. It is 70 to 80%. There will be an increase recommended to the board. I'll need to approve it.
Speaker 5: but there will be an increase recommended and I would expect in those remarks, as I said, that the dividend increase would track our rate base growth. So in the past, it's been around five and I expect it to be six going forward. So you can expect that in May. And I think that will get closer to your number, there is. I think we're in the low 60s right now.
Speaker 5: it'll take you up into that 70 range. The law render that which again we're very pleased with our balance sheet and gives us a lot of flexibility for growth moving forward.
Speaker 10: Great. Thanks for that, Chris. And actually, you alluded to my second question in your response, there. Just wanted to ask about the specific headroom that you have on your balance sheet, as far as obviously we're talking quite a bit about upside to your 5 to 7%.
Speaker 10: as far as LVCs, acquisitions, transmission projects, etc. At what point assuming that those pieces of upside materialized would you anticipate needing additional financing, including potentially external equity throughout this five-year plan?
Speaker 5: So, Derek, I said earlier, based on the joint rate application itself, no need.
Speaker 5: LDCs are interesting because we end up getting synergies of them very early on, so they're actually not dilutive to our borrowing capacity. So effectively, for the smaller ones, it's quite supportive of our debt metrics. So we would not need it for the smaller ones.
Speaker 5: Now, if we had a very large capital program on transmission, for example, that's where you might need it, but it wouldn't be in this five years, because remember, we only balance up equity and death when we actually put the asset in service. So, you know, if new transmission lines are announced, beyond the five or the six that have already been announced, it's unlikely that we're going to service by 2027.
Speaker 5: So the time we would need equity would be on this five-year period in any case. So I'm fairly confident that the requirement for equity is very low in this period. It's non-existent right now. I don't see a position where that would come in the next five years.
Speaker 10: Okay, terrific. Thank you for those responses. I'll pass it along here.
Speaker 3: Thank you. Our next question comes from the line up, David Quasata with Raymond James, she'll let us know.
Speaker 11: Yeah, thanks. Excuse me. Morning, everyone.
Speaker 11: Just one for me, just curious when you look over your net, over your coming five years and thinking about, I guess, things that are not in your capital plan. I know that in the province of Ontario there's new storage capacity that's going to be integrated, potentially some additional renewable and other generation sources. So I'm just curious if you see any opportunities there incrementally over above your current plan.
Speaker 7: As always, we will always connect customers, whether they be load customers or generation customers that come along. As you can imagine, the energy transition or electrification of Ontario's economy is really just starting to pick up steam. We're watching all this and we're paying attention to it. We're really excited by the ISO's independent electric system operators.
Speaker 7: report on pathways to decarbonization and that points to as you pointed out rightly so increased investments and batteries and renewable generation. So we're following all that we're inactive in the discussions with the ISO as well as the entire energy board as well as the province of Ontario and how this plays out so we remain an active participant in a facilitator.
Speaker 5: I think David, just one thing to add to that would be that similar to the question we had earlier on when would those material investments come up and even in pathways is a material amount of that opportunity would be outside this 2027 period. So when we're providing guides today for 2027.
Speaker 5: We will update that on our next application as well, as we've done in the past. And that's when you could expect to see more of those kind of opportunities come out. There's more and more discussion on them. There are more announcements being made, but it's still going to take time for those investments to be made and put into the system.
Speaker 3: Excellent. Thanks very much for the color. Appreciate it. Thank you. As a reminder to ask a question at this time, please press star 111 or you touch the telephone.
Speaker 3: Our next question comes from the line of Murray's Choice with the RBC Capital Markets. You'll find it's now open.
Speaker 12: Thank you and good morning. Just want to fall up on the guidance range. Chris, you mentioned that the approach in designing this guidance is the same as when you put out the 2022 guidance.
Speaker 12: And in deriving this $61 normalizing PES-1222, you remove 6 cents for 100 basis points over earn.
Speaker 12: When we look at the 205 and 226 for 2027, does that include the 100 basis points over earn or put differently any reason why we shouldn't expect you to also deliver this over earn over the next five years?
Speaker 5: Hi, Marie. Thanks for the question. The 100 basis points is in both numbers. So in the guidance we put forward back in 2019, we took it out of the starting number and we left it in the back end and that sort of tilted the roads right up. So in this one here.
Speaker 5: we have left 100 basis points in the base year and it's in the final year as well to show we expect we won't we may not reach it in every year but we would expect that over five years you would absolutely reach that number and that's part of incentive rate making is that we are encouraged to do that or incentive to do it
Speaker 5: because our customers benefit from it in the future. So in short, Marie, it's in both numbers. And we're committing to achieving that for the benefit of all stakeholders. Thank you very much.
