Equity LifeStyle Properties Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 7 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to Hydro One Limited's Third Quarter 2023 Analyst Teleconference. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised. As a reminder, the call is being recorded.

Operator

I would now like to introduce your host for today's conference, Mr. Omar Javed, Vice President, Communications, Marketing and Investor Relations at Hydro One. Please go ahead.

Speaker 1

Good morning, and thank you for joining us in Hydro One's quarterly earnings call. Joining us today are our President and CEO, David Libertad and our Chief Financial and Regulatory Officer, Chris Lopez. In the call today, we'll go over our quarterly results There are also several slides that illustrate some of our points that we will 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 and 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.

Speaker 1

With that, I'll turn the call over to our President and CEO, David Lipacao.

Speaker 2

Thank you, Omar, and good morning, and thank you for joining us on our Q3 earnings call. I would like to begin by acknowledging that today is National Indigenous Veterans Day in Canada. Today to acknowledge and commemorate the contributions and sacrifices made by the First Nation, Inuit and Metis soldiers who served our country. In addition, Remembrance Day is only a few days away. It is a day for us to collectively remember and honor those who died in military service We're served and continue to serve our country during times of war, conflict and peace.

Speaker 2

It's easy to take the freedom we enjoy for granted, so we acknowledge I also want to take a moment to reflect on the current global conflicts. As events unfold across the world, they can have a deep and profound impact on us all. The news of Innocent Life's loss can be overwhelming. Want to extend my support and simply to those affected by these global events. In such times as these, it's important that we stand together and are there for each other.

Speaker 2

Turning to the quarter. This morning, I will provide an update on our recent activities and then Chris will take you through the Q3 financial results. First, on safety, which is a focal point for Hydro One. I'm pleased to report that we are on track to improve on last year's outstanding safety results. Our recordable injury and high energy serious injury rates continue to be below our annual targets, in large part due to the relentless pursuit of 0 safety incidents by our employees.

Speaker 2

However, ensuring every employee returns home safely at the end of the day is a journey with no end. We must work to continue to adhere to our safety absolutes, Carefully plan all work and look out for each other. With continued focus, eliminating all serious injuries is achievable. Turning to our assets, Hydro One continues to invest in the critical infrastructure to energize life and accelerate the adoption of Our investments in modernizing and expanding the grid are playing a pivotal role in Ontario's economic future. At the same time, we continue to advance our economic reconciliation efforts with indigenous communities, ensuring they also benefit from our transmission investments.

Speaker 2

As an example of what team Hydro can accomplish, the Chatham by Lakeshore Transmission Line will enter service in 2024, a full year ahead of schedule. By completing the project early, the company expects to reduce the cost of the project by approximately $15,000,000 As a reminder, we broke ground on the line last quarter. This achievement is a result of the hard work and dedication put forth by our teams, working in collaboration with our partners, communities and regulators. This result underscores Hydrowan's ability to deliver large complex projects safely, on time and on budget. Once complete, the line will provide clean electricity to support the growth in agri food and manufacturing industries in Southwestern Ontario.

Speaker 2

The line will add approximately 400 megawatts of clean electricity to the region, enough power to supply a city the size of Windsor. I am pleased with the efforts our teams The forth and the hard work that went into getting us to this point ahead of schedule and under budget, superior execution is a critical aspect of why Hydro One continues to be a transmitter of choice The development, construction and operation of priority projects in Ontario. As discussed in our Q2 conference call, The Government of Ontario proposed a prioritization of the regulatory approval process for 3 transmission lines in Northeastern and Eastern Ontario to support the growing electricity demand. I I'm very pleased to report that the government has declared the 3 new line projects as priorities and has designated the Hydro 1 as a transmitter responsible for their development. The new lines include the Mississauga to 3rd line, an approximate 75 kilometer, 230 kilowatt transmission line between Mississauga Transformer Station In Wharncliffe and the 3rd line transformer station in Sault Ste.

