20180823Avista Customer Group Response to Report.pdf

ORIGINAI,
VEDRECE
Norman M. Semanko, ISB #4761
PARSONS BEHLE & LATIMER
800 West Main Street, Suite 1300
Boise, Idaho 83702
Telephone: [phone]
Facsimile: 208.562.4901
[e-mail]
[e-mail]
IN THE MATTER OF THE JOINT
APPLICATION OF HYDRO ONE LIMITED
AND AVISTA CORPORATION FOR
APPROVAL OF MERGER AGREEMENT
?ili$ irl.i, 23 Pll lr: 20
Attorneys for Intervenor Avista Customer Group
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASE NOS. AVU-E-I7-09
AVU-G- l7-05
AVISTA CUSTOMER GROUP'S
RESPONSE TO REPORT ON HYDRO
ONE MANAGEMENT CHANGES AND
MOTION FOR SCHEDULING
CONFERENCE
I I. INTRODUCTION
2 The Idaho Public Utilities Commission ("Commission") previously vacated the July 23,
3 2018 Technical Hearing in this matter and ordered that the parties meet and confer to discuss case
4 processing after Hydro One has a new CEO and board of directors in place. Order No, 3411I al2
5 (July 20,2018) ("Order"). Once new leadership is in place at Hydro One, the Commission said it
6 expects the parties to meet for a prehearing conference, to propose a new procedural timeline for
7 the case. Commission Press Release (July 19, 201 8).
8 The Commission also ordered that the Applicants update the Commission of progress
9 relating to Hydro One executive governance by August 15,2018. Order at2. In response, the
AVISTA CUSTOMER GROUP'S RESPONSE TO REPORT ON HYDRO ONE MANAGEMENT
CHANGES AND MOTION FOR SCHEDULING CONFERENCE - Page 1
I Applicants filed lheir Report on Hydro One Management Changes on August 15, along with a
2 Motionfor Scheduling Conference ("Report and Motion"). Hydro One also held a teleconference
3 briefing on August 14. A copy of the transcript from the briefing is attached hereto as Exhibit A
4 ("BriefingTranscript").
5 II. INTRODUCTION
6 The status report provides that Hydro One announced the 10 members of its new board on
7 August 14,2018. Report and Motion at 2. This was as expected from the information previously
8 provided to the Commission. See ldaho Letter at 2 (July 18, 201 8) ("Hydro One has committed to
9 completing the transition process to a new board of directors by August 15, 2018").
10 It is clear that the new board had not been briefed, let alone provided any direction, on the
11 Avista merger. In response to a question on this topic ("[H]ave you had a chance to socialize the
12 Avista acquisition with the new board? In other words how do we know that this new board is in
13 alignment with [the] Avista acquisition?"), Paul Dobson, Hydro One's Chief Financial Officer and
14 acting CEO responded at the company's August 14 briefing: o'So we have not sat down with the
15 new board and gone through the Avista transaction ." Briefing Transcript.
16 The status report also provides that Hydro One has not selected a new CEO to replace Mayo
17 Schmidt who retired on July 11,201,8, the same day that Hydro One's Chief Financial Officer, Paul
l8 Dobson,wasnamedHydroOne'sactingCEO. ReportandMotionat2-3. Theinformationabout
19 the interim CEO was already known to the Commission at the time that it issued its Order on
20 July20. See ldaho Letter at 2 (July 18,2018) ("Paul Dobson, Hydro One's chief financial officer,
2l has been appointed as acting chief executive officer until such time as the replacement board of
22 directors, once constituted, can appoint a new chief executive officer").
AVISTA CUSTOMER GROUP'S RESPONSE TO REPORT ON HYDRO ONE MANAGEMBNT
CHANGES AND MOTION FOR SCHEDULING CONFERENCE -Page 2
1 There is no indication in the report from Hydro One when the new CEO will be named, only
2 the assurance that: "The CEO search will be the new Board's highest priority" and that they will
3 "proceed with all deliberate speed in that regard." Report and Motion at 3. They indicate that the
4 Board "will immediately launch a search for a replacement CEO" and "the search may take some
5 time." Report and Motion at 5. At the August 14 briefing, the company made this equally clear:
6 "That is certainly a matter for the new board that they will be kicking off. I imagine that is a very
7 high priority for them." Briefing Transuipt.
