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00:00Hey, Harry. Thank you for joining us.
00:02You're welcome. It's a delight to be here.
00:04This will be rapid fire because we stand between lunch.
00:09Okay, here we go.
00:10So give us a very quick update on Hydro One,
00:14transmission and distribution company,
00:16but talk about your customer base and where you're at.
00:19Sure. So we're a fairly simple company to understand.
00:23We are in one jurisdiction, the province of Ontario,
00:26largest province in Canada in terms of population,
00:3040% of the population, 40% of the GDP, diversified economy.
00:35We've got everything from heavy industry between steel manufacturing,
00:38automobile parts manufacturing and assembly,
00:41right through technology, financial services and agriculture.
00:45So a full spectrum diversified economy had a lot of growth,
00:49economic growth and population growth over the last number of years.
00:53Those are expected to continue.
00:54And as a result, we as an electric utility, as you mentioned,
00:59are in two businesses, essentially, distribution and transmission.
01:02We are the transmitter of Ontario.
01:04We own all of or a stake in every transmission line in the province except for one.
01:09And we're the largest distribution company,
01:12interlocal distribution company in terms of wood poles and wires to homes and small commercial and industrial businesses.
01:18As I was saying, we have about 1.5 million wood poles.
01:23We also have about 1.5 million customers.
01:26Our customer base on the distribution side is primarily rural.
01:29We're not in the major urban centers.
01:32Ontario is the home of hydroelectricity, hence the name Hydro One.
01:3725% of our power is from hydroelectric sources, primarily rivers and dams.
01:4150% is nuclear, 16% is natural gas, and the rest is renewable.
01:47There's no oil.
01:48There's no coal.
01:49And the goal of the province is to get to full green energy, of which nuclear is a part, by 2050.
01:56And Ontario is seeing pretty strong power demand growth.
01:59Can you talk about that?
02:00Yes.
02:00It's interesting.
02:01I haven't been with Hydro One that long.
02:02So I had a vision or an image of utilities, electric utilities, being slow to no growth, very bureaucratic, et cetera.
02:10It's anything but.
02:12That may have been true.
02:13But we are seeing unprecedented levels of growth that we've already realized.
02:18And as we look ahead, the system planner for Ontario estimates that electricity consumption will increase 75% between this year and 2050.
02:28So on a straight-line basis, that's about a 3% CAGR for 25 years.
02:33Now, by tech standards, that's not that great.
02:35But by utility standards, that's rapid.
02:38And what we need to do is invest to enable that and at the same time ensure we're investing to improve the resiliency of our grid.
02:47Now, to be able to do any of that, you need money.
02:50You're on a mission here.
02:52Tell us about your new project.
02:53I'm on a mission.
02:54So as you say, we've been lucky as a public company.
02:58We went public in 2015.
02:59We've been able to fund all of our expenditures and operations from funds from operations and borrowings.
03:09We're an A-rated utility, very proud of that.
03:12But as we look ahead, the accelerating pace of investment is going to require more debt but also some equity.
03:20On the debt side, we've been exclusively Canadian.
03:23We've always issued bonds in Canada.
03:26We, in August, filed a shelf prospectus to issue here in the United States.
03:30And we intend to have an inaugural issue within the first six months of next year.
03:35And that becomes an annual occurrence just to diversify our investor base.
03:39What could that inaugural issuance look like in terms of total amount and any terms, tenors?
03:45Well, that's a great question.
03:47So we haven't landed on it.
03:49And we're talking with investors now to get a sense since we're not known here.
03:53In Canada, we do everything from fives, sevens, tens, and thirties.
03:57Here, for an inaugural issue for a new issuer, it feels like a ten-year tenor is probably the right one.
04:04We want it to be sizable enough to be interesting to investors, so anywhere from half a billion to a billion to make it meaningful for folks.
04:12We don't want to overshoot at the same time we don't want to undershoot and leave too many people wanting too much more.
04:18So there'll be a lot more to come as we get ready for this and start conducting some of the marketing in the new year.
04:24So a lot has changed in the last couple of weeks.
04:26The U.S. government has shut down.
04:28How does that affect your perspective, like just that and looking at the U.S. overall?
04:32Well, there's a lot of headlines that come across the border, et cetera, et cetera.
04:39I think we're taking the medium and long-term view.
04:42There's lots of issues in both countries, but we're investing for the medium and long-term.
04:48Our outlook is there, and we think the government will find a way to start up again.
