Q1 2023 Hydro One Limited Earnings Call
Good morning, ladies and gentlemen, and welcome to the Hydro one limited's first quarter 2023 analysts teleconference.
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The call is being recorded.
I would now like to introduce your host for today's conference Mr. Omar Vice President of Investor Relations at Hydro one please.
Please go ahead.
Okay.
Good morning, and thank you for joining us and hydro <unk> quarterly earnings call. Joining us today are our president and CEO , David <unk>, and our Chief financial and regulatory Officer, Chris Lopez.
In the call today, we will go over our quarterly 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 our.
We will address in a moment it 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 David Levin.
Thank you Omar and good morning, and thank you for joining us on our first quarter earnings call.
This morning, I'll provide an update on our recent activities and Chris will then take you through the financial results in greater detail.
First let me start by acknowledging the efforts made during the significant storm that occurred during the Easter holiday, even though were 396000 customers without power freezing rain and thunderstorms moved through the province causes tremendous damage, including broken Poles down what trees and word.
Banker teams contract with a utility partners for their outstanding efforts in assessing damage prioritizing work and making repairs to restore power for being away from family and loved ones. During the holidays difficult. It is these times when our customers need us most and proud of the team for stepping up to put our customers first and get the power back on safely without any recordable.
Injuries.
It's been an eventful three months since I moved from the sea overall, the CEO role.
Last call I articulated my priority, namely executing our existing strategy.
First I am pleased to report that we continue with our focus on safety with no high energy serious injuries or fatalities this quarter.
Our recordable injury rate of <unk> 42 per 200000 hours is also below that of last year's 616, or eight and well below the world class benchmark of 1.0.
Second.
Last quarter I committed to aligning the executive team structure to our strategy and filling the vacancy is on our executive team. So we can continue to take advantage of the positive environment for us.
I am pleased to report that we have made a few changes the executive leadership team and our organizational structure.
Jerry <unk>, who has been appointed to the new rule Executive Vice President operations and customer experience she'll bring together teams responsible for driving operational excellence across our transmission and distribution reliability and maintenance functions as well as customer system operations.
We will also continue to retain responsible for hydro other modes.
Andrew Spencer has been appointed a new role executive Vice President capital portfolio delivery, he will be responsible for leveraging our internal capabilities and collaborate with our key stakeholders in our digital partners to efficiently deliver growing capital plan, ensuring hydro one can support the increasing need for clean energy and economic growth in the province.
Thrilled that both appointments were internal which is indicative of the high quality talent and deep bench strength that exists throughout the organization.
In addition to Terry and Andrew departments, we are expanding the role for me can Telford and Chris Lopez.
No EVP strategy energy transition human resources and safety. She will have responsibility for corporate strategy and energy transition along with key strategic supporting functions, including planning.
Partnerships indigenous relations sustainability corporate affairs.
Wind resources and health and safety.
Chris has never EVP, chief financial and regulatory officer.
We'll continue leading the finance Treasury Investor Relations pensions shared services growth and corporate development risks and internal audit functions and will also now lead regulatory practices.
Brad bonus has made the personal decision to leave hydro one to pursue other opportunities at the end of June during his 19 years with hydro one Brad has held senior roles in the organization. That's been responsible for driving a more agile customer focused culture and leveraging technology to deliver on our strategic goals. We've already begun a thorough search for a technology leader to join the team.
<unk> has informed me of his decision to retire from hydro one at the end of the year between now and then Paul has taken on a new role as senior adviser and will continue reporting directly to me in this role Paul will be providing strategic supported based on several key initiatives.
Since joining the company as Chief Legal Officer 2019, all this team a strengthened our relationship with the Ontario Energy Board and jointly lead the first ever settlement of our largest breed application ever followed with the regulator.
<unk> was built with the company for 22 years was appointed General Counsel.
Okay.
These changes represent an important first step in our evolving our structure to execute our strategy in a changing environment. We will continue to refine the executive leadership team in response to the industry landscape and customer needs.