8 In support of its motion, the Applicants state that counsel for Avista Customer Group
9 refused to confer with the parties to establish a procedural schedule. Report and Motion at 5. What
l0 counsel for Avista Customer Group told Hydro One/Avista is that it is premature, and contrary to
11 the Commission's Order, to discuss rescheduling the hearing until after the new Hydro One board
12 and CEO are in place.
13 Avista Customer Group is a full party to this matter and is prepared to meet and confer at
14 the time ordered by the Commission. What the Commission ordered is crystal clear and very solid
l5 in its reasoning. The Commission issued its Notice of Vacated Technical Hearing on July 20. That
l6 notice stated:
. ..[*]e find it reasonable to postpone the technical hearing until a
new CEO and executive board are in place at Hydro One. Applicants
are directed to update the Commission when the new management
team is in place. If a CEO and new board are not in place by August
15,2018, the Applicants are directed by the Commission to provide
a status update. . .the parties shall meet and confer to discuss a
procedural schedule once Hydro One has a new CEO and board of
directors in place." The Commission went on to order: "lT IS
FURTHER ORDERED that the luly 23,2018, Technical Hearing is
vacated. The parties shall meet and confer to discuss case processing
after Hydro One has a new CEO and board of directors in place.
AVISTA CUSTOMER GROUP'S RESPONSE TO REPORT ON HYDRO ONE MANAGEMENT
CHANGES AND MOTION FOR SCHEDULING CONFERENCE - Page 3
17
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t9
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I Order at 2. Having no idea when the new CEO may be in place, Hydro One/Avista now want the
2 Commission to reconsider its July 20 order and require the parties to meet and agree to a new
3 schedule prior to the new CEO being in place. And they want a new schedule by August 30. All of
4 this without any idea when the new CEO will be in place. In fact, Hydro One/Avista readily admit
5 that under their scheduling proposal, the new Hydro One CEO may not even be selected by the time
6 of the hearing. The previous CEO, Mayo Schmidt, was a driving force in the merger proposal and
7 was set to testify at hearing. Now the Commission and the parties are being told that there may be
8 no CEO available to testify at the hearing at all. That would be contrary to the clear intent of the
9 Commission's Order.
l0 Compounding this problem, one of the Applicants' previously submitted witnesses in this
11 matter (see DirectTestimony of Ferio G. F. Pugliese (filed Sept. 14,2017)) has leftthe company
12 and there is no indication when there will be a replacement. As reported by Hydro One during the
13 August 14 briefing: "Ferio Pugliese, Executive Vice President, Customer Care and Corporate
14 Affairs. . .will be departing Hydro One at the end of this week, . .we are confident that we will be
15 in a position to appoint a well-qualified and experienced replacement in the near future ." BrieJing
l6 Transcript.
17 Avista Customer Group has respected and adhered to the Commission's Order. The
18 Commission and the parties have been waiting for Hydro One to put it's new CEO and board in
19 place. The new CEO has not yet been named by Hydro One. The status report doesn't tell the
20 Commission and the parties when the new CEO will be in place. As a result, nothing has changed.
21 Hydro One's Report and Motion do not provide a basis for changing the Commission's deliberate
22 and well-reasoned decision in this matter, offering only that "[t]o not proceed with scheduling at
AVISTA CUSTOMBR GROUP'S RESPONSE TO REPORT ON HYDRO ONE MANAGEMENT
CHANGES AND MOTION FOR SCHEDULING CONFERBNCE _ Page 4
I this time. . .will put Idaho well behind other jurisdictions, and may put at risk any closing of the
2 transaction this year." Report and Motion at 5. While the Applicants would like to have the merger
3 done before the end of the year, it is clear that this is not a firm deadline. As James Scarlett, Hydro
4 One's Chief Legal Officer, stated during the company's August 14 briefing: "There is an outside
5 closing date of September 30, but either party has the right to extend it for six months." Briefing
6 Transcript. Obviously that option will need to be exercised to extend this matter, presumably
7 changing the closing date to the end of March,2019.