Speaker 2

Marie, the Hamner to Mississauga line, an approximately 205 kilometer, 500 kilowatt transmission line between Hamner Transformer Station in the Greater Sudbury Area and Mississauga Transformer Station In Wharnecliff and the Greater Toronto Area East Line, an approximate 50 kilometer, 2 30 kilowatt transmission line between Either Cherrywood Transformer Station near Pickering or Clarington Transformer Station near Oshawa and Dobbin Transformer Station in Peterborough. The 3 new transmission lines will support the continued growth of our northern communities and will help facilitate the growing electricity demand in transportation, mining, Steel and Manufacturing Industries in the Northeastern and Eastern parts of the province will further support the production of clean steel at Agoma Steel, Further in our efforts to help industries decarbonize and at the same time, choose Ontario's long term economic growth. As a reminder, First Nations have the option to invest in a 50 percent equity stake in the transmission line components of the projects through Hydro One's equity partnership model. We are already advanced in the planning, development and construction phase of the projects. On the distribution side, we continue to engage with local distribution companies to facilitate Consolidation within the sector.

Speaker 2

Consolidation isn't just about growth. For Hydro One, it's about energizing life in Ontario by helping communities achieve their goals, Improving the value customers get from the distribution grid and lending to hand when others need it. I'm pleased to report that on November 7, Hydro One announced an agreement Township of Shaflow for the acquisition of Shaflow Hydro, a local electric distribution company which serves approximately 1200 customers. While small, the transaction is meaningful for those 1200 customers in the township of Shaflow who will continue to have dependable electricity. Hydro One started assisting Shaflow Hydro this summer as it experienced challenges in continuing operations.

Speaker 2

We were happy to help. As the service territories embedded within Hydro One's, we already have a local presence and we already serve the indigenous communities and businesses on the outskirts of the township. With this transaction, Hydro One will leverage its deep local knowledge and its scale to ensure the residents and businesses of Chapalo have an electric system which meets their needs today and is ready for the future. Given these synergies, we believe the transaction will be socially and financially accretive. This transaction exemplifies Hydro One's willingness and capacity to step in and provide support across Ontario.

Speaker 2

These successful outcomes are not possible without the dedication and coordinated efforts of our Hydro One family. Our employees are the heartbeat of our organization. We recognize their invaluable contributions to our shared success. Along those lines, I'm pleased to report that 2 collective agreements to reach the Power Workers Union and 1 with the Society of United Professionals were ratified in the quarter. The conclusion of Barcade provides us with certainty in our labor costs Over the next 2 years as we execute our strategic objectives, these agreements expire on September 30, 2025.

Speaker 2

I want to thank our respective teams for negotiating in good faith in search of solutions that meet the needs of employees, customers and Hydro One. In other updates, we continue working with the telcos to advance the delivery of high speed Internet to approximately 700,000 Ontarians. We remain concerned that work packages are not being brought by the proponents as quickly as anticipated to meet the December 2025 completion deadline. Hydro One is prepared and has been for some time. We've made investments in labor and training, strengthened our supply chains, streamlined our joint use process, relaxed standards, Onboarded contractors and purchased materials in preparation of this initiative.

Speaker 2

We understand the importance of connectivity to everyday life for families and business, many of whom are our customers. The spirit of helping is deeply rooted in our corporate culture and is a value our employees live every day. This past September was our annual Power to Give month. Am thrilled to share that Hydro One employees raised over $2,000,000 in donations for more than 800 registered charities in Canada. This is a remarkable achievement A record for Hydro One will go a long way in helping those in need.

Speaker 2

While the given in September is remarkable, it is typical of Hydro employees who demonstrate their community spirit Generosity through donations and volunteer work throughout the year. Recently, Hydro One joined an exclusive club of Canadian companies. In recognition of our commitment to reconciliation, we were awarded the Gold Level Progressive Aboriginal Relations Certification by the Canadian Council For Aboriginal Business. Hydro One is recognized for its commitment to building lasting, strong and mutually beneficial relationships with indigenous communities. This is an advancement from the silver level certification we earned in 2020.

Speaker 2

Our emphasis on economic reconciliation through programs like the fifty-fifty equity partnership model And building lasting partners with indigenous communities has been instrumental in this award. At Hydro One, we are focused on building partnerships based on an understanding, respect, Trust and sharing. Finally, we are pleased to be recognized by Newsweek and its inaugural listing of the World's Most Trustworthy Companies. The listing was compiled after gathering 269,000 evaluations through interviews with 70,000 participants that consisted of customers, investors and employees across 21 countries and 23 industries. With that, I will turn it over to Chris to discuss our financial results this quarter.