Our third party was remained disciplined execute our maintenance capital investment plan I am happy to report that we have been doing just that.
Our capital investments increased by 11, 1% and the assets put in service increased by three 5% year over year.
We also made progress on a regular work programs, while conducting emergency restorations.
Work also continues to advance on our major capital project for the Chatham to Lakeshore line Environmental assessment is complete and the leave to construct a section 92 has been granted by the Ontario Energy Board.
Furthermore, an engineering procurement and construction or EPC contractor has been engaged and execute their construction readiness plan, including continuation of capacity building with the gist community to ensure meaningful participation during the delivery of the transmission line.
But once again, we were pleased to receive the letter from the independent electricity system, operator, or ISO indicated the need for phase two of the line to support mining operations of North clean reliable electricity as a reminder, phase one of the double circuit 230, Kilovolt line that will run for fun debate that a copay.
Two as a single circuit 230 kv line to inadequate and driving.
Plan to submit a leave to construct application or <unk> to the OMB for both phases. Later this year energizing. The north is one of the critical action items to harness the wealth of minerals in the northwest and support the incredible growth in the province.
As a reminder, nine first nations in the region have signed agreements with us that will have the option of investing 50% equity stake in the transmission line component of the project.
With respect to the other lines in the southwest region, we are on track and performing pre development and development related activities. The value will become publicly file a leave to construct for each of the lines.
Apart from these projects, we are proud to support the economic engine by facilitating the electrical connectivity to the businesses in Ontario, whether it's agriculture mining our industrial manufacturing the connectivity the clean larger decarbonize power helps the economy and the environment.
As an example, Volkswagen historic decisions to build their first gig at factory outside your Thomas, Ontario, the transformational investments the.
The plant will produce batteries for up to 1 billion electrical electric vehicles per year.
<unk> demonstrated transmission reliability is a core strength for Ontario at this project like many others required extremely high reliability to operate.
This large battery manufacturing plant will stimulate significant investment in the region and hydro wanted to be ready to provide connectivity needed. This development and the surrounding divestment. It will generate will be great for the economy environment and for investment in our assets.
We are also happy to support the electrification and energy transition panel led by David colleague the.
Panel will provide the ministry of energy with cross sector insight and expertise needed to develop effective pathway to decarbonize the energy sector.
Investments in critical infrastructure necessary to continue to attract economic invest in Ontario.
Our investments in the expansion and optimization of both the transmission and distribution systems are the first steps, enabling the energy transition for all customers residential and digital commercial and industrial.
In other updates we continue to work closely with the Internet service providers and infrastructure I'm sure helped deliver broadband internet access by leveraging our existing infrastructure.
<unk> been hard at work preparing for the significant volume of work that is expected to come we have made investments in labor and training strengthened our supply chain streamlined our used process onboard of contractors and purchase materials in anticipation of this project.
We understand the importance of connectivity to everyday life for families and businesses.
And from our customers. While we are excited to take on the challenge that we have not seen the application commit at the pace we had expected.
We also continue to engage with local distribution companies are ldc's the facility consolidation within the sector. We're.
We are in active discussion with several ldc's, but at this point there are no definitive agreements.
Regarding our collective agreements power workers Union in spite of United professionals collective agreement expired on March 31 2023.
Negotiations to renew these are ongoing.
Also continue to negotiate with the VW on the customer service operations. The collective agreement that expired in August 2022.
Its normal dream bargaining, we won't be providing any further comments.
We continue to make progress on our sustainability goals I'm very proud of the Hydro one received environmental Excellence award the electricity distributors Association for treating a wetland habitat adjacent to our client bird transformer station.
This initiative restored and enhance the resiliency of the existing wetlands and beautify the lands adjacent to the transmission station.
Hydro one's community investment program focuses on building safe communities, Ontario, and direct at least 20% corporate donations and sponsorship through digital communities and initiatives that benefit indigenous communities.
