This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning, ladies and gentlemen, and welcome to the Hydro One Limited's first quarter 2022 NLS teleconference. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. As a reminder, the call is being recorded. I would now like to introduce your host for today's conference, Mr. Omar Javid, Vice President, Investor Relations at Hydro One. Please go ahead.
spk10: Good morning, everyone, and thank you for joining us in Hydro One's first quarter earnings call. Joining us today are our President and CEO, Mark Poetska, and our Chief Financial Officer, Chris Lopez. In the call today, we will go over our first quarter results and then spend most of the call answering as many of your questions as time permits. There are also several slides that illustrate some of the points we'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 Hydro One's website in the investor relations section under events and presentations. Today's discussions will likely touch on estimates and other forward-looking information. You should review the cautionary language in today's earnings release and our MD&A, which we filed this morning, regarding the various factors, assumptions, and risks that could cause our actual results to differ as they all apply to this call. With that, I'll turn the call over to our President and CEO, Mark Poeska.
spk11: Good morning and thank you for joining us for our first quarter earnings call. As you'll see from this morning's release, our teams continue to operate in a very disciplined manner to serve our customers and the communities in which we operate. I'll briefly discuss some of our notable achievements this quarter and then pass it along to Chris to discuss the financial results in greater detail. To start with, I'm very pleased with the results that our teams have achieved. Their hard work has enabled us to provide electricity to our customers when and where it's needed. This dedication to great customer service along with a track record of top quartile reliability for transmission has been recognized. Most recently, we were delighted to receive news that our transmission license has been amended to develop four transmission lines to meet the growing electricity demand in southwest Ontario. This is in addition to a previous transmission designation for the Chatham to Lakeshore line in 2020. These five transmission lines will meet the needs of new and growing industries, help attract future jobs to the region, and, ultimately, facilitate economic growth in Ontario. We are proud that the provision of low-carbon electricity to the region will drive a more sustainable future for all. In addition to the positive news on the transmission lines in Southwest Ontario, the Independent Electricity System Operator, the IESO, recently launched an engagement plan for the timing of the Wassigan transmission line. As a reminder, the Wassigan transmission line, previously known as the Northwest Bulk Transmission Line, is a line that will transmit power from Thunder Bay to Atikokan, which is phase one, and then from Atticoken to Dryden, which is phase two. This line will support economic growth in the Northwest region, including the mining sector. In October of 2018, Hydro One was requested by the ISO to start the development work for the project. Last week, the ISO held a webinar where it indicated that there would be a need to have phase one of the line in service as close to the end of 2025 as possible. We are very pleased with this update that will support the communities and businesses of the North. Our teams will start working immediately to provide feedback to the ISO engagement process, as well as designing plans to meet the desired in-service date. The Wassigan Line also allows us to take progressive steps with First Nations communities towards meaningful reconciliation, which I believe is our obligation as members of Corporate Canada. I'm very pleased to announce that yesterday, Hydro One and First Nations Communities came to a landmark agreement for the Wassigan Transmission Line. This industry-leading agreement offers First Nations Communities the option to invest in a 50% equity stake in the Wassigan Line. We are committed to partnership opportunities and believe this is the way forward for major capital projects. We operate on the traditional territory of over 100 First Nations across Ontario. We are committed to building long-term relationships with these communities, and Wassigan is an example of that. Last year, we publicly stated that we would provide significant economic participation opportunities for Indigenous communities in major capital projects. We also committed to increasing our Indigenous procurement spend to 5% of all materials and services by 2026 and ensuring that 20% of our corporate donations and sponsorship support Indigenous communities. This proactive approach to economic participation recognizes our obligation to advancing economic reconciliation by providing investment opportunities on large greenfield projects. This provides long-term and meaningful opportunities for First Nations communities, which in turn supports our business strategy. Hydro One is committed to all communities we serve. For the second year, we