Hydro One Limited
Q1 2024 Earnings Call Transcript

Published: 14 May 2024

[Operator:]

Good morning, ladies and gentlemen, and welcome to Hydro One Limited’s First Quarter 2024 Analyst Teleconference. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. 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.

[Omar Javed:]

Good morning and thank you for joining us in Hydro One’s quarterly earnings call. Joining us today are our President and CEO, David Lebeter; and our Chief Financial and Regulatory Officer, Chris Lopez. In the call today, we will provide an overview of our quarterly results, and then, we will take some time answering questions as time permits. There are also several slides that illustrates some of the points we’ll address in a moment. That should be up on the webcast now, or if you’re dialed into the call, you can find them in Hydro One’s website in the Investor Relations section, under Events & 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 Lebeter.

[David Lebeter:]

Thank you, Omar. Good morning and thank you for joining us for our first quarter 2024 earnings call. Before we start, I’ll touch on safety, it’s at the core of our business and among the first of our corporate values. Sadly, this quarter, two employees were seriously injured while at work. While we won’t discuss the specifics as the investigations are ongoing, it will take a long time for our teammates to heal physically and emotionally. These injuries are a stark reminder of the unforgiving nature of our daily jobs. At Hydro One, safety goes beyond policies and procedures and must remain firmly ingrained within our culture. We are committed to zero life-altering injuries and that every employee returns home safely at the end of each day. Continued focus eliminating all serious injuries is achievable. Moving on to our update. In today’s call, I’m excited to share our refreshed corporate strategy and highlights some key accomplishments that occurred during our first quarter. Chris will then dive deeper into the financial results of the quarter. Delivering on our existing strategy has created exceptional value for Ontarians, our customers, shareholders and partners. We made critical strategic investments in our system to build a more modern, intelligent grid which enables evolving technologies and the increased integration of distributed energy resources. Through these investments, we play a critical role in supporting long-term sustainable economic growth. Not only did we build a reputation for keeping the lights on and restoring power quickly, but are also delivering major transmission projects on time and on budget. These are some of the reasons why we are now entrusted to build nine transmission projects in the Province. We build strong relationships and trust with many of our partners, including indigenous communities, municipalities, residents and the government. We advanced economic reconciliation with indigenous communities through the development of our industry-leading 50

[Chris Lopez:]

Thank you, David. Good morning, everyone and thank you for joining us today. I am confident that refreshed corporate strategy will position Hydro One for continued success in the years to come, as together we build a better, brighter future for all. Looking at our first quarter financial results, we delivered basic earnings per share of $0.49 compared to $0.47 in the first quarter of 2023. The key drivers behind the year-over-year change included

[Omar Javed:]

Thank you. David and Chris. We ask the operator to explain how they’d like to organize the Q&A polling process. In case, we can’t address your questions today, my team and I are always available to respond to any 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 rejoin the queue. Please go ahead, operator.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Ben Pham with BMO. Your line is now open.

[Ben Pham:]

Hi. Thanks. Good morning. Maybe onto your comments on the broadband discussions you’ve had and some of the updated estimates you provided. How do you think about the timing of that $300 million to $700 million into rate base? And is this more really outcome of these discussions more a matter of just maybe delay or timing changes versus an overall change in scope?

[David Lebeter:]

Good morning, Ben, it’s David Lebeter. Nice to hear you. The overall scope has not changed. Province remains committed to providing high-speed Internet service to 700,000 Ontarians, and we remain committed and ready to support that initiative on their behalf. They’ve just been slower as I’ve said in the past, in getting started. We are seeing an increase that is picking up, and they are using a little bit more plowing or underground than we anticipated, and more than they indicated the initial onset of the program. And in some cases, they’re choosing to go with wireless, which is why we’ve adjusted our guidance.

[Chris Lopez:]

And just adding to that, it will all be in-service in the current rate period. So whatever that range is, whatever proves to be, will all be in-serviced and counted in the growth rate by the end of [‘27] [ph].

[Ben Pham:]

Okay, got it. And on your refreshed strategy, you mentioned regulated and non-regulated opportunities as part of your capital allocation. Has that changed from before? Is it still the non-regulated assets that you’re in now? And is this still up to that max 10% of the business?