In late February we're incredibly pleased to announced the 25 charitable organization indigenous communities and municipalities that each received a grant 25000 for the energizing life community Fund this.
This is the third year in a row that the fund will support community led initiatives that promote physical emotional and psychological safety and wellbeing frontier areas.
We're also thrilled to welcome back the little Native Hockey League or little NHL. After a three year hiatus due to the pandemic a little NHL was created to build inclusivity and hockey for indigenous players and focused on supporting communities and young players through safe play. We are pleased to partner with the Nipissing first nation to return as excited determined that celebrates fan.
Community and friendship.
Finally, our management information circular was released a few days ago. Our annual general meeting will be held at the hybrid format of June with a live webcast and in person attendance in Thunder Bay, all shareholders are welcome and invited to attend.
This year, we have three directors Bill Sheffield Blair Cowper Smith, and Russell Robertson, who will not be stand for reelection I would like to thank them for their valuable services joined the board in 2018 the.
The new independent director nominees standing for election are Mitch.
Mitch Patrick.
You're right, Neil and Brian <unk>, you hear more about the nominated directors in the depth of skills. They bring to the board after the AGM with that I will turn it over to Chris to discuss our financial results this quarter over to you Chris.
Thank you David Good morning, everyone and thank you for joining us today I'd like to extend my congratulations to Terry Andrew Megan Colon Cassidy on the new appointments.
Your hard work dedication and expertise have been recognized and we are thrilled to have you take on your new roles.
I also wish spreads the very best in his future endeavors.
In terms of our financial results for the first quarter earnings per share was <unk> 47, compared to 52 in 2022.
The key drivers to the change in earnings this quarter were higher operating and maintenance and administration or M&A costs, primarily resulting from higher corporate support costs and what program expenditures.
On the financing charges on account of higher weighted average interest rates on short term and long term debt.
Higher depreciation amortization asset removal costs.
These are partially offset by the adjustment to Ontario Energy Board.
Be approve rates post approval of the joint application.
And lower taxes.
In addition to these key drivers there were several net income neutral items that occurred this quarter as we implemented the joined ratification decision.
Our first quarter revenue net of purchase power was higher year over year by 3% deal.
The increase was mainly due to revenues, resulting from ODP approved rates, including the recovery of regulatory assets. Following the implementation of the tariff decision.
The recovery of regulatory assets had offsetting eliminate and income tax expense, making them net income neutral.
This was partially offset by lower peak demand and energy distributed to hydro one customers, which were down by $2, two and three 9% respectively.
On the cost front operating maintenance and administrative expenses were higher year over year by approximately 13, 9%.
The largest portion of the increase was attributable to higher corporate support costs for both segments and then largely timing in nature.
Costs increased as we capitalize common costs at a lower rate due to the timing and volume of capital work in relation to the rest of the year.
It progresses and the capital program ramps up we expect to capitalize common costs at a higher rate, thereby offsetting the increase this quarter.
We also had higher costs related to whet programs, including station and line maintenance.
Emergency restoration and information technology initiatives.
These are partially offset by lower allowance for doubtful accounts or bad debt expense.
Lastly, we had the disposition of regulatory accounts that resulted in higher M&A, both transmission and distribution segments. However, as previously discussed these are offsetting revenues, making them net income neutral.
Depreciation expense was higher year over year by six 3% Tgv increasingly removals.
Associated with highest terminated asset replacements.
Hi, environmental expenditures and growth in capital assets, which is consistent with our stated capital investment program.
On financing, we saw a 16, 2% increase year over year and our financing charges.
This is primarily due to a higher weighted average interest rates on long term debt and short term notes. This.
This includes the financing charges from recent issuances.
Ed.
$750 million of medium term notes in the fourth quarter.
The one 5 billion in overall issuance of medium term notes in January under the sustainable financing framework.
The $1 64 billion in short term notes issued in the quarter.