announced grants for Indigenous communities, charitable organizations, and municipalities from the Energizing Life Community Fund. Given to 24 recipients, these grants support initiatives that promote physical, psychological, and emotional safety across Ontario. The recipients provide critical local services such as service dog training for youth with autism, interactive technology to foster social engagement for seniors, and environmental educational programming for black and racialized families. At Hydro One, We feel a responsibility to be present and support local organizations who are working tirelessly to energize life in their communities. At a time when more than one-third of Canadians know a child or person who is suffering from mental health problems because of the pandemic, we teamed up with Jack.org to provide adults and educators with mental health strategies to support young people. We are proud to work alongside Jack.org in breaking down barriers to get young people the mental health support they need. In addition to removing barriers, we're also actively connecting people. In late March, the Ontario government, Hydro One and Acronym Solutions launched a pilot project that will bring high-speed internet access to homes and businesses in the municipality of Brighton. The pilot project will allow us to use our existing infrastructure to fast-track the development of a high-speed internet network in this community. The past two years have underscored how essential internet connectivity is to economic productivity and ability to access work, education, health, and other critical services. This is just another way in which we are embracing innovative solutions to energize life for our customers. In addition to this pilot, a regulation under the Ontario Energy Board, OEB Act, was passed on April 21st to formalize the important role that all distribution companies play in supporting the government's commitment to connect approximately 700,000 homes and businesses in Ontario. Hydro One welcomes the chance to help enable better access and connectivity for our customers. Continuing with the regulatory updates, using a customer-centric approach, we filed an evidence update with the OEB on the Joint Rate Application, JRAP, on March 31st. We updated the costs of JRAP to reflect market conditions. and the load forecast to reflect the IESO's most recent annual planning outlook. The filing preserves our ability to deliver on our commitments to customers without impacting the proposed transmission and distribution rates during the 2023 to 2027 period. We believe in keeping our commitments to our customers. We also recognize that our customers and all Ontarians are facing increased pressures due to an exceptional set of economic circumstances. As such, we are proposing a unique deferral mechanism. It ensures customers are not burdened during this difficult period with cost increases affecting investments that will benefit current and future generations. The incremental revenue requirements associated with this evidence update are proposed to be recorded in deferral accounts for recovery commencing in 2028. As a result, there will be no changes to the proposed transmission or distribution rates for the 2023 to 2027 rate period due to the proposed changes in this evidence update. Following our evidence update, the OEB issued a procedural order outlining the illustrative hearing schedule Per the schedule, we will enter a period of interrogatories, followed by technical and settlement conferences. The oral hearing is now expected to begin in September 2022, with a decision expected in the first quarter of 2023. In our unregulated segment, we continue to make good strides with our IV charging network. In the first quarter, Ivey opened 32 Level 2 charging stations, now known as Park and Charge, in partnership with various municipalities. Park and Charge provides municipalities and businesses with the opportunity to bring charging to their communities for EV drivers who are not in a rush, backed by Ivey's reliable EV network and customer service. Ivey also rebranded its Level 3 network as Ivey Charge & Go for drivers who want to quickly get back on the road. Following the agreement with Enroute and its partners, the Canadian Tire Corporation and the Ministry of Transportation, Ivey opened fast chargers at 10 Enroute locations. Once built, Ivey's Charge & Go network will be one of Ontario's largest and most connected with approximately 60 locations and over 150 level three chargers. Before I pass it over to Chris, I'd like to take a moment to thank Jessica McDonald, who is not standing for reelection to the Board of Directors this year. Hydro One has benefited from Jessica's leadership, experience, and forward thinking since 2018. The Governance and Regulatory Committee on behalf of the Board of Directors conducted a search to fill the vacancy created by Jessica's departure, and is nominating Mark Pudlasley for election to the Board of Directors at the Annual Meeting of Shareholders on June 8, 2022. You'll hear more about Mark and the depth of the skill he'll bring to the Board after the AGM. With that, I'll turn it over to Chris to discuss our financial results this quarter. Over to you, Chris.
