Soho House & Co Inc. Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 7, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Hydro One Limited's Third Quarter 20 24 Analyst Teleconference. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Omar Javed, Vice President, Investor Relations at Hydro One.

Operator

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 Liebherter and our Chief Financial and Regulatory Officer, Harry Taylor. On the call today, we will provide an overview of our quarterly results and then we will take some time answering questions as time permits. 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

Speaker 2

as they all apply to this call as well.

Speaker 1

With that, I turn the call over to our President and CEO, David Liebherr.

Speaker 2

Thank you, Omar. Good morning and thank you for joining us for our Q3 2/24 earnings call. I would like to begin by acknowledging that tomorrow is National Indigenous Veterans Day in Canada, a day to acknowledge and commemorate the contributions and sacrifices made by the First Nations, Inuit and Metis soldiers who have served our country. Additionally, Remembrance Day is only a few days away. It is a time for us all to collectively remember and honor those who sacrificed and those that continue to sacrifice in serving our country during times of war, conflicts and peace.

Speaker 2

It's a moment for us to pause and be thankful for the freedoms we enjoy today because of the sacrifices made by others. I also want to take a moment to reflect on the various global conflicts. As events unfold across the world, they can have deep and profound impact on us all. The news of innocent lives lost can be overwhelming and it is important that we support one another during these times. I want to extend my support and sympathy to those who have been affected by these global events.

Speaker 2

Turning to the quarter, this morning I will provide an update on our recent activities and then Harry will take you through the Q3 financial results. In the spirit of looking after one another, I'm very proud of the Hydro One team who took time away from their families, including over Canadian Thanksgiving to participate in relief efforts following hurricanes Helen and Milton. Our thoughts and prayers are with our neighbors affected by those catastrophic events. In response, Hydro One sent 150 skilled employees to Georgia and Florida to restore power. We were proud to answer the call during their time of need.

Speaker 2

Time and time again, our teammates demonstrate how Hydro One is always caring for others. This commitment to caring was also evident during our annual Power to Give campaign. In the month of September, Hydro One employees demonstrated their generosity and community spirit, donating and contributed more than 4,500 volunteer hours during the month. This is a remarkable achievement that will make a meaningful impact for those in need across our communities. I'm incredibly proud of our employees' efforts and generosity, not only in September, but throughout the year.

Speaker 2

Their commitment to giving back and supporting our communities is a core value of Hydro One's culture and one they embody every day. As I've mentioned on prior calls, the demand for electricity in Ontario continues to grow. This being driven by population growth, energy transition and new manufacturing capacity such as investments being made by Stellantis, Volkswagen and Honda. All of this is leading to greater economic growth in the province. Consequently, the independent electric system operator, IESO, recently increased its energy demand forecast through to 2,050.

Speaker 2

The IESO is now estimating a 75% increase in electricity demand over the next 25 years, which is higher than the 60% previously forecasted. The IESO estimates new large potential projects such as data centers, commercial sector building electrification, EV production and its supply chain to contribute to the forecasted increase in demand. To meet the increased demand for electricity, work in the process is well underway, building more generation, building new transmission lines, integrating new technologies and expanding energy efficiency programs. Hydro One is part of this growth and continues to play a critical role in meeting the increased demand and supporting the province electrification goals. Whether it's through our investments in transmission and distribution systems, connecting new generation energy storage solutions or using new technology in our control systems, we are building a grid to power Ontario's future.

Speaker 2

Together with industry and indigenous communities, we will ensure reliable, resilient, sustainable energy system for our children and grandchildren. I'm happy to report our new transmission projects continue moving forward. During the quarter, Hydro One received approval for the Ministry of Environment, Conservation and Parks on the final environmental assessment report for the Waseca and Transmission Line. This approval paves the way for construction activities to commence allowing for shelves in the ground before year end. The total expected investment in line will be $1,200,000,000 and will bring an additional 3 50 megawatts of electricity to the region to meet current and future energy needs of Ontario's Northwest communities.