Speaker 2

Over to you, Chris.

Speaker 3

Good morning and thank you for joining us today. I want to acknowledge and thank our teams for their hard work and dedication, allowing us to deliver on our promise to all stakeholders. It is this effort and the outcomes achieved by the whole team that enable us to be the builder of choice for transmission projects in our province. We're extremely proud to have been awarded the 3 priority transmission projects that David mentioned earlier. With these three lines, we continue to build a better and brighter future for All Ontarians.

Speaker 3

In terms of our financial results for the Q3, basic earnings per share were $0.60 compared to $0.51 in 2022. The key drivers to the change in earnings this quarter were higher transmission revenues resulting from adjustments to Ontario Energy Board or OEB approved rates Following the approval of the joint rate application or JRAP as well as higher monthly average piece demand and lower income tax expenses to higher weighted average interest rates on the long term and short term debt and higher depreciation, amortization and asset removal costs, primarily due to growth in capital assets. Our 3rd quarter revenue net of purchased power was higher year over year by 1.1%. Transmission revenues increased 5.7%, primarily due to higher revenues resulting from OEB approved rates, coupled with Higher average monthly peak demand, which increased 4.5%. The higher revenues were partially offset by net income neutral items, including cessation of the deferred tax asset or TTA recovery and normal course regulatory adjustments.

Speaker 3

Distribution revenues net of purchased power decreased by 4%, mainly due to the same net income neutral items associated with the cessation of the DTA recovery And normal course regulatory adjustments. After adjusting for the net income neutral items, the distribution revenues were essentially unchanged from last year. On the cost front, operating maintenance and administration expenses decreased year over year by approximately 1%. The decrease was mainly driven by items that are either going to be offset later in the year or are net income neutral. On transmission, Costs were higher by 4.7% due to the OEB approved recovery of historical cost deferrals, which are offsetting revenue and therefore net income neutral.

Speaker 3

Distribution costs were lower by 6.4 percent due to higher storm restoration costs last year that were also net income neutral as they were recovered from third parties as well as mobile work program expenditures, including vegetation management. These reductions were partially offset by higher costs associated With the OEB approved recovery of historical cost deferrals, which are net income neutral as they are fully recovered in revenues. Depreciation expense was higher year over year by 3.3%, primarily due to the growth in capital assets, which is consistent with our stated capital investment program as well as higher asset removal costs. On financing, we saw a 17.2% increase in financing charges year over year Due to a higher weighted average interest rate on our long term debt and short term notes. This was a result of long term debt issuance executed in 2023 as well as increased rates on short term notes.

Speaker 3

During the quarter, Hydro One issued $425,000,000 of floating rate medium term notes June 2026. This was yet another first, the first corporate issuance of green floating rate notes in Canada. Subsequent to the quarter, Hydro One issued an additional $400,000,000 of medium term notes due in 2025. Concurrent with the offering, the company executed a $400,000,000 fixed floating interest rate swap agreement. Both offerings were done under our sustainable financing framework.

Speaker 3

In total, Hydro One has raised over $1,800,000,000 proceeds in 2023 to retire maturing debt and to support our capital investment requirements. We continue to be pleased with the stability of our balance sheet and robust investment grade credit ratings that have allowed us to execute these financings. We are also happy to report that as part of their review process conducted in August, S and P Global Ratings revised its outlook on Hydro One Limited and Hydro One Inc. To positive S and P also affirmed the existing issuer and issue level ratings on both entities. Income tax expense in the quarter was $36,000,000 compared to $100,000,000 in the same quarter last year.

Speaker 3

The decrease in income tax expense was primarily due to a lower tax resulting from the cessation of a DTA recovery at the end of June, coupled with normal course regulatory adjustments, which as described previously are net income neutral as well as higher deductible timing differences compared to the prior year. These were partially offset by higher earnings adjusted for net income neutral items. The effective tax rate this quarter was 9.1% versus the effective tax rate last year of 24.4%. It is important to note the high deductible timing differences this quarter driven by the timing and class of assets That when serviced, which resulted in a lower effective tax rate are temporary. As such, we expect the deductible timing differences to revert in the Q4 and the annual effective tax rate to be consistent with our previous tax rate guidance of 13% to 16%.