spk06: Thank you, Mark. Good morning, everyone, and thank you for joining us today. In terms of our financial results for the first quarter, earnings per share was $0.52 compared to $0.45 in 2021. The key drivers for the change in earnings this quarter were the annual adjustment to OEB-approved rates for the transmission and distribution segments, as well as higher peak demand and energy consumption driven by favourable weather and reopening of the economy, which were partially offset by higher OMA due to an increased allowance for doubtful accounts and higher depreciation, amortization and asset removal costs. Our first quarter revenue net of purchase power was higher year over year by 12.6%. This was made up of the recovery of deferred tax assets or DTA amounts, as well as the cessation of DTA amount sharing going forward, following the DTA implementation decision by the OEB in April of 2021. As a reminder, the impacts from the DTA implementation decision a cash flow positive, but net income neutral due to a corresponding offset in taxes. In addition, revenues for the transmission and distribution segments reflected the annual adjustment of OEB approved rates for 2022. Colder weather and reopening of the economy drove up peak demand in all months of the quarter compared to the same period last year. The average monthly peak demand for the quarter was up 3.7%, while the energy distributed to Hydro One customers also increased by 9.1%. On the cost front, operating, maintenance and administration expenses were higher year over year by approximately 2.1%. The increase in OM&A was primarily a result of higher allowance for doubtful accounts or bad debt expense due to the ageing receivables in the distribution segment. As a reminder, in the first quarter last year, we had accelerated certain work programs such as vegetation management, station maintenance, information technology and customer program spend. The OM&A on these work programs remain largely consistent with last year's levels. That said, we are beginning to experience the impacts of the current economic environment, especially as it relates to materials and services in both segments. Impacts such as Essential commodities, including copper, aluminum, and steel, have undergone price increases and supply shortages. Continuous demand and limited supply have led to price increases for freight-based shipping. And rising fuel costs have impacted most categories of materials and services purchased, including Hydro One's vehicle fleet fuel costs, which are expected to increase by 30% to 35% in 2022. Due to these market changes, Hydro One is experiencing price escalation for many materials and services that will manifest themselves in the upcoming quarters. Depreciation expense was higher year-over-year by 6.3% due to the increase in capital assets, which is consistent with our stated capital investment program. On financing, we saw no change year-over-year in our financing charges. Financing charges decreased from last quarter by $6 million due to the $600 million repayment of long-term debt which had matured in January. As a reminder, we had borrowed late last year to fund this debt maturity. We continue to be pleased with the stability of our balance sheet and robust investment grade credit ratings. Income tax expense was $79 million for the quarter compared to $26 million in the same quarter last year. The increase in income tax expense was due to the tax expense on account of the DTA implementation decision, which, as discussed earlier, is net income neutral. In addition to the DTA recovery amounts, we also had higher taxes on account of higher pre-tax earnings, which were partially offset by timing differences. The effective tax rate this quarter was 20.2% versus the effective tax rate last year of 8.8%. This is consistent with the annual guidance we provided earlier this year of 14% to 22% over the next five years. As a reminder, the most significant impacts will be over the 2021 to 2023 DTA recovery period. Moving to investing activities, in the first quarter, we placed $229 million of assets in service, which is a 45.9% increase compared to the prior year. The year-over-year increase related primarily to the transmission segment in which a significant portion of the East-West tie project was placed in service. In addition, we had higher spend on station refurbishments and replacements work, as well as higher volume of assets being put into service to maintain North American Electric Reliability Corporation, or NERC, standards. Capital investments for the first quarter were $449 million, which is a 14.8% decrease from the first quarter in 2021. The decrease came primarily from the transmission segment due to the completion of the Ontario Grid Control Centre in the city of Aurelia in 2021, a lower volume of station refurbishments and replacements, and a lower volume of wood pole replacements. The capital investments in the distribution segment were also lower due to the completion of the Aurelia Grid Control Centre. that I just mentioned. In addition, we had a lower volume of wood pole replacements and a lower spend on IT initiatives. These are partially offset by reinforcement projects and a higher volume of work to connect customers. You also know that future capital investment profiles for both segments have been adjusted since our last call. This was done to reflect the evidence update for the joint rate application, which was filed in March. The new transmission lines The developments surrounding the Wassigan Transmission Project and the Broadband Regulatory Initiative have not been reflected in these numbers due to their current stage of development. That said, any amounts on these initiatives will not be part of JRAP and will be additive to future capital investments. As a reminder, the capital investment numbers for future years remain subject to OEB approval. The evidence update we filed has a modest impact on our projected rate-based growth. for both segments. On guidance, we continue to be committed to and affirm our target of 4% to 7% earnings per share growth through 2022. As a reminder, we expect to provide updated guidance for the post-2022 period following the approval of the joint rate application. I'll stop there, and we would be pleased to take your questions.