Speaker 2

As a reminder, the line will be completed in 2 phases, with Phase 1 of the project targeted to be in service in 2025 and Phase 2 to be in service in 2027. Our Chatham Lakeshore Transmission Line project, which began construction in spring of 2023, remains on track for completion by the end of 2024. Commissioning tests are progressing well and we expect that the line fully operational by year end, completing the project 1 year ahead of schedule and under budget as previously disclosed. Once complete, the line will provide clean electricity to support the growth in agri food and manufacturing industries as well as a growing population in Southwestern Ontario, adding 400 megawatts of clean electricity to the region. We are proud that both the Wausaugan and Chatham by Lakeshore Transmission Lines will be co owned with Proximate First Nations through Hydro One's equity partnership model.

Speaker 2

We are also pleased to report significant progress in our regulatory efforts. Settlements in principle have been reached for 3 5 year revenue requirement applications for 3 of our transmission partnerships, including the Bruce to Mill Limited Partnership, the Niagara Reinforcement Limited Partnership and the Chatham by Lakeshore Limited Partnership. On October 21, 2024, in collaboration with parties for the settlement conferences Hydro One filed settlement agreements with the Ontario Energy Board or OEB for the Bruce to Milton Limited Partnership and the Niagara Enforcement Limited Partnerships. These agreements outline total revenue requirements of $193,000,000 for Bruce to Milton and $45,000,000 for the Niagara Reinforcement over the 5 year period. The settlement proposals accepted the rate making framework proposed by the partnerships, including a modest 3% reduction in proposed OM and A expenses over the period and an additional 0.15% stretch factor.

Speaker 2

With respect to the Chatham by Lakeshore Limited Partnership, Hydro One has reached the settlement agreement in principle and expects to file this proposal with the OEB shortly. These settlement proposals support investment in our infrastructure to maintain a safe and reliable system that meets our customers' needs and highlights constructive regulatory framework in Ontario. These achievements mark significant success for Hydro One and our First Nations partners. Once approved, the proposed settlements will provide revenue and cost certainty for the projects from 2025 to 2029. Final approvals from the OAB are expected by year end.

Speaker 2

Separately, in late October, the OAB released the cost of capital parameter for 2025. The deemed ROE was formulaically updated to 9.25 percent and will be the applicable rate for these settlement agreements. The rate will remain fixed for the duration of the rate period. In other news, I'm pleased that our good work and collective efforts continue to be recognized by others. We are recently named one of Canada's Most Responsible Companies for 2025 by Newsweek.

Speaker 2

The list recognizes companies across 13 industries for their commitment to climate, social welfare and responsible governance. This award reflects the hard work and dedication of our entire team to positively impact our communities and the environment. Hydro One is dedicated to responsible business practice that balance sustainability, social responsibility and governance. We take a holistic view of corporate responsibility that considers how these topics are incorporated deeply into our business. Through our actions, Hydro One strives to be a responsible corporate citizen contributing to a better future for all Canadians.

Speaker 2

We were also honored to receive the PowerLine Safety Award from Electrical Safety Authority in recognition of our role in enabling the safe delivery of very large piece of equipment to a brewery in Southwestern Ontario. In collaboration with our partners, Hydro One raised and lowered conductors along 117 kilometer route along with the safe movement of the equipment while minimizing the impact on customers. This award is a testament to power of partnerships and our collective efforts to achieve an objective without compromising safety. With that, I will turn the call over to Harry to discuss our financial results. Harry, over to you.

Speaker 3

Thank you, David. It certainly is an exciting time in the province and Hydro One is well positioned to contribute to the energy transition and electrification initiatives underway to meet the needs of all Ontario residents and businesses. Turning to our Q3 financial results, we delivered basic earnings per share of $0.62 compared to $0.60 in the Q3 of 2023. The key drivers behind the year over year change included higher revenues, net of purchased power, partially offset by higher income tax expense, primarily due to unfavorable timing differences compared to last year and higher pretax earnings, higher depreciation and amortization and asset removal costs, as well as higher interest expense. As a reminder, both the transmission and distribution segments had net income neutral items in revenue that include normal course regulatory adjustments such as OEB approved recovery of historical cost deferrals.