8 III. CONCLUSION
9 The appointment of a new CEO is fully within Hydro One's control. The sooner that the
10 Hydro One board takes care of its self-proclaimed "highest priority", the sooner the merger proposal
I I can be addressed with a new schedule. The Report and Motion provide no basis for changing the
12 Commission's previous Order.
DATED this 23rd day of August, 2018.
PARS BEHLE & LATIMER
By:t
M
AVISTA CUSTOMER GROUP'S RESPONSE TO REPORT ON HYDRO ONE MANAGEMENT
CHANGES AND MOTION FOR SCHEDULING CONFERENCE - PAgC 5
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing document was served on the
following on this 23rd day of August, 201 8 by the following method:
X U S. First Class Mail, Postage PrepaidLarry A. Crowley, Director
The Energy Strategies, Inc.
5549 S Cliff s Edge Ave.
Boise, ID 83716
crowley .com
Peter J. Richardson
Richardson, Adams, PLLC
515 N 27th Street
Boise, lD 83702
peter@richardsonadams. com
Benjamin J. Otto
Idaho Conservation League
710 N.6th Street
Boise, ID 83702
[e-mail]
Elizabeth Thomas, Partner
Kari Vander Stoep, Partner
K&L Gates,LLP
925 4th Ave., Ste. 2900
Seattle, WA 98104-l158
I iz. thomas@kl gates.qeE
kari. vanderstoeo(Ekl gates. com
d irk. middents (@kl eates. com
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Williams Bradbury, PC
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AVISTA CUSTOMER GROUP'S RESPONSE TO RBPORT ON HYDRO ONE MANAGEMENT
CHANGES AND MOTION FOR SCHEDULING CONFERENCE - Page 6
David J. Meyer, Esq.
Vice President and Chief Counsel of
Regulatory and Government Affairs
Avista Corporation
l4l I East Mission Ave.
Spokane, WA99220
davi d. me yer@ avi stacorp. c om
avistadockets@avi stacorp. com
Linda M. Gervais
Senior Manager, Regulatory Policy
Regulatory Affairs
P.O. Box 3727 MSC-27
Spokane, WA99220
Linda. [e-mail]
Brandon Karpen
Deputy Attorney General
Idaho Public Utilities Commission
472 W Washington
Boise, ID 83702
Brandon. karpen@puc. idaho. gov
Washington and Idaho Northern District
Counsel ofLabors
Danielle Franco-Malone
Schwerin Campbell Barnard Iglitzin
Lavitt I.LP
l8 W Mercer Street, Ste. 400
Seattle, WA 98119-3971
[e-mail]
Dr. Don Reading
6070 Hill Road
Boise, ID 83703
dreadin g@mindsprin g.com
Brady M. Purdy
Attorney at Law
2019 N. l Tth Street
Boise, ID 83702
[e-mail]
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AVISTA CUSTOMER GROUP'S RESPONSE TO REPORT ON HYDRO ONE MANAGEMENT
CHANGES AND MOTION FOR SCHEDULING CONFERENCE -Page7
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AVISTA CUSTOMER GROUP'S RESPONSE TO RBPORT ON HYDRO ONE MANAGEMENT
CHANGES AND MOTION FOR SCHEDULING CONFERENCE - PAgC 8
4836-2316-6320v2
EXHIBIT A
Seeking AlphaG
Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results -
Earnings Call Transcript
Aug. 14, 201811:23 AM ET | 1 Like
by: SA Transcripts
Q2'. 07-19-1 8 Earnings Summary
S/ides r--\gl Neurs
EPS of $0.32 | Revenue of $1.48B (+ 8.0% Y/Y)
Hydro One Ltd (OTC:HRNNF) 02 2018 Results Earnings Conference Call August 14,
2018 8:00 At\4 ET
Executives
Omar Javed - lR
Paul Dobson - President, CEO and CFO
Greg Kiraly - COO
Judy McKellar - Chief Human Resource Officer
Patrick Meneley - Chief Corporate Development Officer
Ferio Pugliese - EVP, Customer Care and Corporate Affairs
Jimmy Scarlett - Chief Legal Officer
Analysts
Linda Ezergailis - TD Securities
Robert Catellier - CIBC World Markets
David Galison - Canaccord Genuity
Ben Pham - BMO