We used the proceeds to repay $600 million of long term debt that matured in the quarter as well as $2. Two 1 billion of short term notes.
The financing charges were partially offset by higher weighted average interest on short term investments.
We continue to be pleased with the stability of our balance sheet and robust investment grade credit ratings.
Income tax expense was 64 million for the quarter compared to $79 million in the same quarter last year. The decrease in income tax expense was due to lower earnings compared to last year and high deductible timing differences.
As previously discussed these decreases were partially offset by the tax on the disposition of regulatory accounts, which are again net income neutral.
The effective tax rate this quarter was 18, 4% versus the effective tax rate last year of 22%.
This is consistent with the annual guidance, we provided earlier this year.
As a reminder, we expect the effective tax rate to be 13% to 16% over the next five years with the most significant impact in 2023 due to the recovery of the previously shared deferred tax asset or DTA recovery amounts, which will be fully recovered by midyear.
Moving to investing activities in the first quarter, we placed 237 million invested in service, which is a three 5% increase compared to the prior year.
The increase related primarily to our distribution segment, which included a higher volume of storm related asset replacement and customer connections.
The increases in the distribution segment were partially offset by the transmission segment.
Assets in service decreased year over year due to timing.
She replaced a significant portion of the east West tie project into service along with other line Refurbishments and replacements.
Capital investments for the first quarter were $499 million, which is an 11, 1% increase from the first quarter in 2022.
Our capital investments in the distribution segment were higher due to higher spend on storm related asset replacements timing of initiatives and higher volume of customer connections.
The trends mission segment also increased with investments in the new chat intellectual on projects and higher line refurbishment and replacement, partially offset by timing of customer connection and major development projects.
On guidance, we continue to be committed and a firm target of 5% to 7% earnings per share growth rate through 2027 on the normalized earnings from 2020 to EPS of $1 61.
As a reminder, the EPS growth range does not factor in growth from broadband LDC consolidation and five of the six transmission lines that had been previously awarded to us, but only preliminary estimates as well as any amounts from externally driven various accounts.
Finally, I am pleased to report that in line with our long term guidance, we declared a dividend to common shareholders of $29 64 per share.
I'll stop there and we'd be pleased to take your questions.
Thank you, David and Chris wed like 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 follow up questions. We ask that you limit your questions to one question and one follow up if you have additional questions. We request you to read.
Joined the queue. Please go ahead.
Thank you.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
Draw. Your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Robert Hope with Scotiabank. Your line is now open.
Hi, good morning, everyone.
Maybe first on the broadband initiatives.
Can you maybe give us some update on how the conversations are going with your potential customers. There when we can see meaningful capital being put to work and I guess subsequently when you think you could update guidance for that.
Good morning, Robert David leave it is speaking and thanks for that question, we're engaging with all the Internet service providers as well as infrastructure, Ontario, which is the provincial.
Thats been tasked with implementing this program.
As I indicated my opening remarks, we had expected orders to tremendous when you net service providers sooner than they had we are getting orders just not the volume that we expected. Yes, we are still anticipating a ramp up later on this year. It's difficult at this point in time, it's a $4 billion program that the provincial governments put in we anticipate that there could be anywhere from.
Have a $1 billion to $1 billion worth of work that has to get done in our assets, but until we see enough of those orders to really be able to quantify what that impact is we're not we're not able to come forward with updated guidance, we had had and still hope to be able to do that by the end of this year early next year in the first quarter.
I appreciate that and then just maybe moving over to the transmission investment as well understanding that.
Five of the six lines that you've been awarded or not in your guidance, but maybe taking a look at the next tranche of potential opportunities in front of you. We continue to see Ontario kind of outperform in terms of that near shoring trend.
Where are you seeing the greatest opportunities that further potentially.
Potentially increase your transmission investment.
Yeah.
So obviously we're <unk>.
Really pleased in the independent <unk>.