Speaker 3

There are corresponding offsets for these items in the tax expense and in OM and A, thus making them net income neutral. Our 3rd quarter revenue, net of purchased power increased year over year by 6%. Transmission revenues increased by 5.7%, primarily due to changes in OEB approved rates for 2024 and higher average monthly peak demand. These were partially offset by the revenue impact of the net income neutral items mentioned earlier. Distribution revenues, net of purchased power increased by 6.1% year over year due to changes in OEB approved rates for 2024, higher energy consumption and a higher number of customers.

Speaker 3

On the cost front, operating maintenance and administration expenses in the quarter were essentially unchanged year over year, increasing slightly by 0.3%. In the transmission segment, costs were higher by 1.8%, mainly due to higher work program expenditures attributable to stations, lines maintenance and vegetation management. In addition, we also had some net income neutral items that were offset in revenue. In the distribution segment, costs were lower by 4.3%, mainly due to lower corporate support costs and regulatory adjustments, partially offset by higher work program expenditures, mainly attributable to customer programs and emergency power restoration. Depreciation expense for the Q3 was higher year over year by 6%.

Speaker 3

This was due to the growth in capital assets and higher asset removal costs, partially offset by lower amortization of regulatory assets. Regarding financing, we saw a 10.5% increase in interest expense year over year, mainly due to a higher weighted average interest rate on our long term debt and more long term debt resulting from issuances in the second half of twenty twenty three and year to date this year. These charges were partially offset by a lower average volume of short term notes outstanding and higher capitalized interest due to a higher average balance of assets under construction. During the quarter, Hydro 1 issued $1,200,000,000 of medium term notes. This consisted of $700,000,000 of 4.25 percent notes due in 2,035 and an additional $500,000,000 of 4.85 percent notes due in 2,050 4.

Speaker 3

The issuance was completed under our sustainable financing framework. One of our differentiating factors is the strength and stability of our balance sheet along with our creditworthiness, both of which we are happy to report remain robust. Our current FFO to debt metric, which is a good proxy for creditworthiness remains well above the threshold limits the credit rating agencies use to qualify our credit rating. Turning to taxes. Our income tax expense in the quarter was $56,000,000 compared to $36,000,000 in the same quarter last year.

Speaker 3

Contributing to the increase were unfavorable timing differences compared to last year. As a reminder, we put several information technology initiatives in service in the Q3 last year that qualified for 100% capital cost allowance. This year, we also had higher adjusted pre tax earnings and these were partially offset by the impact of the net income neutral items discussed earlier. The effective tax rate this quarter was 13% versus an effective tax rate last year of 9.1%. The effective tax rate for 9 months was 14.5% compared to a rate of 15.3% last year, which included the deferred tax asset recovery through June 30, 2023.

Speaker 3

The current rate is consistent with our effective tax rate expectations of 13% to 16% for the remainder of the JRAP period. Moving to our investing activities. In the 3rd quarter, we placed $597,000,000 of assets in service for our customers, which was a decrease of 14.6% compared to the prior year. In the transmission segment, we saw a decrease of 2.4% year over year, primarily due to a lower volume of line refurbishments and the timing of assets placed in service for information technology initiatives. These are partially offset by an increase in assets placed in service for grid operating and control facilities as well as the timing of investments placed in service for customer driven work.