spk10: Thank you, Mark and Chris. We asked the operator to explain how she'd like to organize the Q&A polling process. In case we aren't able to address your questions today, my team and I are always available to respond to follow-up questions. We ask that you limit your questions to one question and one follow-up. If you have any additional questions, we request you to rejoin the queue. Please go ahead.
spk01: Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the panel key. Please stand by while we compile the Q&A roster. Our first question comes from Maurice Choi with RBC Capital Markets. Your line is open.
spk08: Thank you, and good morning. My first question is on the JRAP. I just wanted to get a little bit more understanding about your cost updates. Specifically, can you just discuss the mix between what is inflation slash pricing updates and how much of it is just shifting of projects between different regulatory periods.
spk11: More to Maurice, it's Mark here. As you know, we developed an investment plan based on the engagement with our customers when we put that investment plan together. So, over 50,000 customers, we engaged in that. And we still believe in the investment plan, and we still believe that that is what our customers asked us to do. And so the evidentiary update that we filed is to reflect the increase in costs on delivering that program, but the program itself has stayed intact for the JRAP period.
spk08: Understood. And just to follow up to one of your comments and prepared remarks about using deferrals instead of increasing the cost of customer rates. Broadly speaking, you know, has this been something that you've filled up with as part of the consultation or is something that if you had early thoughts from the regulator about their view about this approach?
spk11: Yeah, so as part of OEB's rules of practice, we're required to update evidence when there's a material change to our filing. And given the economic situation and the increased cost due to inflation, we were required to update that evidence. So that's what we've done. We believe in the commitments we made to our customers, and we wanted to hold to those commitments, which are the rates that we committed to when we filed our evidence. And so we've proposed the regulatory mechanism which will help us to deliver on that commitment and not put those cost pressures on our customers at this time when they're facing pressures in other aspects of their life. And we will look to collect those costs in the future period.
spk08: Thanks, and if I could just finish off with thoughts about the election now that the campaigning is underway. Thoughts of the tone from the leaders with regard to energy policy and as well as affordability and capital?
spk11: As you point out, the election is officially underway. As of yesterday, the risk has dropped. So we know that an election is going on. We do expect to hear various points of view from parties and several people on that. What we're focused on at Hydro One is to continue executing on our strategy to serve our customers, to facilitate economic growth through the things like the new transmission lines where I talked about on my opening, and to continue to drive costs out of our business. And we've been successful on that for, as you know, many years, consistently finding at least $50 million cost improvements each year. We'll continue to focus on doing that.
spk08: Thank you very much.
spk01: Thank you. Our next question comes from Rob Hope with Scotiabank. Your line is open.
spk09: Morning, everyone. I want to follow up on the deferral treatment of the incremental JRAP costs. So, When you evaluated all the different opportunities in your front view, can you maybe give us some puts and takes on why you thought deferral mechanisms would have been the best path forward? I understand it would be net income neutral, but it will be a headwind in terms of cash flow of what you could have gotten. Does the strong balance sheet and credit metrics where you are right now give you that willingness to give up some cash flow in the near term?
spk11: Yeah, Rob, I think you nailed it. Like I said before, we made a commitment to our customers when we filed this, and it was based on that input to those customers. We feel a deep obligation to meeting those commitments to our customers, and we do have a strong balance sheet, and we can support that during the JRAP period, so we thought it was the right thing to do as an organization to support our customers through these times over the, over the JROP period and look to collect those costs later.
spk09: I appreciate that. And then maybe just more kind of longer term and conceptual, you know, for years, we didn't see any real, you know, demand growth out of Ontario. And then, you know, moving forward, we are seeing a relatively good amount of transmission build out, whether it be to, you know, serve Southwestern Ontario and some load there, whether that be greenhouses or battery manufacturing or the kind of the mining up North. When you take a look at the ISO load forecast and you kind of see some of the puts and takes, do you have a bias upwards in terms of load growth in Ontario and, I guess, as an extension, further transmission growth?