[David Lebeter:]

Yeah, nothing’s changed there, Ben. We still have the three non-regulated entities. Ivy, our car charging network, Aux, which is in the battery solutions and Acronym, which is our telco.

[Ben Pham:]

Okay, that’s great. And Chris, all the best in your next venture.

[Chris Lopez:]

Thank you, Ben.

[Operator:]

Thank you. Our next question comes from the line of Maurice Choy with RBC Capital Markets. Your line is now open.

[Maurice Choy:]

Thanks and good morning, everyone. If you could just pick up on the refreshed strategy. It’s not immediately clear to me how the strategy is clearly different from the previous strategy. So if I could just ask you to help me tangibly put it. What has changed here? I know you mentioned finding innovative and sustainable ways to accommodate growth. What does that all mean in terms of what you’re going to offer?

[David Lebeter:]

Sure. Thanks for the question, Maurice. The reason we called it a refreshed strategy is, because it is not a revamp. As I indicated in my earlier comments, our previous strategy is highly successful. What you’ll see has changed if you were to go back, compare the two, is, we’ve changed our approach to customer. We want to provide excellent customer service, whereas the previous strategy we talked about advocating for the customer. So we’re really focusing on the full range of customers from residential through to industrial, understanding what their needs are, and perhaps rather than waiting for them to say, this is what we want to do, getting involved early so we can help them shape what their electrical, electrification journey would look like. The other significant change is, we had ISD or IT as a – still as a support function. We moved that right up to the front. We see that having enhanced data capabilities or digital capabilities going to be integral to our success in integrating the modern smart distribution grid into an already intelligent transmission grid. So really doubling down on that. Which is why I’m so pleased to announce that Renee McKenzie has joined us. Those would be the two biggest changes. Of course. We’re still going to remain focused on excellence in delivering on our capital program, both in distribution and on the transmission side, and providing incredible customer service in terms of restoring power in times of storms.

[Maurice Choy:]

Got it. And then if I think about the investments, both OpEx and CapEx that go into all of this, is this something that’s done within the current rate envelope? Or is this something that you have to spend first and then request for rates in the next five year application?

[David Lebeter:]

No, it will be contained within the current rate envelope. What we’re doing is restructuring some of the expenses that we had planned to make sure they align with the refreshed strategy. A lot of what we’re doing is already in the current envelope, such as rolling out our smart meter, our second-generation of smart meters. That’s a foundational piece for the distribution grid of the future that was already in. We are going to take a look at our IT stack to make sure we have the right programs that we’re rolling out there.

[Maurice Choy:]

Understood. If I could just finish off with the broadband rollout. So you now have a revised forecast that of $300 million to $700 million. Historically, I suppose this has provided upside potential to your EPS guidance as well as your rate-based CAGRs. If you could help us just help quantify in basis points or even EPS upside, what would this new revised work estimate be?

[David Lebeter:]

I think, Maurice, what we talked about in the past was, we were saying $0.5 billion to $1 billion. And $1 billion, I think we had that as 100 basis points. So you can work off, or 1 – is that correct, Chris?

[Chris Lopez:]

1%.

[David Lebeter:]

1%.

[Chris Lopez:]

But I think, Maurice, an easy way, it’s got the same economics as our distribution business, so it gets the same ROE, 9.36%. When it goes in-service, it will all go in-service by the end of this rate period. So, you can take whatever number you want in that range. Take the midpoint, $0.5 billion, and you can apply your calculation. You can work out pretty quickly. I think it’ll come out at $1 billion, it would have been 1%, at $0.5 billion, it would be 0.5%.

[Maurice Choy:]

And from memory, you’re not – the dividend is not going to chase this rate-based EPS growth. The dividend’s just going to stay, am I right?

[Chris Lopez:]

Yeah. So, Maurice that will be a decision for the Board. And now the next CFO to recommend to David. So, I think I communicated previously that we would look at it and speak to shareholders. That’s still and all stakeholders. That is still the case. So if possible it could go up. It’s not going to chase it to 10, I think is what I said in the past when I expect growth to go much higher than that in the next joint rate application. But it could go to 7.

