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spk01: Good morning, ladies and gentlemen, and welcome to Hydro One Limited's fourth quarter 2022 analyst teleconference. At this time, all participants are on the 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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.
spk07: Good morning and thank you for joining us in Hydro One's quarterly earnings call. Joining us today are our President and CEO, David Lieberer, and our Chief Financial Officer, Chris Lopez. In the call today, we will go over our quarterly and annual results and then spend most of the call answering as many of your questions as time permits. 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 all cause our actual results to differ as they all apply to this call. With that, I'll turn the call over to our President and CEO, David Lebeder. Thank you, Omar.
spk02: Good morning, and thank you for joining us for our fourth quarter earnings call. This morning, I will talk about our fourth quarter, our annual achievements, and a look forward. This will then take you through the financial results in greater detail. I'm excited to take on the role of the CEO of Hydro One and to continue to work with all our employees across Ontario. As many of you know, I've been the COO at Hydro One for the past three years, and I've seen firsthand the hard work and dedication that our teams bring to our organization every day. Together, we have achieved great success, and I'm confident that we will continue to successfully execute our strategy in the years to come. My top priorities as CEO will be to maintain our focus on safety, meet our customers' expectations, drive operational excellence, and invest in our teams to ensure we have the skills and capabilities to meet the demands of the future. In short, we will continue to focus on executing our strategy. As we move into 2023, I want to assure our employees, shareholders, partners, and stakeholders that the transition from Bill Sheffield's leadership to mine is smooth and seamless. Our priority is to maintain the momentum. I am proud of the results we have achieved. Our strategy, people, culture, and values are what have made Hydro One successful. I'm committed to building upon that foundation, delivering on our promise to our customers and stakeholders. In Q4, we built on the momentum of the first three quarters and achieved outstanding safety results. Our focus on and commitment to protecting the well-being of our employees has truly paid off, as demonstrated by our record-low recordable and serious incidents. I am proud of the dedication and hard work that has gone into making our workplace safer. While we have made good progress, we have much more work to do. Safety will always be a priority as we continue to make the workplace safer. In 2022, Hydro One achieved our best safety results ever and made significant progress to preventing life-altering injuries and fatalities. Our workplace was safer in 2022 than it has ever been because we had a good plan, the Safety Improvement Plan, which we created with our employees two years ago. And because the entire organization was committed to that plan, the results speak for themselves. Hydro One's recordable injury rate of 0.616 for 200,000 hours is well below the world-class benchmark of 1.0. Hydro One saw significant improvement in the number of high-energy serious injuries over 2021, with only one employee sustained a high-energy serious injury in 2022 compared to the four in 2021. This equates to a high-energy serious injury and fatality rate of 0.012 for 200,000 hours, well below our annual target of 0.066. We are well on our way to eliminating all serious injuries and fatalities by 2024. Our safety results are even more impressive when considered in relation to the adverse storms of 2022. Our crews, who are committed to providing the highest level of service to our customers, restored power to nearly 760,000 customers after the Duracho storm in May, spent weeks in Maritime Canada rebuilding their system after post-tropical storm Fiona, and then restored power to approximately 550,000 customers during the December holiday season storm. While these storms adversely impacted our reliability statistics, I am pleased to report there were no recordable incidents during those events. In addition, We are once again recognized by the Edison Electric Institute for our efforts following the May derecho. This is our 13th Edison Electric Institute Award. In late November, the Ontario Energy Board approved our five-year joint rate application. This was a culmination of years of work for many people and established the clear path forward. The rate application was approved because, through the largest customer outreach ever, we knew what Ontarians wanted. We demonstrated year-over-year productivity savings, who were responsive to the concerns of interveners and had built an investment plan which met the evolving needs of our customers while keeping in place the maintenance and growth needs of the transmission and distribution system. We believe this plan will benefit all Ontarians by ensuring we are able to provide safe and reliable electricity for years to come. I also want to recognize our regulator, the Ontario Energy Board, for their constructive process. It is only because we submitted a strong investment plan into