spk11: Yeah, so we did see in the latest annual planning outlook from the ISO that they are forecasting an increase in load, which, as you point out, load in Ontario was relatively flat for quite a period of time, started to creep up a bit, but the latest outlook annual planning outlook which looks 10 years beyond um is showing some increase in load we are actually seeing that on the ground that's why we uh in southwest ontario we've talked in the past about agriculture and and in the the load increases uh required for meeting the agricultural load but now we're seeing manufacturing that the announcements on ev and ev battery manufacturing other sectors of the economy are starting to electrify. And that's why we went with our partners to the ISO and advocated that they need this electricity, that they're making commitments to invest in Ontario and we need to supply the power. So that was part of the impetus around these new lines. And then when I look at the Northwest, we are seeing a lot more action in mining. And a lot of those minerals are actually to support the EV manufacturing or the EV battery manufacturing. So earlier this month, The ISO has actually asked us to see if we could put Wasagan in by the end of, as close to the end of 2025 as we can. So that's accelerating and that's driven by investments and requirements in the Northwest. So we are seeing that people are recognizing that Ontario is a place to set up business with the low carbon electricity we have here. And that's starting to happen and that with real commitments and announcements by companies. We're pleased to see that. Thank you.
spk02: I'll hop back in the queue.
spk01: Our next question comes from Darius Lasmi with Bank of America. Your line is open. Darius, your line is open. Please check in the button.
spk02: Hi, good morning, and thanks for the time. I just wanted to maybe continue going down the similar line of questioning about the specifically about the four transmission projects that were announced that are potentially incremental to JRAP. Just wanted to maybe ask you, at what point do you see yourselves having enough confidence in those projects going forward that they would be added to your formal investment plan? And just wanted to confirm on the financing part of that, it sounds like you wouldn't need external equity, but if you could just confirm that up, please.
spk06: Hi, Darius. It's Chris. Thanks for that question. So our process usually is when it's awarded, like we've just had, we will now calculate those development costs and we'll put the development costs in. We would put the actual construction costs in when we do what's called a Section 92. That's when we're comfortable around how the cost of the project would move forward under the regulatory construct. So it's been allocated to Hydro One. Now we need to do the development work and then we need to put in the construction costs. So you're still a ways off. There'll be a couple of those lines, like there's five in total. One is Cham to Lakeshore. We'd expect Section 92 on that fairly soon. So we'll be able to put that one in. So you'd see them going into our forecast progressively over the next 12 to 18 months is my guess. You'll start to see development costs going in in the next six months. So that's how I'd see it. Darius, in terms of your question on equity, I love having the challenge of more growth. This particular announcement will not require new equity, but the more announcements that come, Mark's talked about, the further growth in the Northwest and so on, there may come a point where we look at it, but we'll actually communicate that very clearly to all stakeholders if and when that moment comes. This particular announcement will not cause that.
spk02: Okay, thank you. That's very helpful. The next one's maybe more long-term, maybe a little bit more conceptual. I think like you guys are making more of an effort to highlight some of the unregulated initiatives, including IV charging and the telecom piece. So perhaps as we look ahead to your coming guidance update, which will be on the other side of the JRAP process, are you considering perhaps putting maybe some formal growth targets around that segment, whether it be the charging or some of the other unregulated businesses that you're involved with?
spk06: Darius, Chris again. Yes, good question. We would. I would remind you that IV is more, we've said this a number of times, it really is about supporting our customers. Our customers have asked for it. It's not a high-growth business right now. So I wouldn't want to read too much into that, but it's really about supporting EVs and that whole industry here in Ontario. We talked about manufacturing. We talked about the batteries. You need a good market here in Ontario to support that as well. So that's what that's about. It may develop into a growth business, but right now it's more of a developing business. The other areas that you're talking about around LDC potentially, that's still regulated. But EMS, absolutely, we'll put some guidelines around that when we come out with guidance, which will be after the next level of guidance we give will be after the joint rate application decision.
spk02: Okay, thank you very much. I'll leave it here.
spk01: Thank you. Our next question comes from Linda Ezegelez with TD Securities. Your line is open.