Independent electric system, operator last week announced they'd like us to build phase two of the Washington transmission line, which is the northwest they've asked for us to bring that in service as soon as possible. After phase one and just as a reminder, phase one we're targeting to have in service by the end of 2025 independent Electric system. Operator has also recommended to the government.
With the Ministry of Energy, They released three transmission lines in North East, Ontario.
So we're in discussions with several parties over those transmission lines no.
No timing from the government on when they plan to award those or if theyre going to use a competitive process to release those and we continue to work on our five transmission lines down in southwestern Ontario, those are all proceeding very well.
That's what we have available right now we are always in negotiation have negotiated we're always working with independent electric system operate on regional plans and the province on economic development, where theyre, having discussions with new economic actors moving into the province.
I appreciate the color. Thank you.
Thank you.
Our next question comes from the line of Andrew Kuske with Credit Suisse. Your line is now open.
Thanks, Good morning, I guess, the first questions for Chris.
Really just looking at the volumes that you have across the TX and analysis of the Dx business. If there was a more normal weather.
In the quarter.
What that looked like in the financials and then.
Sort of follow up to that is just on the M&A.
A bit elevated versus last year to what degree is that really just getting ahead of things for the remainder of the year on year, and we're going to see a little bit of a tail off in there on the expense.
Thanks, Andrew.
Let's start with the volume question first so the first quarter of last year was an exceptional year on volumes, mainly driven by weather. We did see the normal economic growth that we see higher new connections higher economic demand.
But the weather impact this quarter was not as favorable as the same quarter last year. It was still above the long term average Andrew. So this is what you can expect is where we are today.
It's just last year was significantly more.
Advantageous from a weather perspective.
Turning to our M&A.
What can you expect and why we were up this quarter, we're up $40 million about half of that was corporate support costs that as timing that will come back.
About 25% is around at what programs again timing and the last 25% is all to do with the regulatory accounts.
M&A was higher but also our revenue was higher.
I would say three quarters of the eliminate was all timing.
I will come back in the back part of this year.
Okay very much appreciate it and then maybe just a bigger broader question.
As it relates to the ongoing energy transition and we've seen.
Volkswagen announcement, and just some other initiatives going on in Ontario.
To what degree are involved in the discussions about sort of the bigger stuff ring of fire.
<unk> developed on a more accelerated basis and I ask the question in part because we've seen some other examples in the world where battery manufacturers are really going to mining companies.
During supply on a longer term basis, and all of that seems to fit very well for Ontario.
So to what degree are you involved in the conversations whether directly with the companies or the government itself.
Good morning, Andrew It's David speaking.
Great question, we're engaged at both levels. So we do engage with individual companies that are considered investments whether that be for new developments or what that's for.
Decarbonize in their current assets. So we have those conversations were also involved in conversations with the government.
Obviously, they have a different network than we do so they'll bring it similar one understand the transmission capability of the best places to locate some of the investments theyre, considering attracting to the province.
And we're also in discussions with our peers on how the products might develop so quite a wide ranging group of people that we engage and where investment is going to occur the pace of it is going to occur and the role we're going to play.
Lastly, and perhaps most important we're also engaged with indigenous communities and leaders across the province, and their vision for how they want to see the natural resources, the province, developing where they're focusing their development opportunities.
Okay I appreciate that thank you.
Thank you.
Our next question comes from the line of Ben Pham with BMO capital markets. Your line is now open.
Alright, Thanks excuse me thanks, good morning.
I was wondering could.
Could you maybe comment on if you think about the next year or five years, you have that 100 basis points.
Expected up requirements.
Pardon me it maybe even more than that.
Can you detail some of the initiatives here.
Working on or looking to work on that to attract that Patel.
Potential performance.
Hi, Ben its Chris Thanks, Thanks for the question.
Yes, so the 100 basis points as a reminder, it was in the guidance that we provided so it wouldn't be.
Above and beyond that guidance.