8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results- Earnings Call Transcript lSeeking Alpha
Seeking Alphau
Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results -
Earnings Call Transcript
Aug. 14, 201811:23 AM ET | 1 Like
by: SA Transcripts
Q2'. 07 -19-1 8 Earnings Summary
S/rdes @ News
EPS of $0.32 | Revenue of $1.488 (+ 8.0% Y^f)
Hydro One Ltd (OTC:HRNNF) 02 2018 Results Earnings Conference Call August 14,
2018 8:00 Atvl ET
Executives
Omar Javed - lR
Paul Dobson - President, CEO and CFO
Greg Kiraly - COO
Judy McKellar - Chief Human Resource Officer
Patrick Meneley - Chief Corporate Development Officer
Ferio Pugliese - EVP, Customer Care and Corporate Affairs
Jimmy Scarlett - Chief Legal Officer
Analysts
Linda Ezergailis - TD Securities
Robert Catellier - CIBC World Markets
David Galison - Canaccord Genuity
Ben Pham - BMO
Andrew Kuske - Credit Suisse
Robert Kwan - RBC Capital Markets
h ttps://seeking a lp ha. com/a rticle/41 98951 -hyd ro-o ne-ltd-h rn ntceo-pa ul-dobson-q2-201 8-resu lts-ea rn ing s-call-tra n scn pt?page= 1 1t3
8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
Mona Nazir - Laurentian Bank
David Casado - Raymond James
Jeremy Rosenfield - lndustrial Alliance
Operator
Good day ladies and gentlemen, and welcome to the Hydro One Limited Second Quarter
2018 Result lnvestment Community Teleconference. As a reminder, this call is being
recorded.
I'll now like to turn the call over to Mr. Omar Javed with the Hydro One [\Ianagement team
Please go ahead.
Omar Javed
Good morning, everyone and thank you for joining us, l'm here in Toronto today with
Hydro One's leadership team including our acting President and CEO and Chief Financial
Officer, Paul Dobson; our Chief Operating Officer, Greg Kiraly; our Chief Human Resource
Officer, Judy McKellar; our Chief Corporate Development Officer, Patrick Meneley; our
Executive Vice President of Customer Care and Corporate Affairs, Ferio Pugliese; and our
Chief Legal Officer, Jimmy Scarlett.
We'll provide some brief comments on our second quarter results and then spend the
majority of our call answering as many of your questions as time permits,
There are also several slides which illustrates some points we'll go over in a moment.
This should be up on the webcast now, or if you've dialed in to the teleconference, you
can find them in the Hydro One's website in the lnvestor Relations section under Events &
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 in our quarterly
lvlD&A, which we filed this morning, regarding various factors, assumptions and risks that
could cause our actual results to differ as they all apply to this call.
With that, I turn the call over to Paul Dobson
Paul Dobson
Thank you, Omar. And thank you to everyone for joining me on the call today,
https://seekingalpha. com/article/41 98951 -hyd ro-o ne-ltd-h rn nf-ceo-pa ul-dobson-q2-201 8-resu lts-ea rn ings-call-tra nscript?page= 1 2t3
812312018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
I'm looking fonrrard to reviewing with you our robust second quarter results, but also to
address some of the questions you have undoubtedly. As we understand you have
questions, so we will endeavor to keep this initial portion of the call short with plenty of
time at the end to address them. lf however, you don't have a chance to speak, please
reach out to Omar and his team as we take feedback from our shareholders very
seriously.