a robust regulatory process in which all participants, interveners, the Ontario Energy Board regulators, and Hydro One displayed a high level of cooperation, but such a complex case was settled so quickly. Now that the approval is behind us, it's all hands on deck executing our investment plan and delivering on our promises to our customers and stakeholders. I have no doubt that every person in Hydro One will continue to execute their work to the best of their abilities. Once again, we met our capital investment commitments. This year, we deployed $2.132 billion of capital and in-service $2.267 billion of assets. I am pleased to say we have done this while being extremely mindful of costs. Every dollar we invest comes at a cost to our customers, which is why we are committed to spending wisely and continually improving productivity. In 2022, we achieved productivity savings of $374 million, which represents an 8.6% increase year-over-year. Total productivity savings since 2015 now amount to almost $1.5 billion. This is a remarkable effort, especially considering the inflationary pressures faced this past year. We operate in the traditional and treaty territories of more than 100 Indigenous communities. In 2022, we were proud to announce a historic partnership model with First Nations when building new transmissions. This partnership model reflects our commitment to reconciliation, sustainable development, inclusivity, and being a responsible corporate citizen. By working together, we aim to create long-lasting benefits for Indigenous people, Ontarians, and Hydro One. The Hydro One equity model offers First Nations a 50% equity stake in new transmission line projects with a value exceeding $100 million and will transform the benefits of infrastructure development for First Nations. We believe that this collaboration sets an example for the industry and demonstrates the power of listening, respect, and seeking mutually beneficial outcomes in infrastructure development. As part of our commitment to being a trusted partner to Indigenous communities, this year we also increased total procurement with Indigenous businesses to 95.9 million, our highest spend to date. This is a significant increase from last year and has us well on our journey to purchase 5% of our materials and services from Indigenous businesses by 2026. The Indigenous procurement target is one of the many goals that are included in our updated sustainability report that was released in August. At Hydro One, we take our commitments to the people, planet and community seriously, and we'll continue to keep you informed of our annual progress report. Following the release of the sustainability pricing on our lines of credit in January 2022, we recently published our sustainability financing framework in January 2023. The framework, which is a first for a utility in Canada, allows Hydro One and its subsidiaries to issue sustainable financing instruments, such as sustainable and green bonds, and allocate the net proceeds to investments in eligible green and social project categories. The framework was so well received that we issued Hydro One's first medium-term notes in accordance with the sustainability financing framework. This was the largest aggregate amount in issuance of sustainable bonds by a corporate issuer two days in Canada. Looking out for our people, planet, and communities is ingrained in the DNA of our organization. Hydro One employees personally raised approximately $1.6 million in the annual Power to Give month last September, more than doubling what was raised the year before. It is this commitment to serving others and doing the right thing that makes Hydro One such a special place to work. For the eighth consecutive year, Forbes recognized Hydro One as one of Canada's best employers. It's an honour for me to lead this committed and dynamic group of people. Looking ahead, I see tremendous opportunities for Hydro One. Ontario and Canada are building an economy more reliant on clean electricity. The Independent Electricity System Operator, or ISO, estimates that attaining a decarbonized electricity sector by 2050 will require a system more than double the size it is today, at an estimated cost of around $400 billion. Hydro One has the unique opportunity to be a leading player in achieving that goal. As I take on the leadership role of Hydro One, my top priorities are, one, ensure our safety journey continues, two, fill the vacancies on our executive team, And three, remain disciplined in executing our maintenance and capital investments. As I conclude my remarks, I want to thank Bill Sheffield, who stepped in from the board as interim CEO when the company needed him. Bill, I know you're listening to today's call. On behalf of the company, the executive team, and myself, I want to thank you for your service to the company, its shareholders, partners, customers, and stakeholders. Your leadership and dedication to ensuring a smooth transition has not gone unnoticed, and I'm truly grateful for your unwavering support. Your guidance has been invaluable and has set a strong foundation for my role as incoming CEO. I'm confident that your contributions will have a lasting impact on Hydro One, and I'm eager to build on the progress that you have made. With that, I'll turn it over to Chris to discuss our financial results. Over to you, Chris.