But to hit those numbers part of it is as volumes that as I said the volumes.
Not as good as last year, but they are above.
What we had expected with normalized so that's part of it.
And then the specific programs that we do it's more programmatic or systematic across the company, we look to offset about 2% of all spend and it's made up of a number of projects that go across multiple years, but some large ones that you can think of our investments in technology to improve productivity. So we are doing.
Distribution operations.
The technology investment that will improve the way, we execute work across our distribution network.
A good example that will drive productivity.
We're constantly working with suppliers to reduce cost and improve efficiency.
And the final one is.
Doing another investment in them.
Our HR system that potentially again reduces cost so like I say this.
30, or 40 initiatives that we're working on at any one time is the sum total of that that allows us to get about half of those that overhang from productivity and the other half usually comes from economic demand and we're seeing that already in the first quarter of this year. There is no change that we've seen high new connections and we're seeing higher economic demand.
That's great color, Chris and then maybe.
And our smart card.
Business outside of rate base of non nonregulated side of it.
<unk>.
Couple.
Okay.
And libraries in there and anything you can share in terms of commercial updates on <unk>.
Quick charge anymore.
Telecom side of things and when do you.
Back to see maybe more of a.
Modest impact on on that part of the business.
Thanks Pat.
I always we reiterate this we are primarily focused on growing the regulated side of the business.
The majority of the focus is the guidance that we put out there.
5% to 7% and potentially going up from the really driven by investments in new transmission lines that is all regulated.
I think the question Youre asking <unk>, what what extra juice is there about thats about half a percent and that comes from our telecom business.
Other investments, we've got a business called <unk> energy that business is looking at helping our logic customers solve some of their energy needs behind the meter batteries and so on we have a joint venture with a company called pathway, which is owned by EDF.
And those two together will deliver about half of 1% per year across the guidance period. We're on track to do that I don't have any other details of the amendment, we are constantly looking at rfps and different opportunities with our partners there.
And we'll give you those updates when we actually sign them and release them.
Okay, great. Thank you.
Thank you.
Our next question comes from the line of Darius <unk> with Bank of America. Your line is now open.
Hi, Good morning, Thank you for taking my question.
Just maybe at the outset I was wondering if you could give an update on.
What are your debt funding needs that you see for the balance of the year and perhaps what type of rates youre seeing in the market relative to your plan.
Thank you.
Hi, Dara, it's Chris Thanks for the question.
I think I asked this question last quarter, it's still the same because we did an issuance.
In February just before we actually released their results.
We'll shortly thereafter, but we got the same indications. So this yet and any usual, yes, we would do one to one 5 billion but.
But I'll just remind you last year, we did a little less.
Around 700 million. So you can expect us to do a bit more this year will be at the upper end of that range.
And the other opportunity we have is we have short term debt outstanding.
That we can turn out so what does that look like we've done 1 billion already we could do another 1 billion to open in <unk> This year.
To secure funding into early next year, we've got.
Okay.
And issuance that's coming due in April next year. So we could pre fund that as well. There is one advantage you get today, if youll funding long term to short term interest rates that you are in on that.
To ensure there's no holding costs were a slight benefit so we will access the markets opportunistically.
To deal with that.
The rates that they are.
In line or slightly better than what we've got in our funding plans.
We've seen some volatility I'm not going to say it's easy.
But right now rates are back to roughly where we issued early this year. So a good indication of that.
We're pleased with those rights so rates around its mark.
Advantageous to us.
Thank you okay.
Yes.
Sorry, I was going to ask.
Im sorry, our next question comes from the line of Mark Jarvi with CIBC. Your line is now open.
Thanks.
Just as you look out and potentially more transmission projects coming down the pipe here, how you think about human capital in terms of being able to deliver on that is it.
I mean, you guys have to step up step by step ups internally is there enough out there in terms of labor for us and then audience, bringing third party contractors to manage a lot of.
Incremental belt.