spk04: Thank you. Just wondering if you could maybe talk a little bit more about how management and the board thinks about balancing incremental growth with incremental marginal growth. cost of capital. Specifically, as you look at potentially acquiring LDCs or adding more growth projects, might there be a point where some of the transmission opportunities that have just been awarded to you could potentially delay certain LDC consolidation?
spk06: Hi, Linda. Chris, good question. I think you're talking about the speed at which we do these transactions. Today we've got a fair bit of balance sheet capacity, so we don't have that challenge today. Even if that challenge came, Linda, say we had a number of transmission lines and a number of LDC opportunities that came up at the same time, the economics on them are very similar. It works out that they effectively go in at one time's rate base for us ultimately. So we pay a premium on the LDC, we get a chance to earn back some of that premium in the first five to 10 years of ownership. So the economics are identical for us. So that's a tough one to choose. We would do them all and we'd look for the right way to finance that. I don't think it would be an incremental, you're talking about the next cost of that dollar of financing. Like I said, they're effectively both regulated businesses. I don't see a higher cost as a result of that. It becomes a larger business but the next dollar doesn't cost us more to acquire.
spk04: Thank you. Maybe just switching gears a little bit, as you progress in your sustainability efforts, can you help us understand which programs are included in the JRAP, what programs are outside of that and how that might evolve over time and how you make that decision?
spk11: We will be updating our materiality assessment when we issue our next sustainability report. Our ESG initiatives, which we've been focusing on so far in our sustainability report, are diversity, equity, and inclusion. So we've made commitments there. And there's no incremental costs on that. That is embedded in our base business. There's commitments to greenhouse gas reductions. through things like greening our fleet. Again, no incremental costs, that is part of our JRAP and that as we replace vehicles due to end of life, we will replace them with lower carbon vehicles. We will continue to support communities and that is part of our space business budget and included in JRAP. So I don't see our ESG metrics adding additional pressures to our costs overall. But we will be updating our materiality assessment, and you'll see that in August likely when we issue our next sustainability report.
spk04: Great, thank you. I'll jump back in the queue.
spk01: Thank you. Our next question comes from Ben Pham with BMO. Your line is open.
spk05: Hi, thanks. I'm wondering, are you able to attach any with the recent priority projects that were announced?
spk06: Ben, I think you're talking about the recent transmission lines. And Darius asked a similar question. You can expect us to put some development costs in over the next couple of quarters with regard to those projects. And then, one, we do a Section 92, which is our regulatory application to go and construct. we would put their full cost of construction at that time. So I would expect that we would do that for one of those lines in the near term. The other four are fairly new, so that will come over the next 12 to 18 months.
spk11: And whilst we've been working on it for several years, so we will be filing that application for Section 92 lead to construct relatively soon. So you'll get visibility at the cost of that one as well.
spk06: Yeah, so there's two separate announcements there. One was the southwest, five lines. One we've been working on for a while, four are fairly new. And then there's a Wasagan one that the ISO had said they wanted in service by 2025. We haven't had the directive on that yet, but we know it's coming now. When that comes, we would put the construction cost in.
spk05: Okay, great. Thank you for that. And these projects that... that the rest reference, I mean, some, some is to facilitate greenhouse and other ones for the, the battery manufacturing facility. And my question is, I mean, is it very tough to figure out EV penetration rates and electrification? Like do you, do you anticipate building transmission in a way that you would be overbuilding to facilitate electrification? which would be mindful of consumer costs, or is it going to be more of a piecemeal situation where you see a battery facility, a battery plant come up and you build that and then wait for the next one to come?
spk11: So we work with the ISO to look at the load forecast where the expected growth may come. The ones that we're building now, we do, like I said earlier, have really good um, visibility into the load is actually going to come to fruition in, in, for those. And so, for example, the first line that we, uh, announced in 2019 for the Southwest is already oversubscribed. And so, uh, so I, I wouldn't say this is a build in and they will come, uh, approach. We actually have, uh, the load and customers waiting to get connected. So, uh, So we'll continue to do that. Ultimately, the ISO makes the decision on whether we go forward with these, but we work with our customers to ensure that the commitment from them to connect to the grid is there, and then we advocate with the ISO for the need.