spk08: Thank you, David. Good morning, everyone, and thank you for joining us today. David, I'd like to extend my sincerest congratulations on your appointment as CEO. Your leadership, strategic vision and passion for excellence have been evident in your previous role and I'm confident that you will bring that same energy to this new role. Your unwavering commitment to our mission and values will be instrumental in driving the company to new heights. I look forward to working with you and our talented team at Hydro One as together we continue to strive towards achieving our goals and creating long-term value for our stakeholders. Once again, congratulations. In terms of our financial results for the quarter, earnings per share was $0.30 compared to $0.27 last year. For the full year, EPS was $1.75 compared to EPS of $1.61. The main drivers of the higher earnings this year were consistent with our experience throughout the year. They were higher revenues on account of approved rates, which considers our annual investment in the grid and power system, strong electricity demand experience throughout the year, and recognition of conservation demand management, or CDM revenues, a one-time item in the fourth quarter. These drivers were partially offset by higher operations maintenance and administration, or OM&A expenses, on account of higher work program expenditures, including environmental management, stations and line maintenance, and IT initiatives. Higher depreciation, amortization, and asset removal costs due to the growth of our capital assets, partially offset by the sale of surplus property, a one-time item in the fourth quarter. higher year-over-year financing charges due to the recognition of carrying charges for the Deferred Tax Asset, or DTA, recovery amounts last year, and higher interest rates on short-term notes, as well as higher income tax due to increased pre-tax earnings, partially offset by higher deductible timing differences. As a reminder, we adjusted for the amounts pertaining to the DTA implementation decision in both revenue and income tax, making them net income neutral. Similarly, we had a tax recovery relating to the capital overhead tax variance, in both transmission and distribution following the joint rate application or JBAS decision, which resulted in a reduction in both revenue and income tax, once again making this net income neutral. While our costs were higher this year, I did want to echo David's comments that we continue to be highly productive. As a result of our efforts, we were pleased to give back approximately $23.5 million to our customers via the earnings sharing mechanism, as both our transmission and distribution businesses performed very well this year. On the productivity front, we achieved $374 million in productivity savings in 2022, which brings our cumulative productivity gain since the initial public offering to approximately $1.5 billion. We saw meaningful increases in productivity in areas such as operations and forestry. Overall, productivity was weighted evenly between capital and OM&A. Through these achievements, we are delivering on our multi-year commitment to keep costs as low as possible. Turning to the fourth quarter, net income to common shareholders was higher year over year by 11.9%. Key drivers of the quarter were higher revenues due to approved rates, two one-time items, one in revenue and one in depreciation, as mentioned previously and upon which I will elaborate further during this call, as well as lower taxes, which was partially offset by higher OM&A. Our fourth quarter revenue net of purchase power was higher year over year by 11.8%. The increase is mainly due to revenues resulting from the Ontario Energy Board, or OEB, approved 2022 rates, as well as regulatory adjustments, including the recognition of CDM revenues following the receipt of the JRAC decision, net of earnings sharing. For the transmission segment, revenues were higher by 14%. This increase reflected the recognition of the one-time CDM revenues arising from the JRAC decision, on account of the disposition of the variance account associated with CDM revenues from 2018 and 2019. Going forward, we did not expect there to be any material amounts to CDM revenues from prior years as this account is now closed. The CDM revenues were partially offset by a higher earning sharing adjustment for 2022 that is recorded in the fourth quarter. Additionally, we had higher transmission revenues due to OEB approved rates for 2022. Year-over-year peak demand for the quarter was relatively flat, driven by marginally weaker demand in all three months compared to the same period last year. For the distribution segment, revenues net of purchase power were higher by 9.9%. The main drivers were the OEB-approved rates and positive regulatory adjustments net of earnings sharing for 2022 compared to last year. Consistent with the annual analysis, both the transmission and distribution segments had net income neutral items included in revenue resulting from the DTA implementation decision and the capital overhead tax variance. The corresponding offsets are in tax expense, making them net income neutral. On the cost front, operating maintenance and administration expenses were higher year over year by approximately 39%. This represents approximately 75% of the annual increase in OM&As. OM&A was higher in the transmission segment due to higher work program expenditures, which included maintenance on stations and lines, higher corporate support costs, and higher property taxes, which were partially offset by lower project write-offs. In the distribution segment, OM&A was higher due to higher work program expenditures that included a higher volume of emergency restoration and environmental management, higher spend on IT and customer programs, as well as higher corporate