Speaker 3

Moving to investing activities. In the Q3, we placed $699,000,000 of assets in service, which is a 74.3% increase compared to the prior year. The increase in the transition segment was primarily related to the timing of investment placement service Station equipment refurbishments and replacements as well as timing of assets placed in service related to information technology, partially offset Major Development Projects put in service in the prior year. In the Distribution segment, the increase was primarily related to The timing of assets placed in service pertaining to the Information Technology Initiatives, a higher volume of storm related asset replacements, Customer connections and line refurbishments and wood pole replacements, partially offset by a lower volume of station refurbishments and replacements. SAS' placement service also increased to the other segment, primarily due to the replacement of Acrodon's information technology equipment.

Speaker 3

Capital investments for the Q3 were $638,000,000 which is a 27.3% increase from the Q3 in 2022. Transmission capital investments increased 23.5% year over year, primarily due to a higher volume of station refurbishments and equipment replacements. Distribution capital investments increased by 34.6%

Speaker 1

due to

Speaker 3

higher volume of storm related asset replacements, High volume of line refurbishments and wood pole replacements, investments in the Advanced Metering Infrastructure System 2.0 project, as well as higher volumes of work on customer connections. With the announcement regarding the revision of timing for Chatham intellectual lines, We have updated the future capital investments table to reflect the acceleration of timing and decreasing capital costs. The table does not include any future investments associated with the 3 Northeastern and Eastern lines that David discussed earlier today. Consistent with past practice, those lines and others that do not have estimates will be updated in the table once the Section 92 or Lead to Construct Application has been filed. As David mentioned, Hydro One reached an agreement with the Shafway Public Utilities Corporation To acquire substantially all the business and distribution assets, the township of Chapleau is located around 200 kilometers from our Timmins operations center.

Speaker 3

The acquisition equates to a purchase multiple of approximately 1.2x enterprise value to rate base on a current rate base of $1,900,000 The acquisition is conditional upon the satisfactory of customary closing conditions and approval by the OEB. We believe this transaction provides excellent value to both Hydro One and the customers of Chateau Hydro. We are very pleased to join the Shaflow community. We intend to file an application with the OEB for approval of the acquisition by the end of 2023 and expect to close the transaction in the second half of twenty twenty four, with integration completed by the end of 2024. We continue to engage with other local distribution companies and look for additional opportunities to facilitate further consolidation within the sector.

Speaker 3

On guidance, we reaffirm our previous target of 5% to 7% earnings per share growth through 20.27 On the normalized 2022 EPS of $1.61 As a reminder, the EPS growth range does not factor in growth in broadband, LDC Consolidation or the transmission lines that have been previously awarded, but only have preliminary assets for our pending approval, such as the Wasecaon transmission line, as well as any amounts from externally driven variance accounts. Finally, I'm pleased to report that we declared a dividend to common shareholders of $0.2964 per share. I'll stop there and we'd be pleased to take your questions.

Speaker 1

Thank you, David and Chris. We ask the operator to explain how they'd like to organize The Q and 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

Operator

ahead. Thank you. Our first question comes from the line of Robert Hope with Scotiabank. Your line is now open.

Speaker 4

Good morning, everyone. Good to see the recent transmission line enter service ahead of schedule and under budget. Can you just speak to what you're seeing with the supply chains? A bunch of third parties are still noting some tightness there and some inflation there. And then can you just maybe compare and contrast that with your recent experiences and successes on the recent lines?

Speaker 2

Thanks, Robert, and good morning. Supply chain, it is definitely tightening up. And what we find is we're ordering critical components Further out, now this is an advantage that Hydro One has perhaps over other utility companies and that we saw this starting at the beginning of the pandemic. So our Chairman team reached out to our suppliers, diversified the supplier base, standardized the product mix among other things, But also started securing manufacturing space further out. We've continued that as we've seen the increase in the electrification.

Speaker 2

So, so far, we haven't had any challenges reaching Getting the critical equipment on-site for any of the projects we're working on.

Speaker 4

Good to hear. And then just in terms of the 3 new projects that were awarded to you, any visibility on any incremental projects there? And when do you think you

Speaker 2

You sound like me asking my team those same questions. They're working hard to get the detailed engineering finished to do the engagements that are necessary with the local communities, the indigenous groups, partners And landowners, so as soon as we can have that material pulled together, we'll be sharing that.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from the line of Darius Losni with Bank of America. Your line is now open.