04:53The parties will come together, come up with something.
04:55It doesn't really interfere with our business in any way.
05:00We're happy to export.
05:01We do export a fair bit of electricity.
05:03In terms of funding, we don't see any anomalies developing in the market.
05:08We have to be commercial.
05:10So if something changes in such a way that it's uneconomic or disadvantageous for us to issue here,
05:17then we'll hold and wait until the conditions change.
05:20We don't have a natural use for U.S. dollars since we're in one geography.
05:25So we have to swap it back, and we just have to make sure that the swapped rate, all-in rate, is competitive for us.
05:33Because we have to look after our customers, our rate payers, to ensure we're not doing anything that's imprudent or driving costs up,
05:39which will drive rates up.
05:40In Canada, I believe Hydro One is the largest issuer of green bonds.
05:44Is that something you're looking for in the U.S.?
05:46Or is it just like regular, like green is not a good one?
05:49There's no premium, if you will, or greenium, if you will, for that.
05:54So we're certainly proud of our sustainability record and our environmental focus.
06:00But it doesn't have to be labeled a green bond, and we don't think that will yield anything more for us.
06:06If investors are interested in that, we're happy to try to meet them,
06:10because we have a terrific sustainable financing framework, award-winning sustainable financing framework.
06:16But our initial issue, probably not issued under that.
06:19And you mentioned a lot of demand growth.
06:21Will this be used to fund that, or what's the plan?
06:24Yes.
06:25So we have organic growth, population growth, economic growth that just continues along in the distribution business.
06:33But our transmission business is the real needy business from an incremental capital point of view.
06:39We have nine more transmission lines to build between now and 2032.
06:44And we expect to win or be designated as the designer and constructor of more lines
06:50to support the nuclear build-out that is happening, and I think was discussed earlier this morning.
06:56We have to enable all that electricity gets transmitted and distributed to the homes and businesses in Ontario.
07:03Now, that sounds like a lot of transmission building in a short time.
07:06In the U.S., it can take 10, 17, 20 years to build a long-haul line.
07:10How are you finding success?
07:11Thankfully, we don't have those durations.
07:15So we're confident that these nine lines that we've already been approved and designated are in various states.
07:19They'll all be done by 2032, 2033 at the end.
07:22Part of the reason we've been able to do things fairly quickly by transmission standards is our First Nations partnership.
07:31So in Canada, we have a focus as a country for economic and social reconciliation with the First Nations in our lands.
07:41All of our transmission lines will cross some, if not exclusively, First Nations lands.
07:47So we have a 50-50 partnership model where we work with the nations and give them the right to purchase up to 50% or 49.99% of a transmission line that runs across their lands
08:00and also to procure services and goods from Indigenous-owned businesses, either in the construction or the maintenance of the lands.
08:12And what we found is by partnering with them, and we don't wait until the line is being prepared.
08:19We start months early or years early.
08:21We know where the next lines will be, building relationships, establishing relationships in the community, investing in the communities so that they become our partners.
08:31And often, at least in Canada, the transmission line regulatory and approval processes take a while because First Nations are opponents.
08:44Either the land rights haven't been negotiated, they're sacred burial grounds that need to be rooted.
08:48When you're a partner with them, you work with them.
08:51They become your proponent as opposed to opponent, and they make things happen.
08:55And so we've been able to accelerate approval processes, actual construction processes, and energization so that they can participate in the upside.
09:05What kind of timelines are you talking about when you say accelerate?
09:07Is this something done within, like, X number of years, and it took five or ten years?
09:11Yes.
09:11So you were saying 10 to 15 years.
09:12So we're at anywhere from two to three years to four, depending on the length of the line, the complexity of it.
09:20But the work starts before the construction starts.
09:23So from absolute beginning to end is anywhere from five to, say, eight years at the outside.
09:30Are there any lessons learned in interacting with First Nations or how early you get them involved?
09:36You're never early enough, number one, to understand every nation has some uniqueness to it.
09:43And so understanding what's important for them and their nation in terms of economic reconciliation and what is literally and truly sacred versus not.
09:52But enabling them to invest and participate and be part of the process is an absolute winner.
10:00And we know this based on our record of working with them and hearing from them.
10:06But in addition, the lines that we've been awarded, either in a competitive process or in a designation,
10:11often we see the partnership that has been established is one of the deciding factors.
10:17So they take a 50 percent equity ownership, right?
10:21Can you talk a little bit about when they come in and how that works?