support costs and project write-offs in comparison to last year. The level of OM&A expenditure is consistent with our expectations that had been outlined in previous calls as we caught up with our work programs that were deferred on account of storms earlier in the year. Depreciation expense for the fourth quarter was lower year over year by 6.5% due to a one-time gain realized on the sale of surplus property to the City of Toronto to facilitate transit. This was partially offset by higher depreciation from the increase in capital assets, which is consistent with our State of Capital Investment Program and higher asset removal costs. On financing, we saw an increase of 4.1% in interest expense in the quarter due to a higher weighted average rates on short-term notes, partially offset by gains on interest rate swap agreements. As I mentioned, on January 12th, 2023, we announced our sustainable financing framework. Under this framework, we can issue green, social or sustainable bonds, loans or commercial paper for several purposes. The use of proceeds allows us to raise financing for initiatives including the transmission and distribution of clean energy, smart grid technology and other uses that promote energy efficiency, facilitation of clean transportation including EVs, biodiversity conservation, climate change adaptation, socio-economic advancement of Indigenous peoples and access to essential services like broadband. On January 27, 2023, Hydro One Inc. issued an inaugural offering of 1.05 billion of medium term notes under the sustainable financing framework. This consisted of 300 million maturing in 2029 with a coupon rate of 3.93%, 450 million maturing in 2033 with a coupon rate of 4.16% and 300 million maturing in 2053 with a coupon rate of 4.46%. This was the largest aggregate corporate sustainable bond issuance in Canada and a further demonstration of our strong commitment to sustainability. We continue to be pleased with the stability of our balance sheet and robust investment grade credit rates. As we look forward, we will continue to access the debt markets opportunistically. Income tax expense was $41 million for the quarter compared to $55 million in the same quarter last year. The decrease in income tax expense was due to high deductible timing differences and net income neutral items that are also capturing revenues. These are partially offset by taxes on higher earnings for the quarter. The effective tax rate this quarter was 18.6% versus the effective tax rate last year of 25.5%. On a full year basis, income tax expense for 2022 was $288 million compared to $178 million in 2021. The increase in income tax was primarily due to the net income neutral items discussed earlier and higher pre-tax earnings, partially offset by higher deductible timing differences. The effective tax rate for 2022 was 21.4%, versus 15.5% in 2021. This is consistent with the annual guidance we provided last year of 14 to 22% over the next five years. Following the approval of the joint rate application and the corresponding capital plan, we are now updating the ETR guidance to 13 to 16% over the next five years, with the most significant impact occurring in 2023 due to the recovery of the previously shared DTA amounts. Moving to investing activities, capital investments for the fourth quarter were $570 million, which is a 7.1% increase from the fourth quarter in 2021. The increase came primarily from the distribution segment, which had a higher spend on storm-related asset replacements and higher volume of work on customer connections. There was a marginal increase in the transmission segment, which had a higher volume of refurbishment and replacement work on transmission stations and lines, and a higher volume of work on wood poles. This was partially offset by a lower volume of work on customer connections. For the full year 2022, capital investments were relatively flat, with a 0.3% increase compared to the full year 2021. You'll also note that the future capital investment profile for both segments have been updated since our last call. The primary reason being to reflect the adjusted timing and pacing of future capital investments and reprioritisation of work. The overall increase in transmission capital reflects the projects that are outside of the joint rate application. In the fourth quarter, we placed over a billion dollars of assets in service for our customers, a 38.7% increase compared to the prior year. The year-over-year increase in the transmission segment of 44.7% related to completion of large replacements for end-of-life air blast circuit breakers, higher customer connection, timing of IT initiatives, and refurbishment and replacement of transmission lines. In the distribution segment, the 26.8% increase was on account of the partial inservicing of a feeder development project, storm-related asset replacements, and miscellaneous assets placed in service for IT initiatives and customer connections. On a full year basis, assets placed in service were higher by 29%. On guidance, as most of you know, we are unique in the Canadian utility sector because we provide earnings guidance along with projected rate base and targeted dividend growth estimates. This not only demonstrates the confidence we have in our ability to execute, but also the stability and predictability of our earnings in our business. As promised, we updated our earnings guidance to reflect our view of the next five years. We have also provided normalized earnings for 2022, which can be used as a waypoint for our guidance. The updated slide is available in the investor presentation that is posted on the website. Our view of normalized basic EPS is $1.61 after adjusting for items that we view as non-recurring and for rebasing due to the new rate period commencing in 2023. Starting at the 2022 reported EPS