Speaker 3

In the Distribution segment, in service additions decreased by 22.9% from the prior year due to the timing of investments placed in service for information technology initiatives and the timing of assets placed in service for system capability reinforcement projects. These were partially offset by a higher spend on customer connections and a higher volume of wood pole replacements. In terms of our capital expenditures, for the Q3, we invested $773,000,000 which was an increase of 21.2% over 2023. The increase occurred in both the transmission and distribution segments, resulting from higher investments in new transmission and distribution infrastructure, increased customer connections and a higher volume of line refurbishments and wood pole replacements. They were partially offset by a lower spend on information technology initiatives.

Speaker 3

Turning to broadband, we were very pleased with the Ministry of Infrastructure's announcement last week to provide subsidies to Internet service providers for work associated with designated broadband projects. The $400,000,000 program is intended to provide financial support to ISPs to carry out their work and deliver high speed Internet access to rural communities. While it is too early to comment on the impact of this program and our magnitude of work, we are hopeful this move will advance the pace of orders. Our expectation of the magnitude of work remains between 300 $1,000,000 $700,000,000 of incremental rate base in the distribution segment. As a reminder, this is not included in our capital investment projections nor in our earnings guidance at this point.

Speaker 3

With respect to LDC consolidation, we continue to be active in engaging with local distribution companies and their respective municipalities to facilitate further consolidation within the sector. We are committed to being disciplined in our process and as such we will not pursue opportunities that do not meet our stringent investment criteria. Looking ahead, we maintain our guidance of 5% to 7% compound annual growth for earnings per share for the 2023 to 2027 period using the normalized 2022 earnings per share of $1.61 as a base. Finally, I am pleased to report that our Board of Directors declared a dividend of $0.3142 per share payable to common shareholders of record on December 11, 2024. With that, we'll open the phone lines and be pleased to take questions.

Speaker 1

Thank you, David and Harry. We ask that the operator explain how they would like to organize the Q and A polling process. In case we can't get to your questions today, my team and I are always available to respond to follow-up questions. We ask that you limit your question to one question and one follow-up. If you have additional questions, we request you to rejoin the queue.

Speaker 1

Please go ahead.

Operator

Thank Our first question comes from the line of Jessica Hoile with Scotiabank. Your line is now open.

Speaker 4

Good morning. Thanks so much for taking my questions. So just to start, just given the higher demand forecast out of the ISO, can you talk a little bit more about what you see in terms of incremental transmission opportunities moving forward?

Speaker 2

Good morning, Jessica. David Lebieder here. We've been working with the ISO on their forecast and we have identified areas where there are capacity constraints in the province that we anticipate will be addressed moving forward. The next phase now the ISO has updated their forecasted growth is to go back to their planning and update their planning. We expect to see something from that early next year.

Speaker 4

Great. Thanks so much. And then just how are you thinking about the supply chain and inflation risks given this increasing demand for electricity, not only in Ontario, but also just across the continent?

Speaker 3

Jessica, it's Harry Taylor. Are we have a procurement team that has been well out in front coming out of the pandemic in writing contracts with our vendors, our vendor partners and anticipating supply chain issues securing supply with pricing based on indices, etcetera. So there's I would say there's really isn't any new news. Supply chain issues have been with us for a while and for all our significant vendors and requirements in terms of materials, we have long term contracts with multiple vendors to ensure we've got adequate supply and at the same time ensure our pricing is certainly market based if not better.

Speaker 4

Appreciate the color.

Operator

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

Speaker 5

Yes. Good morning, everyone. Maybe just on the government support for broadband, at what point will you have clarity? And then do you think the dollar value that's been put forward is enough to maybe bring you up to the top end of the $300,000,000 to $700,000,000 rate base growth for your side of the equation?

Speaker 3

Hey, Mark, it's Harry here, Harry Taylor. It's too early to determine whether we're at the bottom end or the top end of the range. I know it's a wide range. We are certainly very welcoming of the incentive. Do expect that it will break the logjam in terms of orders and applications that we see.