[Maurice Choy:]

Understood. Perfect. Thank you very much for everything, and thanks for the good years, Chris. I’ll see you around.

[Chris Lopez:]

Thanks, Maurice.

[Operator:]

Thank you. Our next question comes from the line of Linda Ezergailis with TD Cowen. Your line is now open.

[Linda Ezergailis:]

Thank you. And before I jump into my question, I wanted to make sure I congratulate Chris on his successful contributions and time at Hydro One. And it’s been a real pleasure getting to know you.

[Chris Lopez:]

Thank you very much, Linda.

[Linda Ezergailis:]

So maybe just to double check on your strategy. What are the updated evolved thoughts on geography? Is the expectation that the focus remains on Ontario? Or is there may be some evolving thought on the merits of toeholds and other jurisdictions? And then, similarly, recognizing that your unregulated business is likely to remain relatively small, can you comment on the merits of considering owning any infrastructure beyond electric transmission and electric distribution?

[David Lebeter:]

Great. Thanks for the questions, Linda. In terms of geography, we are naturally going to remain focused on Ontario. Ontario is growing rapidly. There’s significant investments that need to be made in this Province. That’s why we have the nine transmission lines. We see significant investments coming also on the distribution sector. With the recent announcement of the LT1 by the Ontario Independent Electric System Operators, we’re going to – not everything we do will not sacrifice our focus on Ontario. And we see that as our primary toehold. That being said, we’re not looking outside the Province, but if something came along that had really strong adjacencies and wouldn’t distract us, we would take a look at it. Said that in all of the investor conferences. But we’re not looking outside the Province. We’re focused on what is going on inside Ontario, we just see tremendous growth here. And remind me of your second question. The unregulated – the unregulated aspects. The unregulated –

[Linda Ezergailis:]

Sorry, no, regulated but other than electric transmission and electric distribution. So, whether it be natural gas distribution, transmission, maybe some power generation, et cetera, that could be regulated.

[David Lebeter:]

Now, at this time, we’re not looking at that all. We’re going to stay with the wires business. We know that business, distribution and transmission, we’re not looking at getting into the gas business, the water business or the generation business.

[Linda Ezergailis:]

Thank you. And just as a follow-up, looking at your talent to execute on your refreshed strategy, you’ve appointed Renee and Lisa, which is great. You’re on the – almost close to finalizing your CFO search. Just wondering if you can give us an update more broadly at all levels of your organization, where you see any gaps potentially in talent and how you’re looking to address that, including maybe the demographic kind of shape of the age of your employees as well?

[David Lebeter:]

From a demographic perspective, our average age is getting younger. So I’m really pleased with our workforce. We’ve got a talented workforce. We continue to bring apprentices in and train them through the system. We’ve got a strong pool of Vice President and Directors coming up to support the Executive Team. So I’m very pleased with the depth we have there. We put a lot of effort and time into managing and developing our talent. So right now I don’t see any weaknesses in our bench strength at any of the levels and I’m quite pleased with where we are. I’ll be very happy when I’m able to announce the CFO selection.

[Linda Ezergailis:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Jonathan Lamers with Laurentian Bank Securities. Your line is now open.

[Jonathan Lamers:]

Good morning. On the upcoming wildfire season, I’m just curious how you’re feeling about how well prepared the network in Northern Ontario is for the wildfire season and whether you see a need for additional investment to adapt the equipment for climate change adaptation? And whether the current JRAP provides enough rate base growth for that? Or just how you’re thinking about that? Thank you.

[David Lebeter:]

Thanks for the question, Jonathan. In terms of wildfire, we’re well prepared for what may come this summer. Of course, as we know that we didn’t have the usual winter snowpack. We certainly didn’t have the low temperatures that we’d have in the past. That said, over the past couple of years we’ve been increasing our wildfire capability. We’re part of a group that spans North America that looks at best practices. We’ve already started getting ready in terms of reviewing our training, making sure we have the appropriate equipment and any changes we need to make to our operating procedures. So feeling very comfortable with where we are from that perspective. In terms of climate change adaptation, we’re just in the process of finishing on a rather in-depth study of what we think the climate change is going to be over the next 20 years and what changes we need to make as we continue to invest and maintain our assets to make sure we harden the grid and we’re ready for our Mother Nature can throw at us. So we’re in a very good position. The investments that we had approved in the joint rate application set us up very nicely to survive and do well in the fire season. So I’m not concerned. There’s nothing that we want to do that we’re not able to do.