of $1.75, we make two adjustments for one-time items that we discussed earlier on this call. The gain on sale of surplus properties sold to the City of Toronto and the recognition of the disposition of the CDM revenues that were approved as part of a joint rate application. The resulting figure is an EPS of $1.67 that has been normalized for one-time items. This is slightly above the target of 4% to 7% EPS growth, a possibility we communicated in last quarter's call. We then normalized earnings to factor in the allowed return on equity, or ROE, for both segments, as well as 100 basis points of potential over-earns. This step is necessary to rebase for all the productivity savings, favourable demand, and impact of low interest rates that will now benefit customers in the next rate period. The rebasing is a great example of a constructive regulatory incentive rate-making model that has worked as intended to deliver positive outcomes for the long-term benefit of the customer. The resulting normalised BPS for 22 is $1.61. With that waypoint in hand, we move to the future. we are updating our guidance and introducing a range of EPS for 2027 of $2.05 to $2.26. This range translates into a compound annual growth rate of 5% to 7% over the period 2022 to 2027 on normalized EPS of $1.61 in 2022. The long-term projected rate-based growth currently stands at 6%, and it could be expected that dividends, with the approval of the Board of Directors, would follow this level of rate-based growth. Finally, we anticipate funding this growth through internally generated cash with no need for external equity issuance. As important as it is to know the growth figures, it is equally important to know what is not included in this forecast and how we intend to update it. The EPS growth range does not factor in growth from broadband, LDC consolidation, and five of the six transmission lines that have been previously awarded to us but only have preliminary estimates, as well as any amounts from externally driven variance accounts. We will update guidance if there is a material change to the growth range when we have further clarity and concrete estimates on these specific initiatives. Furthermore, we will not provide quarterly or annual reconciliations going forward unless there are material events that impact the guidance discussed here. We also don't expect to provide rolling guidance. Future guidance is expected to mirror the term of the rate files. This is an exciting time for Hydro One. We have a strong culture of performance. This is proven through our historical ability to deliver on our predictable capital plan and our ability to realise significant operational efficiencies year over year. We have plans to grow our business through investment in our ageing assets and in support of the growing Ontario economy. Lastly, we have a strong balance sheet that provides stability and underpins our growth plan. I'll stop there, and we'd be pleased to take your questions.
spk07: Thank you, David and Chris. We asked the operator to explain how they'd like to organize the Q&A polling process. In case we can't 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, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Robert Hope with Scotiabank. Your line is now open.
spk06: Good morning, everyone. David, the question is for you. What has been your focus in the first few days as a CEO? And as you look forward, I do appreciate kind of the priorities that you did lay out in your prepared remarks. But diving into that a little bit deeper, any areas where you'd want to focus on more than has been a focus in the past?
spk02: Good morning, Robert, and thank you for joining us on the call today. Clearly, my focus in the first few days, weeks in this role has been reestablishing the executive team, filling the vacancies that we do have, and I'm very confident we're going to be able to fill them from internal. We have a strong bench strength of people coming up within the organization, as was evidenced by my promotion into the CEO role. In terms of the other priorities, There's not much more detail I'd like to actually provide. Safety continues to be a paramount focus for us. It's been a long-term goal of ours to reduce all fatalities and serious injuries, and one which I indicated in my prepared remarks that we're well on our way to. And then maintaining our focus on delivering or executing on our maintenance and capital programs. That is really our priority, and that's how we live up to our promise to our shareholders, our stakeholders, and our customers.
spk06: Thanks for that. And then maybe a little bit more of a detailed question. On the broadband opportunity, you spoke quite a bit about that with your last quarter results. When you take a look at the opportunity set in front of you, how are the opportunities coalescing and when would you expect to see meaningful capital being put to work on that opportunity?
spk02: The broadband program, the intent is to have all Ontarians connected up by the end of 2025. Our role in that program is really to facilitate access to our infrastructure so the internet service providers can attach their equipment and connect customers. So to that extent, the program is really driven by their pace. We started to see some ramp up in the back half of 2022. We're continuing to see some increased activity right now. We expect that to accelerate through 2023 and onward towards that completion date of 2025. Appreciate it, Keller. Thank you.
spk01: Thank you. Our next question comes from the line of Linda Ezegelez with TD Securities. Your line is now open.
spk09: Thank you. I'm wondering if you could help us understand some of the elements or potential opportunities that are not embedded in your guidance. What could that add potentially to your earnings growth outlook? What's the magnitude?