Mark It's Dave and thanks for that question one of the advantages of having a stream of transmission projects come in as we're able to enter into different conversations with our construction partners. So for new transmission build we typically go to the market and use the constructor.
We're able to reach out and talk to them about a series of projects assuming they perform adequately of course allows them to go out and secure labor and bring that labor.
The secured locally either Ontario, or from Canada, or they can bring it into the country, but they have a stream of work that allows them to do that now obviously you can't just hire contractors and walk away from projects. So we are increasing our contract management capability of our project delivery capability.
We have had not had a challenge finding labor resources to do that we're able to recruit very talented and very competent individuals.
Okay. Good to hear and then Chris Historically, you guys have the use of commercial paper program quite regularly.
Is that something you still want to continue that sort of thing.
Alternatively, you may consider here in terms of the short term funding.
Yes, Hi, Marc It was very favorable I mean part of the reason why our interest costs are up this year as last year. The first quarter of last year was extremely favorable borrowing costs on the CP market Walnut Street.
Today that doesn't exist.
<unk> is about as high as say.
Yes that was my comment Mark around we would look to term out some of that short term.
<unk> the.
The rates if you go out three to five years, and we know what they're going to be for us over the next five years.
There are opportunities in the marketplace to reduce your overall interest cost.
We'll stay flexible I don't expect this to always be the case.
It is the case today, because we know all central banks are raising interest rates slowed the economy.
That will come to an end at some point I hope and then we get to use the commercial paper market again.
To optimize interest cost.
I guess I'm, just thinking that sometimes there's a.
A quarter or two while the commercial data before you can.
Come to market determined just wondering if there's any alternatives to shave off some of that borrowing costs.
Yes, so right now the way it's working for US is that if you borrow longer term.
You can invest in that short term market itself.
And you either offset the borrowing cost when you end up with a slight gain so so that's the reason why we were out ahead. This year thinking about pre funding next year. So thats.
Does that answer your question Michael.
Yes.
That makes sense. Thanks, Greg yes, so that's exactly what we're doing in <unk>.
Darius asked the same question really we're going to take advantage of this backwardation in interest rates.
<unk> pre fund our growth for 2023 and 2024.
Understood. Thank you.
Thank you. Our next question comes from the line of David Quezada with Raymond James Your line is now open.
Thanks, Good morning, everyone. Just one for me I'm curious what your thoughts were.
Around the Canadian Federal budget I know there was some commentary in there about connecting the electrical grid from coast to coast wondering if theres any rule free to play there maybe longer term.
Good morning, David David speaking.
We are really pleased with the federal budget as well as the provincial budget, which came out shortly thereafter, they're both focused on economic developed are both focused on.
Driving the energy transition or electrification of the economy forward.
The federal budget does have some tax credits for inter provincial transmission Bill.
Believe are optimistic there will be some amendments to that that allow there to be some tax credits for inter inter provincial transmission. So we're certainly engaged in conversations on that and then there were some tax credits associated with clean energy investments, which we would be a lot of the times, we end up supporting those clean energy investments through by connect them to the grid connect them to load. So we view it.
As a very favorable budget that will be beneficial to hydro one as well as the electricity sector in general.
I appreciate that thanks, David.
Thank you.
A reminder to ask a question at this time, Please press star one one rins Heston telephone.
Our next question comes from the line of Maurice Choy with RBC capital markets. Your line is now open.
Okay.
Thank you very much and good morning, I wanted to focus on how we should interpret to needs about phase two in Wasilla in line.
Given that this is somewhat like an expansion that you don't seem to need to bid for can.
Can you share with us number one how many phases in total out there on this line and a bigger question.
The other lines that you previously awarded.
Are there any other expansion opportunities through additional lines, which do not need to competitive bidding that can be built under hydro one's existing award or license.
Good morning, Morris David speaking.
Phase II was always in the plan for Watkins that wasn't something that was new what was what was new as independent electric system, operator, reviewing the demand growth projections for economic development in that part of the province, and determining when that need had to come online.