Speaker 3

Candidly, if this doesn't, I don't know what would. But at this point, we just haven't it was just announced last week, we haven't seen the uptick yet. So it's tough to try to put a pin in a wide range at this point. We will update as and when we see the trend develop and try to narrow the range as best we can. Obviously, we'd like it to be at the top end to serve Ontarians and put it into our rate base, but it is subject to the applications from the ISPs.

Speaker 5

Understood. And then David, just following up your comments about interactions with the ISO around ultimately transmission planning demand. The government is also pretty vocal about being sort of an energy exporter. What conversations are you having around that in terms of transmission interconnects a role for Hydro One to play if we are sending more power south?

Speaker 2

Good morning, Mark, and thanks for the question. That's a really interesting question. There's a lot going on. So the first half, the government said we're going to become energy self sufficient and we're going to be able to address the growth that we see in the province. That will be the 75 percent or 70% increase 75% increase.

Speaker 2

2nd goal they said is to keep it affordable and that's where the export comes in. If you're going to build out an energy system, you're going to want to make sure that you on the side of having a bit more than you need because being short is a real problem. And so you want to have access to export markets. So we've worked with both the ISO and the government to identify one constraint as I pointed out earlier, where additional flow or ties would be required going south or going east or west as well because we can move power in 3 different directions. It doesn't all have to go south as well as where they are thinking about citing the additional generation that opens up opportunity.

Speaker 2

So what I would expect to see in the coming next year as the government announces more details on what becoming an energy superpower means, where the generation is going to come from, additional build out in the transmission going beyond 2,030. So this will probably late mid-two thousand and thirty to late 2030s, particularly if it's nuclear. Does that answer your question, Mark?

Speaker 1

Yes. No. And then your view

Speaker 5

would be that you still would be sort of the transmitter of choice and the scale of these projects would be something that you think you would have sort of first rate to look at?

Speaker 2

Yes, absolutely. I mean that's going to be our opening position. We believe we're the best suited to manage these projects and build them. We've demonstrated that with our Chatham by Lakeshore coming in early and under budget. We've demonstrated that with the Waseca and transmission line by how quickly we've moved into construction where we have shoveled in the ground this year.

Speaker 2

We have a strong relationship with the indigenous communities, our partners as well as with government. Government ultimately gets to make the decision as you saw with the Wawa to porcupine, they did put a competitive process, but I think they're going to find and at the end of the day, they did award that to us. So obviously, are seeing the value we bring to these lines. So that's our hope that we get designated. But if that isn't the case, we're certainly confident in our ability to compete.

Speaker 5

Okay. Thanks for the time this morning. Appreciate it.

Operator

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

Speaker 6

Thanks and good morning. Maybe just a quick follow-up on the Wawa porcupine. You said they did award that to you. I think they designated you they proposed to designate you as a transmitter of choice, but has that been awarded or and if not any reason why the delay?

Speaker 2

Good morning, Morris. It was designated to us, then they had a consultative process for 45 days where the award was open for discussion and comment. That ended a couple of months ago. I'm still confident that we will get the final letter designating that project to us so we can get moving forward on it. They're just taking this time to make sure they reviewed all the comments and provided back comments to everybody involved.

Speaker 2

But it's, in my opinion, unlikely they're going to change their designation. So we're very confident that we will hear some positive news on that later on this year.

Speaker 6

Thanks. And just to finish up on your comments about the Ontario government and their vision for the province's energy future. So they are obviously looking to launch their 1st integrated energy resource plan next year as you mentioned. Thoughts on what would actually be different, meaningfully different from what is being done today and what that means for you?

Speaker 2

Building on the comments of the integrated plan means they're going to look at take particularly bring gas, electricity together, so you can build out the system in the most rational way, provide certainty to the gas companies as well as the electricity companies. I would expect given that they want to become an energy superpower to be a long term vision. So rather than the ISO's current process, which is looking out at a couple of years, I would expect this to be a 5 to 15 year outlook, so you can actually track a trajectory and start making investments.

Speaker 6

Understood. Thank you very much.

Operator

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

Speaker 1

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

Operator

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

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