spk06: Ben, I'd just add to that to say that perhaps what you're referring to is things like Wastegan have been stop-start. We've worked on that for the last few years, and that's the reason why we can bring it into service very quickly now. The same in the southwest. Mark just highlighted that first line we've been working on for a number of years. Even though they announced five, one is pretty much ready to construct. So really what we're talking about is we've got, and the whole industry is getting greater certainty around environmental targets, EVs, policies from the federal government, the provincial government. It's that certainty that's allowing these large investments in infrastructure to move forward. So we hear that a lot, but the environment is right today. The economic environment, the environmental targets are all being supported federally and provincially. That's what's allowing these things to move forward rather quickly. They've been on the boards for a number of years, but it's that certainty more recently that's helped that progress.
spk05: Excellent. Thanks for that. My other question, you mentioned your balance sheet's in good shape, but you also, it sounds like with the higher CAPEX, deferral accounts out there. There could be a bit more pressure on your balance sheet in other years. You may need to look at equity. I think that's what I heard. But when you look at hold code debt first, perhaps before looking at that, and what are your thoughts with drip programs?
spk06: Yeah, so Ben, I'll just clarify my statement earlier. As I said, based on what's been announced today, that's The Wassigan line up in the north, the five lines in the south, there is no need for equity over that joint rate application period. So that's through to 2027. If additional lines came along in that timeframe, then we would look at what does that mean. I would not turn away any growth. We would make sure that power is to all of our customers where and when they need it. So we'd absolutely do that. We are that supplier. We have 99% of transmissions. in Ontario, so we would not turn that away. At that point, I'd look at, you know, how do you finance the next dollar? You've made one suggestion, which I agree with, is we would look at whole code debt, certainly, at that point. We would, you know, just ensure that the business stays on the right footing, 60% debt, 40% equity at the regulated level, and then we'd look at, you know, the whole code as to what makes sense in terms of bringing in that additional funding.
spk05: Okay, that's great. Thank you.
spk01: Thank you. As a reminder, to ask a question at this time, please press star then 1. Our next question comes from Mark Jarvie with CIBC Capital Markets. Your line is open.
spk03: Thanks. Good morning, everyone. Just on the transmission lines, you know, obviously you saw or seen some accelerated timelines on Wausau again. Is there a chance for that to play out on the southwest lines? And then is the right way to think about a sort of three to five years to end service once you do the Section 92 filing?
spk11: Yeah, Mark here. so so obviously i can't make commitments on that that's up to the iso when they want us to go forward to those um and it is dependent on the length and size of the line on how long it takes us to construct but the the upfront development work and the environmental assessments and the permitting and all those things does take a two to three years on a major transmission line and that's the work that we're we're uh we're doing right now on on a bunch of the ones that we announced in the southwest so That really enables us that as soon as we get notice on when the in-service needs to be, it enables us to meet those timelines. So, you know, I think your timeline two to three years to construct on average is accurate. But the upfront work on these, as you know, along in linear infrastructures, there's a lot of consultation and environmental permitting and checks and balances that also take the upfront work. our time. And that's what we're working on a bunch of these already.
spk03: Got it. And then would you guys assume that you'd be a hundred percent owners or, or would there be first nation partners on this? Like what do you guys envisage in terms of your ultimate ownership on these transmission lines?
spk11: Yeah, we, you may have seen yesterday, we announced an equity partnership with, with, First Nations in the Northwest on the Wollaston line where we're 50% equity partners. So we're equal partners on that line. We do see that that is the model going forward for linear infrastructure in Ontario is through partnerships like that. So we do see a new greenfield, large transmission lines that it will be done through partnerships. I will remind you as well that... The OED has set out a separate regulatory process for those types of projects where we are doing them through partnerships with First Nations. So that is not included in our JRAP application. Those will go through separate regulatory processes.
spk03: Okay. And then just coming back to the deferral under the refiled joint rate application, Have you been able to get any feedback from stakeholders? And I believe there is a precedent for it. So is the assumption there that the OEB is comfortable with this construct? And maybe you can share some initial thoughts on any feedback.