spk08: Hi, Linda. It's Chris. Thanks for that. Yeah, so what we attempted to do here in the guidance is stay consistent to what we've done previously for 2019 to 2022, which is show the base growth rate, which is what we're showing you here, 5% to 7%, which really tracks the 6% in the joint rate application effectively. So that's the midpoint. Things that can force that up or can help us go above that would be you know, earnings above 100 basis point overrun, which is good for everybody if we get there by 2027, because it means that we can give more back to our customers. Savings off interest rates, for example, if we can secure rates that are lower than what was previously secured. A good example was the recent one we just did that gave us some benefit on that. So if we can continue to do that and time those allocations, that would be useful. But I think what you're asking is what additional investments could come in. So broadband was already asked. And I think the question that Robert had was, you know, when could we expect some guidance on that number? The more insight we get into the demand program broadband, that's when we'll have confidence in bringing that forward. You know, I've said in the past it could be anywhere from, it's in the hundreds of millions, it's not in the billions. It could be half a billion to a billion dollars. We won't know that until we see more of this demand coming through. So that's one example. The other one is the the transmission lines. We said five of the six are not included. So the only one that's in here right now is Chatham to Lakeshore of $268 million. Again, I don't have an estimate for you today of what each transmission line is worth. You can have an assessment yourself. But again, that can be in the hundreds of millions. And then the final one is the acquisition of LVCs. And it's set out on the slide on the website. And that one there, we target $100 to $200 million per year. So that can add another certain amount. And I've said that one in the past, for every 100 million that we acquire of rate base, it's about one cent accretive. So those items are not in this guidance range. So if they came through in any material way, it would cause us to reissue guidance and it would push us above that range.
spk09: Thank you. And just as a follow-up in your core business, you've got an approved joint rate application. Clearly, some opportunities there to benefit all stakeholders as you execute and implement your plans around that. What are the priorities and the milestones of putting things in place to pivot to that new regime, and where do you see the challenges in executing that?
spk02: Good morning, Linda. It's David. I'll answer that question. The joint rate application is very consistent with our previous strategy. We're focusing on our investments, maintaining our assets, and new builds, as Chris outlined. So there's really no change and there won't be a pivot as we move forward.
spk09: And where do you see the biggest challenges, like continued inflationary pressures or attracting and retaining the right talent to execute that?
spk02: Yeah, my apologies, I forgot the second half of your question, so thank you for reminding me. The challenges are, it's actually going to be the inflationary pressure. So far we've experienced about 6%. It is different by category. I'm really pleased at the way our team has responded to that inflationary pressure. We've looked at alternative sources of supply. We've purchased long lead times ahead of, purchased long lead time items. A lot of our procurement has locked in rates that are formulaically driven based on the base price of commodities underneath. So that's going to be our biggest challenge in the short term. Talent for us, we're very, very fortunate that in general, we have very low turnover, somewhere around 1%. When we do go to the market to recruit people, we have many people that apply and want to come work for us. Now, there are a few sectors that are a bit more challenging for us, IT, cybersecurity being two of them that come to mind. But today we've been very successful in filling the vacancies we have and acquiring the talent that we need to continue to deliver on our strategy.
spk09: Thank you and congratulations on your promotion. I'll jump back in the queue.
spk02: Thank you.
spk01: Thank you. Our next question comes from the line of Darius Lozney with Think of America. Your line is now open.
spk05: Hey guys, good morning and thank you for taking my questions. First one is I just wanted to maybe reconcile a couple of the statements made in the opening remarks and in your presentation. So I understand that over the long term, you're targeting a 70% to 80% dividend payout range. And I think with the dividend update this morning, you're tracking a little bit below that. So curious if you could maybe speak to those dynamics a little bit. As far as relative growth rate of the dividend payout over this five-year timeframe that you laid out the new EPS CAGR for?
spk08: Thanks, Darius. It's Chris. You're correct. So we didn't have an increase this morning. We've traditionally done that in May, and you can expect that to occur in May of this year. We have not changed the target. It is 70% to 80%. There will be an increase recommended to the board. They'll need to approve it. but there'll be an increase recommended. And I would expect in those remarks, as I said, that the dividend increase would track our rate-based growth. So in the past, it's been around five and I expect it to be six going forward. So you can expect that in May. And I think that will get closer to your number, Darius. I think we're in the low 60s right now. It'll take you up into that 70 range. The lower end of that, which again, we're very pleased with our balance sheet and gives us a lot of flexibility for growth moving forward.