They awarded a trust largely because it is the extension of an existing line. So.
We're always we're optimistic that was going to happen.
We just didn't know what the timing was going to be so we're very pleased that came out and asked us to complete that as soon as possible. After phase one just sort of as I said earlier phase one target completion date at the end of December 2025.
As for the other transmission lines. It's a lot of it is driven by new economic development, the province, whether thats on renewables loads coming onboard whether that's battery storage or other forms of non wire solutions or economic development, such as we saw with the Volkswagen battery plant being located in the province.
So as those opportunities come forward, we're engaged as I said earlier to look at the transmission system to determine the most efficient most cost effective and most reliable way to provide power to those developments.
Some of those may or May not result in extensions of existing transmission lines. We just don't know at this point, but we are optimistic there'll be more economic activity new actors attracted to the problems.
So is it fair to say that when you get awarded a line.
Not just awarded align its cost of $250 million this actually.
Expansion option piece and go beyond the $2 50.
I'm not sure exactly you mean by that Morris, but the way it works is.
The province, the independent system, operator to identify as a need.
They then make a recommendation to the province to province decided to build direct award that to somebody could be us.
It could be somebody else or whether through a competitive process, that's up to the province.
However, this successful.
Gaming the rates to build that transmission line does the development work, which is actually picks the root location does the environmental assessment determined the cost and then you go to the Ontario Energy Board to get approved let's call. It a section 92 once you get that approval that youre commenced to start building. The project. So it's through those that exercise the environmental assessment the route selection.
The formative partnerships with indigenous communities and also the negotiation with individual landowners that are impacted by the by the route that the total cost of the project.
<unk>, it's Chris I'll, just clarify one thing because I.
We did put some disclosure in the MD&A to make it clear at Wassa.
Once again was awarded.
Back in 2013, and then I saw at that time, then allocated that to hydro one banking.
For 2015 with a government directive 2014 was the.
The award or the pace from the ISO.
In that award phase, one and phase II will always included so that's what was a little unique about once again.
And David's comments earlier was we always knew it would be there and if it ever came it was ALS because that of what took place back in 2014.
The other lines are all more recently that more specific to point a to point B and if there was an extension beyond point B then it's likely to go through another process again.
Hope that helps.
That really helps thank you very much for that and maybe just final one for me on these cost estimates are you running for all of these lines.
Can you speak to.
Obviously, you've seen a lot of.
In terms of cost increases across infrastructure land are you seeing some of these costs stabilizing.
What areas are still.
Somewhat rising in terms of cost.
Hey, Morris, obviously, it's been a bit of a roller coaster with supply chain first of all it was availability of materials.
<unk> been inflation kicked in and we've seen some escalations.
We got out of the gate. We believe ahead of most people. So we saw this coming.
And what we did is we reached forward we placed orders further in advance we locked up locked up manufacturing capacity further in advance we normally would we increased our inventory of materials critical materials, though we had these projects coming forward and where we could we tied the cost of materials or equipment that we're buying to indices that allows the manufacturer to the.
Equipment that we're buying to actually go out and hedge their investment in raw materials that allows them to secure those materials in advance and through those efforts, we've been able to manage our cost to increase to a reasonable level. We have obviously experienced cost increase but we believe we're doing the best job. We can to manage that down. We've also done other things such as standardizing our range of materials of substance.
Oh of course.
We've quantified new suppliers, again, which drives down cost with quite a range of activities, we're undertaking to manage the cost escalation pressures or field on these projects.
Thank you thanks for that color.
Thank you and that does conclude our Q&A session for today.
Like to turn the call back over to Omar Chavez 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 definitely a busy day.
We appreciate your interest and your ownership if you fear you have any further questions that weren't addressed on the call. Please reach out and we'll get them answered for you. Thank you again and enjoy the rest of your day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect everyone have a great day.
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