spk11: It is one of the mechanisms that is available. It's used in other jurisdictions. I don't think we've used it here, as far as my knowledge, at Hydro One. And, you know, we proposed it. Ultimately, it will be up to the OEB to decide on whether they want to, you know, allow us to use an account like that or not. And, again, you know, we believe it's the right thing to do for our customers, but ultimately the OEB will decide. Okay. Thanks, Ron.
spk01: Thank you. Our last question comes from Andrew Kuski with Credit Suisse. Your line is open. Thank you.
spk07: Thanks. Good morning. I guess that's a question probably starts with Chris and then maybe also transitions into Mark. And it's really just on the OM&A. And I know there's a commentary in the MD&A that said something to the effect of lower spend on lines maintenance. Is this more of a timing issue or is this something structural given just the performance improvements that you've seen across the portfolio over the last few years?
spk06: Hi, Andrew. For the quarter, I would say we do have productivity, but I don't think that would be material in terms of lower quarter over quarter. So when that analysis is really comparing this quarter to the same quarter last year. So we further said the overall work program hasn't changed dramatically in terms of the volume of work being done. So I would not say that that is an ongoing part. We've definitely become more productive, but we also have an ageing system that we need to prepare. So I wouldn't say it that way.
spk07: Okay, that is helpful. And then maybe if you just give us a bit of a refresher on your views on inflationary pressures and how philosophically you've dealt with them in a historical fashion and then how you think about dealing with them on a go-forward basis.
spk06: That's a good question, Andrew. So in the past, our productivity program, we've aimed to offset $50 million per year. And it just happened to be that that $50 million was roughly 2%. It's roughly the long-term inflation rate that we've been seeing since the 1990s. So that was working really well. So in this new environment that we're in today or over the last few years, where you've seen inflation above that, we still continue to perform our productivity program and we're still targeting $50 million per year, so roughly 2% to 2.5% of our spend. But with inflation above that, we're not able to fully offset it at this point in time. So that was the main driver behind us bringing forward our joint rate application evidentiary update. And it also will provide a little bit of additional pressure this year. So we're now in the third year of COVID. You've seen the disruption in Europe. We've seen commodities increase. We've seen freight increase. We've had really good strategies around locking in costs over a longer period of time, and that's worked well. But the longer this goes on, and you renegotiate contracts, that starts to come through our cost structure somewhat. Protected in JRAP because we go through and do that work with them. This year we'll need to manage that and offset that in the best way we can. We've had a good first quarter. We've highlighted that. And then I reiterated that earnings guidance will be at the top end of our range. So that gives you a hint that we have got some cost pressure in the current year, but we've had some good results here in Q1 that will allow us to meet the top end of that range.
spk07: I appreciate the context. And then maybe just one final question. This ties into just the bigger, broader strategy and that $50 million of effectively productivity savings to counteract the inflation. As you bring in some of the capital and replacing agent infrastructure with brand new, does that productivity savings effectively widen and enhance itself?
spk11: Yeah, Andrew, it's Mark here. Actually, when we bring in new equipment, it does have some effect on our OM&A, but not as big as you would think. New equipment doesn't necessarily mean that you reduce your maintenance or reduce your maintenance costs. So there isn't a one-to-one offset of that. We do see that as we increase our capital, we're also reducing putting a lot more assets in the ground that need to be maintained over the longer period. So that does offset some of the kind of savings that you may get by replacing old assets with new, if that's the question you're asking.
spk06: I think I just added that, Andrew, is that our program has expanded. So over the next five years, we're preparing the system for the future. The investment plan is... is greater. The greater the investment plan, the greater the opportunity is to achieve productivity savings because you're actually investing a higher volume. So we get it from that. In terms of the offsets, as Mark said, it's not one-to-one, but the greater the program and the more transmission lines we're doing, we have higher purchasing power. So we actually end up with a better outcome overall for all consumers.
spk07: Okay, that's great. Thank you.
spk01: Thank you. And that does conclude our Q&A session for today. I'd like to turn the call back over to Omar Javid for any further remarks.
spk10: Thank you so much for joining us today. And if there are any follow-up questions, please feel free to reach out. We thank you for your ownership and for your time today. Thank you.
spk01: 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.
Disclaimer