First, let's review our financial results for the second quarter. We saw increases in
earnings per share and adjusted earnings per share compared to the second quarter of
last year. Taken as a whole, the strong results were due to timing of the transmission rate
decision, which also resulted in new rates approved by the Ontario Energy Board,
increased consumption from more favorable weather, higher return on equity in the
transmission business and lower operation maintenance and administration costs. The
difference between the headline EPS and the adjusted EPS number is due to the
adjustments for Avista acquisition, such as the fair value, unrealized gain on the deal
contingent foreign exchange fonvard contract to convert CAD 1.4 billion to U.S. dollars.
Revenue net of purchase power was higher by 11.2o/o year-over-year driven primarily by
the transmission business which reflects the decision on our 2017-2018 transmission rate
filing that was implemented in the third quarter of last year. The transmission revenue was
also possibly affected by higher return on equity and more favorable weather resulting
from higher peak demand.
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8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript lSeeking Alpha
Seeking Alpha0
Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results -
Earnings Call Transcript
Aug. 14, 201811:23 AM ET | 1 Like
by: SA Transcripts
Q2'. 07 -19-1 8 Earnings Summary
S/ldes @ News
EPS of $0.32 | Revenue of $1.48B (+ 8.0% Y^/)
OM&A was lower in the quarter versus the same period last year by 6.6% driven in large
part by lower cost for information technology work based on our new service provider
contract, lower cost for emergencies and storms, and lower spend on customer programs
and lower corporate support costs.
Financing charges were lower by 3.9o/o year-over-year primarily on an unrealized gain
driven by the same deal contingent currency exchange I mentioned earlier that affected
adjusted EPS. However, the gain was partially offset by increased interest expenses
related to the convertible debenture issued last August to satisfy the equity component of
the Avista transaction.
Assets placed in service were higher in the second quarter of 2018 versus the second
quarter of 2017 due to the substantial completion of a major development work at our
Clarington Transmission Station. This demonstrates our strong operational ability to
continue to deploy capital in an efficient manner.
From a liquidity standpoint during the quarter, the company issued CAD 1.4 billion medium
term notes at attractive rates that will be used primarily to repay short term debt. To help
fund the Avista transaction, the company has secured a CAD l billion non-revolving equity
bridge credit facility and a $2.6 billion non-revolving debt bridge facility.
With respect to our ratings on June 28, ltloody's lnvestor Services downgraded the long
term debt rating for Hydro One, lnc. to BAAl from A3 and revised its outlook to stable
from negative. As per their press release, the downgrade resulted from l/loody's no longer
assigning any probability that extraordinary support from the Province of Ontario due to
Hydro One credit analysis.
https://seeking a lpha. com/a rticle/41 98951 -hyd ro-o ne-ltd-h rn nf-ceo-pa u l-d obson-q2-201 8-resu lts-ea rn ings-ca ll-tra nscript? page=2 1t2
At23t2O18 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
The Standard and Poor's a placed Hydro One Limited and Hydro One lnc. on credit watch
negative for up to a potential two notch downgrade. Pertheir release on July 18, S&P
articulated the first notch was due to the Avista transaction and the second would be
based on its assessment of whether recent developments of the Hydro One Limited's
governance structure would fail to promote the interests of all stakeholders and adversely
affect management's decision making. We will continue to engage with the rating agencies
to demonstrate our financial strength.
Regarding regulatory updates, the Ontario Energy Board hearings for the 2018 and 2022
distribution applications were held in June. ln July, the company submitted its Argument-
in-Chief. lntervenors had until August 1Oth to respond and Hydro One will make its final
submission by August 31. Post the final submission, we expect the decision from the OEB
to be forthcoming.
The timing for the filing for the 2019, the 2022 transmission rates is currently under review
following the OEB's request for Hydro One to file its transmission filing for a four-year test
period to synchronize the transmission and distribution rate files. We'll provide further
guidance as and when it becomes available.
During the quarter, Hydro One and a Orillia Power Distribution filed a motion to review and
vary the OEB's decision denying Hydro One's proposed acquisition of Orillia Power. An
oral hearing was held in July on the threshold question of whether the matter should be
reviewed before evaluating the merit of their motion to review in their submission.