[Jonathan Lamers:]

Thanks for your comments.

[Operator:]

Thank you. Our last question is from the line of Mark Jarvi with CIBC. Your line is now open.

[Mark Jarvi:]

Yeah, thanks. Good morning, everyone. So lots of discussion lately around housing policy in Canada, including some potential government support. How are you thinking about that in Ontario? How does that factor into sort of the next rate application potentially? And how are you going through that engagement on that policy front?

[David Lebeter:]

Thanks for the question, Mark. We’re seeing, as we have seen for the last number of years, increased activity in new connections. So we’ve been engaging with the homeowners associations across Ontario to understand what is it that Hydro One can do and should do to make it easier for them to get their houses built and connected to the grid as quickly as possible. And with that, that also means as low a cost as possible. They’d given us some very good feedback that we’ve been incorporating into our procedures and processes. We’ve changed those and we’ll continue to engage with the homeowners association and with municipalities to make sure we’re ready there to meet whatever homebuilding targets they have, we’re going to be able to meet those.

[Chris Lopez:]

I would say also, Mark, it’s just – it’s part of the integrated planning that’s done with the IESO and looking where power needs to be in the Province. That will also lead to not just new connections but reinforcement of existing transmission lines and so on to enable that housing growth to occur in alignment policy. All of that will be reflected in our customer consultation as well as our next joint rate application.

[Mark Jarvi:]

Have you engaged with federal government around some of their ambitious targets, like whether or not they’re actually realizable in terms of the connections and or the backbone that’s required to meet some of the housing targets they put out there?

[David Lebeter:]

I was in Ottawa about a month ago. We talked mostly about the investment tax credits, the indigenous loan guarantee, the groups, the companies that are involved with generating electricity. They’ve been in Ottawa having conversation around the clean energy targets, what those look like, as has a Provincial government of Ontario.

[Mark Jarvi:]

Understood. And then a question for you, Chris. Maybe just with the yield curve where it is now, it’s inverted, but it could start to flatten later this year. Any updated views in terms of debt financing strategy, anything subtly different as you work through this year and into next year with the team appreciating that maybe you’re not for to see it through, but just sort of thoughts around that?

[Chris Lopez:]

Yeah, I don’t think anything drastically different, Mark. I agree the yield curve is flattening. So previously you could fund short-term, you could invest it and get the arbitrage there. That’s sort of coming away now. We’re in a good position. We’ve already done $800 million of the $2 billion to $3 billion per year going forward. Plenty of flexibility on our credit line, so we’ll access it opportunistically going forward. So no real change. But I do agree with your comments that the short end of the curve is – starting to flatten out. So you’re not getting that same benefit that you got in the past.

[Mark Jarvi:]

So is that something that’s going to be taking away a little bit of optionality that you would have been able to leverage last year or in the last, I guess, handful of months?

[Chris Lopez:]

No, not – yeah, not to any material extent, because we’ve already done that financing. We’ve already done that first part of the financing this year, the $800 million. So we’re not actually in the market right now. So we’ve got the chance to wait and look at what – how to access that market opportunistically going forward. We are going to target over the long-term, Mark, regardless, an average term of 15 years. We’re currently sitting at 13, 13 and change. So we’ll probably go towards the longer end over the next three to five years.

[Mark Jarvi:]

All right, thanks and all the best, Chris.

[Chris Lopez:]

Thank you, Mark.

[Operator:]

Thank you. And that does conclude our Q&A session for today. I’d like to turn the call back over to Omar Javed for any further remarks.

[Omar Javed:]

Thanks, Jen. 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 continued support. If you have any questions that weren’t addressed on the call, please feel free to reach out and we’ll get them answered for you. Thank you again and enjoy the rest of your day.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, and you may all disconnect. Have a great day.