10:24So it's for us, we take a lot of risk up front.
10:29So we take all the construction risk and we work with our EPC contractors, engineers, et cetera,
10:34do all the design, the development and the First Nations partners.
10:37But we don't look for them to invest until the line is constructed.
10:42The rate application has gone in and been approved.
10:46And from the moment the electricity is flowing up until a year after that,
10:51they have the right but not the obligation to buy from us equity in the line.
10:56It doesn't cover the stations at either end.
10:59It's the cables, the wires, the poles, transformers, insulators, conductors, et cetera, all that.
11:05We keep, just because there's other assets coming into those stations, it gets very complicated that way.
11:09And then are you helping them with the financings on that end or do you have a role?
11:13We do have a role.
11:15So Kevin Dickinson, our assistant treasurer, is here.
11:18He and his team are integral to ensuring they have availability of financing.
11:22We don't guarantee it, but we'll do everything we can to make introductions,
11:26ensure there's multiple sources of funds.
11:29Some nations have the cash on their own, a lot don't.
11:32This is a great investment for them because right now there are, and for the foreseeable future,
11:38there's both provincial and federal loan guarantee programs.
11:42So the nations effectively borrow at the rate of the government of Ontario, the government of Canada.
11:46So that's in the fours.
11:48They're earning 9.2% on these.
11:51So it's a great return, but we don't guarantee it.
11:53We don't want to take that liability on our books.
11:55Now, I have to ask about data centers because I'm in the U.S., so that's all I write about.
11:59What are you seeing?
12:01Are they knocking on your door, or is that mainly they're going to the generators
12:05and you're just hooking up the generators?
12:06Well, they're knocking on the door.
12:08It isn't as dramatic as some of the headlines here,
12:12here being in the United States around what data centers are doing, et cetera.
12:15We have about 10 gigawatts of applications in process,
12:21process, but those same applicants are also talking in Alberta.
12:27They're talking in Virginia.
12:29They're looking to source different things.
12:31So for us, we see it as an opportunity.
12:34It isn't that dramatic.
12:35They tend to co-locate or locate very close to generation,
12:38so it's a bigger opportunity for the generators to get some base load and amortize some costs.
12:44We're happy to support in any way.
12:46Our one caveat is we want to make sure that geography is considered.
12:51Southwestern Ontario, from Toronto through to Windsor, Detroit area, highly congested, needs more power brought in.
12:58The last thing we need is another data center in southwestern Ontario,
13:01because that will just create more problems in the grid.
13:04Do data centers have to register with you to come online?
13:08Like, how does that work?
13:09There's different processes in the U.S.
13:11Yes, they don't have to register, but we're involved.
13:14So when they make a proposal and put in a formal application,
13:18we are one of the parties to the work to ensure the solution is designed as effectively as possible before it's approved.
13:27Now, all this new demand growth is coming at a time when we're seeing grids across North America
13:32facing greater stress from extreme weather.
13:34How are you bolstering reliability, whether it's extreme winter storms or are you seeing wildfire risks?
13:40Thankfully, we're not seeing wildfire risks.
13:42So the province of Ontario is rated either low, very low, or negligible in terms of wildfire risk.
13:49Having said that, there's not none.
13:50It's just they're not anywhere close to any significant assets or, thankfully, in most cases, population centers.
13:57This year, we're actually over where we were last year, but below the 10-year average in fires, and we've had no real loss.
14:03For us, the natural disaster that we worry more about is wind and ice.
14:11And we did have what we call a generational ice storm roll through March 28th of this year
14:16that took a huge swath of our assets out of service and our customers out of power for as long as three and a half weeks.
14:24I mean, it was catastrophic.
14:25That's something that we have normal storm restoration.
14:29That was extraordinary.
14:31And so we file a Z-factor application for extraordinary relief that has been filed,
14:37and we can hopefully get that approved.
14:40They'll be put in our rate base, and we don't have to defer others.
14:42So to answer your question, it's wind and ice more than wildfires.
14:47We monitor it.
14:48We do lots of things to ensure from a forestry and vegetation management we keep our assets at least as low risk as possible,
14:57but they're always going to be there because we can't do everything to absolutely prevent it.
15:01And undergrounding is not going to work.
15:03Too much Canadian shield that you're just not going to put everything underground.
15:07On that note, thank you so much, Harry.
15:09Really appreciate your time.
15:10And it's time for lunch.
15:11All right.
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