While we are on the subject of LDC consolidation, we recently announced that we
reached a definitive agreement to acquire the business and distribution assets of
Peterborough Distribution lnc. subject that will be approved. Hydro One will pay the city of
Peterborough $105 million for the transaction. This is consistent with the Ontario LDC
consolidation strategy and we look fonvard to welcoming the customers and employees of
Peterborough Distribution to the Hydro One family.
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8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
Seeking Alphafi
Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results -
Earnings Call Transcript
Aug. 14, 201811:23 AM ET | 1 Like
by: SA Transcripts
Q2'. 07 -19-1 8 Earnings Summary
S/ides
T-\gl Neuvs
EPS of $0.32 | Revenue of $1.48B (+ 8.0% Y^/)
Moving to the regulatory approval process for the Avista transaction, we have made good
progress with approvals from Alaska and lMontana. We've also achieved all required
federal regulatory approvals, consents and clearances to go fonruard with a merger.
'More recently on July 19, the ldaho Public Utilities Commission issued an order vacating
the technical hearing that was scheduled for July 23rd and a new date has not yet been
established. On July 20, the Washington Utilities and Transportation Commission
extended the deadline for a decision on the proposed merger by four months to December
14.
lf we look to operations, we see more proof that the company is aligned at all levels to
improve every facet of the business. Referenced earlier in April, we completed the largest
transmission project in the last six years, bringing clearance in station online, on schedule
and 18% under the initial CAD 297 million budget.
We had four major storms within the quarter, which resulted in aggregate of over 1.4
million affected customers requiring power restoration, which was more than all lhe 2017.
We met this challenge and set a new internal record for speed of restoration by utilizing
new weather monitoring and outage prediction technology to align crews and resources in
advance.
The company is further on track to achieve a one hour reduction in total average power
outage duration for distribution customers compared to 2017. Thanks to improvements in
response times for restoration crews through better outage planning, reporting and
https://seeking a lp ha. com/a rticle/41 98951 -hyd ro-o ne-ltd-h rn nf-ceo-pa u l-d obson-q2-201 B-resu lts-ea rn ing s-ca ll-tra nscript? pag e= 3 Ul
On July 25, the Public Utility Commission of Oregon issued a new procedural schedule
and outlined the target date of December 14 for their decision. We continue to be fully
committed to this transaction and anticipate closing in Q4.
812312018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
analysis and more proactive storm readiness. The culture of continuous improvement in
customer service is also driving results.
We demonstrated strong metrics for first call resolution and customer satisfaction with
agents during the first full quarter, since bringing the new contact center in-house. There
was a 30o/o lear-over-year reduction in accounts receivable, thanks to support services for
customers who were behind on their bills.
Along these lines, we continue to maintain an exceptionally high level of billing accuracy
which came in actually high level of billing accuracy, which came in at 99.63o/o year-lo-
date. Transmission customer satisfaction also remains high at g0% up 2 points in the
same period last year and the highest score on record due to new efforts to centralize
large and industrial customer service to be more responsive to and engaged with their
needs.
The intense focus on operations, customer service and corporate citizenship resulted in
two awards from the U.S. based Edison Electric lnstitute for mutual systems and storm
response. And a third from the Natural Resources Canada for supportive energy star
products.
Three customer service initiatives designed to improve customer experience offered
greater choice and lower cost recently received Chartwell's Best Practice Award, which
recognized service excellence among North American electric and gas utilities. This is just
a snapshot of how the company at all levels is committed to improving efficiency,
controlling costs and putting the needs of our customers first.
Before we move to questions, I would like to take a moment to acknowledge the transition
and leadership that is undenvay at Hydro One. We benefit greatly from the leadership and
guidance of lVlayo, David and other members of our Board of Directors as Hydro One
emerge from a government entity into a publicly traded company under their tenure. They
instilled in us corporate culture of continuous improvement as we strive to become a
leading North American utility. For their leadership, we are grateful.