Speaker 12: Perfect. And maybe just a follow up on a DPS question earlier on about your dividend payout ratio. Suppose you get into a situation where your EPS obviously outstrips your DPS growth.
Speaker 12: When you think about the next five years and the propensity for this to be perhaps on the lower end of your dividend payout ratio, what would propel you to, or motivate you to consider increasing that rate or even changing your target payout ratio to be perhaps closer to some of your
Speaker 5: peers, and self-liter water? Yeah, so I think Marie, it's always a matter for the board, and I get the lucky position of recommending what we should do about the board will approve it. My thoughts are this, that look, it's a way of financing new growth. We don't have any restriction right now on how we're going to finance new growth. So.
Speaker 5: The dividend will absolutely match our rate-based growth. I could see at 6% we have no challenge with that. At 7, it still would be okay. So I would see it tracking at that point. It's when you get up, if I think about, you know, David spoke about ISO pathways and so on, beyond 2027.
Speaker 5: when you start getting into much higher growth rates that are potentially there, that's when we would think about do you chase the dividend payout all the way up or do you use that as a form of financing? You know what I would do when I said it before, Marie says I would consult with share holders and all stakeholders to work out what is the best way of financing that growth for the longer term?
Speaker 5: because there are shareholders that depend on the dividend payout. So we would look at all forms of financing, but I don't see any need to change it at this point. It will be 70 to 80. I think it would, if rate-based went up to 7%, it would chase it to 7. And we'd look at it as and when needed. So I don't expect any change or departure from that policy.
Speaker 11: Thanks, good morning, everyone. Wanted to come back to the Pathways Decarbonization DA, so report. In 2021, you guys were awarded or directed to advance some transmission projects. Given the sort of grander scope on the Pathways Decarbonization, what do you think the process going forward is? You expect them just to continue to direct projects as needed, or do you think you start to become sort of longer term planning here?
Speaker 7: Director Awards to Hydro One. We've also seen direct awards to other people, other organizations with respect to transmission infrastructure. It's unclear at this time how the government plans to award transmission in the future.
Speaker 7: I know it's a topic they're discussing at Queen's Park and what approach they're going to take. We're certainly actively involved participating recommendations. But at this point it really is in their bulk park and we hope that they decide to award them to Hydro One. But if they were to go down the path of competitive transmission, we're quite prepared to compete with anybody else.
Speaker 13: Okay and then Chris coming back to you in terms of some assumptions on the
Speaker 13: EPS growth. Just to clarify whether or not there's any change in view in terms of whether financing costs interest expenses a drag or a net positive and then maybe you just elaborate in your comment around the most recent sustainable financing in the potential positive impacts it has in terms of EPS. Yeah. Thanks, Buck. So in short, we've not in this range for us to go above so you've got a six percent rate phase growth.
Speaker 5: for us to go above six, a way that we could do that is by achieving better all-in financing costs. So it's not included in the base number, but it's included in the range, if you like, as a way of getting above six percent growth and into the higher end, like seven, for example. And we did quite well in the last period because rates were accommodative.
Speaker 5: We're fairly confident that opportunities will come. Again, we maintain a lot of flexibility on our balance sheet, so we can do that. So my point Mark about this last financing, is we managed to time that at the right point if I was to issue it today, those rates are already 30 to 40 basis points higher than where they were when we did the issuance a few weeks back now.
Speaker 5: So it's capturing those moments throughout the year. If we can do that, and we're very successful in doing that in the last rate period. If we can do that, we actually get lower all in rates over this period. And a benefit to everybody. It benefits our shareholders now, because you'll get a 3-D rate period. And when we go back in for a new race, the rate pay gets to benefit over the longer term. So.
That's what I was talking about. On the last one, we did the sustainable bond itself. We got a greenium, so it was pleasing to see that when you do all the work and you're a good ESG citizen, that there is a benefit to that. And there was three to four basis points. So again, not a lot, but it shows that there is...
some spread now for that kind of activity. And again, all in lower cost of financing. Every time we do this, it's the gift that keeps on giving. It gives today, it gives for the next five years to the shareholder, and after that, it gives for the next, in the case of the 30-abond, another 25 years to our customers. Understood. OK, thanks, Chris.
Thank you, and the concludes our Q&A session for today. I'd like to turn the call back over to Omar Javed for any further remarks.
Thank you, Shannon. The Management Team in Hyderone. Thanks everyone for their time with us this morning during what is a busy period. We appreciate your interest and your ownership. If you have any questions that weren't addressed on the call, please feel free to reach out and we'll get the answer 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. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.