spk05: Great. Thanks for that, Chris. And actually, you alluded to my second question in your response there. I just wanted to ask about the specific headroom that you have on your balance sheet as far as obviously we're talking quite a bit about upside to your 5% to 7% as far as LDCs, acquisitions, transmission projects, et cetera. At what point, assuming that those pieces of upside materialize, would you anticipate meeting additional financing, including potentially external equity, throughout this five-year plan?
spk08: Yeah, so, Darius, I said earlier, based on the joint rate application itself, no need. LDCs are interesting because, you know, we end up getting synergies off them very early on, so they're actually not dilutive to our borrowing capacity. So, effectively, you know, for the smaller ones, it's quite... supportive of our debt metrics so we would not need it for the smaller ones now if we had a very large capital program on transmission for example that's where you might need it but it wouldn't be in this five years because remember we only balance up equity and debt when we actually put the asset in service so you know if new transmission lines are announced beyond the five or the six that have already been announced it's unlikely they would go into service by 2027. So the time we would need equity would be on this five-year period in any case. So I'm fairly confident that the requirement for equity is very low in this period. It's non-existent right now. I don't see a position where that would come in the next five years.
spk05: Okay, terrific. Thank you for those responses. I'll pass it along here.
spk01: Thank you. Our next question comes from the line of David Quasada with Raymond James. Your line is now open.
spk04: Yeah, thanks. Excuse me. Morning, everyone. Just one for me. Just curious, when you look over your coming five years and thinking about, I guess, things that are not in your capital plan, I know that in the province of Ontario, there's new storage capacity that's going to be integrated, potentially some additional renewables and other generation sources. So I'm just curious if you see any opportunities there incrementally over above your current plan or guidance there. from integrating those new generation sources in storage.
spk02: Hi, David. It's David. And good morning. There will be opportunities as we move forward and the future becomes clearer. So right now, we do have some battery storage within our own joint rate application. As always, we will always connect customers, whether they be load customers or generation customers that come along. And as you can imagine, the energy transition or electrification of Ontario's economy is really just starting to pick up steam. So we're watching all this and we're paying attention to it. And we're really excited by the ISO's, Independent Electric System Operators, report on pathways to decarbonization. And that points to, as you pointed out rightly so, increased investments in batteries and renewable generation. So we're following all that. We're in active discussions with the ISO, as well as the Ontario Energy Board, as well as the province of Ontario, and how this plays out so that we remain an active participant and a facilitator.
spk08: I think, David, just one thing to add to that would be that, similar to the question we had earlier on when would those material investments come up, and even in pathways, a material amount of that opportunity would be outside this 2027 period. So when we're providing guidance today for 2027, We will update that on our next application as well, as we've done in the past. And that's when you could expect to see more of those kind of opportunities come out. There's more and more discussion on them. There are more announcements being made, but it's still going to take time for those investments to be made and put into the system.
spk04: Excellent. Thanks very much for the call. I appreciate it.
spk01: Thank you. As a reminder, to ask a question at this time, please press star 11 or your touchtone telephone. Our next question comes from the line of Maurice Choi with RBC Capital Markets. Your line is now open.
spk03: Thank you and good morning. Just want to follow up on the guidance range. Chris, you mentioned that the approach in designing this guidance is the same as when you put out the 2022 guidance. And in deriving this $1.61 normalized EPS for 2022, you've removed six cents for 100 basis points over-earned. When we look at the 205 and 226 for 2027, does that include the 100 basis points over-earn or put differently, any reason why we shouldn't expect you to also deliver this over-earn over the next five years?
spk08: Hi, Maurice. Thanks for the question. The 100 basis points is in both numbers. So in the guidance we put forward back in 2019, we took it out of the starting number and we left it in the back end, and that sort of tilted the growth rate up. So in this one here, we have left 100 basis points in the base here, and it's in the final year as well, to show we expect, we may not reach it in every year, but we would expect that over five years, you would absolutely reach that number, and that's part of incentive rate making, is that we are encouraged to do that, or incentive to do it, because our customers benefit from it in the future. So in short, Maurice, it's in both numbers, And we're committing to achieving that for the benefit of all stakeholders.
spk03: Perfect. And maybe just to follow up on a DPS question earlier on about your dividend payout ratio. Suppose you get into a situation where your EPS obviously outstrips your DPS growth. When you think about the next five years and the propensity for this to be perhaps on the lower end of your dividend payout, payout ratio, what will propel you to or motivate you to consider increasing that rate or even changing your target payout ratio to be perhaps closer to some of your peers south of the border?