Speaker 5

Hey, guys. Good morning and thank you for taking the question. Maybe just starting on the distribution Capital opportunity related to the build out of broadband. Certainly, it sounds like you guys have done quite a bit of work and perhaps Some investment ahead of time to be prepared. Can you comment on any impact on OM and A or capital associated with that?

Speaker 5

And is Part B to that question certainly appreciate the 2025 timeframe that you're managing to. Just wondering if there's been any talk at all of that possibly getting pushed back whether by amending the legislation or otherwise. Thank you.

Speaker 2

Thanks, Darius. Start with the last question. First, no talk about amending that time frame. It's critically important People who live in rural Ontario, they have access to high speed Internet and all the parties are working to make sure we still meet that December 25 deadline. Recently, I've been having meetings with the executives of some of the different telcos that have participated and they're starting to ramp up and get So starting to feel a bit more positive on how this is moving forward.

Speaker 2

In terms of your first question, No impact on our OM and A and capital programs at this point in time from the work the pre work we've done to get ready. It's just set us all up For success over the next 2 years.

Speaker 5

Okay, excellent. Thank you for the color. One more if I can, just on the Effective LDC opportunity, we are and have been in a higher rate environment. Are you seeing perhaps an uptick in Smaller LDCs that might be in sort of more difficult financial condition that would therefore Open them up for a potential transaction or are you seeing more or less kind of the regular cadence?

Speaker 3

Hi, Darius. It's Chris here. As the higher interest rates for longer coupled with the theme of energy transition and high demand On capital, those 2 coming together and they've both been increasing and have been now around for 12 months or more. We have seen an increase in activity and Chapo is a good example of that. There are others.

Speaker 3

Certainly, the pressure at the smaller end is higher. And then as you get to the larger LDCs, they have a few more options, but

Operator

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

Speaker 6

Thank you and good morning. If I could just start with the financing bid and Chris, could you discuss your upcoming maturities to 2026, the rates of which these maturing debt All right. What we tend to borrow today and maybe bigger picture too, seeing as your cost of capital is fixed for a duration of the Chirap Thoughts on how this might feed into your guidance and what tools you have in your financing toolbox to offset any drag?

Speaker 3

Hi, Maurice. Thanks for the question. Look, in the short term, not a concern. We've completed our borrowing for this year. As you'll know that through JREP, they factor in forecast borrowing rates for the 1st year.

Speaker 3

So it's all covered and we've met our requirements there. We've retained some flexibility because the last two were floating rate issuances, which allows us to fix those as interest rates Normalize at a time, which we believe will occur. In fact, in the last couple of weeks, interest rates in the long end have dropped 50 to 60 basis points. So That was a fortuitous decision for us. In the longer term, we don't see a big concern here, Maurice.

Speaker 3

The question we get a lot is, what if interest rates stay at the current level throughout the entire period? It would still keep us Within our current guidance, it would not take us outside of that. So we're quite comfortable that we have the ability to Like the way we finance either short or long term, we can change the timing of that. We can go with any duration 2, 5, 10 or 30. There are many options available to us to do that.

Speaker 3

In short, it's not going to change our guidance at this point.

Speaker 6

And just to be clear, you're able to stay within the 5% to 7% range without the potential bump up in Wasegun As well as the high speed Internet.

Speaker 3

Sorry, can you repeat that Maurice? I didn't get that.

Speaker 6

Yes. You mentioned that you're able to stay within the 5% to 7% range if rates they already are. But you're seeing that without having to have any offsets from Duasegan as well as high speed Internet. Is that correct?

Speaker 3

Correct. So we haven't updated our range. I think last time I said, Marie said, Wasingen has got Section 92. I think the question came and my response was that, if Waseca was approved at its rate and in service as planned, It would put us at the upper end of the 5% to 7% range. Any impact from interest rates or financing those projects would not take us outside that range.

Speaker 6

Perfect. Thank you very much.

Operator

Thank you. And that does conclude our Q and A session for today. Like to turn the call back over to Omar Javed for any further remarks.

Speaker 1

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

Operator

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

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