spk08: Yeah, so I think, Maurice, it's always a matter for the board, and I guess the lucky position of recommending what we should do is that the board will approve it My thoughts are this, that look, it's a way of financing new growth. We don't have any restriction right now on how we're going to finance new growth. So the dividend will absolutely match our rate-based growth. I could see at 6%, we have no challenge with that. At 7%, it still would be okay. So I would see it tracking at that point. It's when you get up, if I think about, you know, David spoke about ISO pathways and so on beyond 2027, when you start getting into much higher growth rates that are potentially there, that's when we would think about do you chase the dividend payout all the way up, or do you use that as a form of financing? What I would do, and I've said this before, Maurice, is I would consult with our shareholders and all stakeholders to work out what is the best way of financing that growth for the longer term, because there are shareholders that depend on the dividend payout. So we would look at all forms of financing, but I don't see any need to change it at this point. It would be 70 to 80. I think it would If rate base went up to 7%, it would chase it to 7%, and we'd look at it as and when needed. So I don't expect any change or departure from that policy in this five-year period.
spk03: Got it. Thank you.
spk01: Thank you. Our next question comes from the line of Mark Jarvie with CIBC. Your line is now open.
spk00: Thanks. Good morning, everyone. I want to come back to the pathways to decarbonization at the ISO report. In 2021, you guys were awarded or directed to advance some transmission projects. Given the sort of grander scope on the pathways to decarbonization, what do you think the process going forward is? Do you expect them just to continue to direct projects as needed, or do you think you start to become sort of longer-term planning here that provides maybe a bit more visibility in terms of your transmission needs over the next decade?
spk02: Morning, Mark. This is David here. You're absolutely right. The Pathways report lays out some pretty ambitious investments that we need to make for Ontario to decarbonize the electric grid by 2050. In the past, we have seen direct awards to Hydro One. We've also seen direct awards to other organizations with respect to transmission infrastructure. It's unclear at this time how the government plans to award transmission in the future. I know it's a topic they're discussing at Queen's Park and what approach they're going to take. We're certainly actively involved, participating in recommendations, but at this point it really is in their ballpark and we hope that they decide to award them to Hydro One. But if they were to go down the path of competitive transmission, we're quite prepared to compete with anybody else.
spk00: Okay. And then, Chris, coming back to you, in terms of some assumptions on the EPS growth, just can you clarify whether or not there's any change in view in terms of whether financing cost, interest expense is a drag or a net positive, and then maybe just elaborate on your comment around the most recent sustainable financing and the potential positive impacts it has in terms of EPS?
spk08: Yeah. Thanks, Mark. So in short, we've not, in this range, for us to go above, so if you've got 6% rate-based growth, for us to go above 6%, a way that we could do that is by achieving better all-in financing costs. It's not included in the base number, but it's included in the range, if you like. It's a way of getting above 6% grossing into the higher end, like 7%, for example. And we did quite well in the last period because rates were accommodative. We're fairly confident that opportunities will come. Again, we maintain a lot of flexibility on our balance sheet, so we can do that. So my point, Mark, about this last financing is we managed to time that at the right point. If I was to issue it today, those rates are already 30 to 40 basis points higher than where they were when we did the issuance a few weeks back now. So it's capturing those moments throughout the year. If we can do that, and we were very successful in doing that in the last rate period, if we can do that, we actually get lower all-in rates over this period. And it benefits everybody. It benefits our shareholders now because you'll get it through this rate period. And when we go back in for new rates, the rate pay gets the benefit over the longer term. So that's what I was talking about. On the last one, we did the sustainable bond itself. We got a greenium. So it was pleasing to see that when you do all the work and you're a good ESG citizen, that there is a benefit to that. And it was three to four basis points. So again, not a lot, but it shows that there is some spread now for that kind of activity. And again, all in lower cost of financing. Every time we do this, It's the gift that keeps on giving. It gives today. It gives for the next five years for the shareholder. And after that, it gives for the next, in the case of a 30-year bond, another 25 years to our customers. Understood. Okay. Thanks, Chris.
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.
spk07: Thank you, Shannon. The management team at Hydro One thanks everyone for their time with us this morning. during what is a busy period. We appreciate your interest and your ownership. If you have any questions that weren't addressed in 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.
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.
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