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8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript lSeeking Alpha
Seeking Alpha0
Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results -
Earnings Call Transcript
Aug. 14, 201811:23 AM ET | 1 Like
by: SA Transcripts
Q2: 07-19-18 Earnings Summary
S/rdes
r--\gl News
EPS of $0.32 | Revenue of $1.488 (+ 8.0% Y^f)
I would also like to express how much the team and I are looking forward to working with
our new Board of Directors. The nomination process has been completed and members of
the new board were announced this morning. The members of the fully independent board
are highly capable individuals, who bring with them substantial industry experience and
significant expertise and strong governance.
As a management team, we look fonruard to working closely with the new board through
the process of designating a new President and CEO new board with the process of
designating a new President and CEO and addressing the strategic challenges and
opportunities that lie ahead. We're pleased that the new board is coming at a time when
Hydro One is building operational momentum and delivering strong financial results.
As everyone is aware the Ontario Government has introduced the Hydro One
Accountability Act which among other things will expand the visibility of executive
compensation and instructs the Ontario Energy Board to exclude executive compensation
from rates.
At this point, we expect this decision will have an incremental annual impact of
approximately $0.03 per share to $0.04 per share to our earnings. We will provide further
guidance on this matter as and when appropriate.
Going fonvard, we continue to have a relentless focus on the fundamentals of the
business, specifically we will continue to support customers, strive for operation
excellence, sustainably drive down our OIM&A cost and continue to add value to the
business.
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8t23l2oj| Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
As discussed earlier, the recent decisions by commissions in Washington, Oregon and
ldaho to include additional process in the regulatory review means our anticipated date to
close the Avista transaction moves from Q3 to Q4 of this year.
We will provide additional input required in these regulatory processes and I iterate and I
reiterate Hydro One remains fully committed to the transaction. ln Ontario, we will also
continue to work through the OEB processes with respect to Orillia and Peterborough and
will review future M&A opportunities in due course.
Lastly, Ferio Pugliese, Executive Vice President, Customer Care and Corporate Affairs
who has been with us since September 2016 will be departing Hydro One at the end of
this week for another opportunity. We want to thank Ferio for his significant role in driving
customer first culture across the organization. We will miss Ferio. We are pleased to have
significant bench strength and management
We are pleased to have significant spend strength and management within Hydro One,
and we are confident that we will be in a position to appoint a well-qualified and
experienced replacement in the near future.
I will stop there, and we'll be pleased to take your questions
Omar Javed
Thank you, Paul. I will request the operator to please explain how she'd like to organize
the Q&A polling process. Please go ahead, Christi.
Question-and-Answer Session
Operator
[Operator lnstructions] And our first question is from the line of Linda Ezergailis with TD
Securities. Your line is open.
Linda Ezergailis
Can you give us an update on whether there has been any discussions yet or a process
established for Hydro One to consult with the province on matters relating to executive
compensation, as stated in your agreement. And if not, what sort of conversations have
there been, and at what point with the effects of Bill 2 disallowing executive compensation
be reflected in rates?
Paul Dobson
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812312018 Hydro One ttd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
Thank you, Linda, for the question. So, first of all I'd just like to reiterate that the EOT is
committed to a smooth transition with the new Board of Directors, and the impacts of the
executive compensation.
The new board will be responsible for looking at executive compensation, and we expect
that will be a priority for them as soon as they arrive. We look fonryard to working with them
in that regard.
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8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
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Hydro One Ltd (HRNNF) CEO Paul Dobson on Q22018 Results -
Earnings Gall Transcript
Aug. 14, 201811:23 AIV ET | 1 Like
by: SA Transcripts
Q2: 07 -19-1 8 Earnings Summary
S/rdes ts Neurs
EPS of $0.32 | Revenue of $1.488 (+ 8.0% Yl/)
With respect to Bill 2, we do acknowledge the Bill 2 received do have a sense, and we'll
manage the company within the parameters of that legislation. We're currently analyzing
the impact of Bill 2. I did mention the $0.03 to $0.04 in my opening remarks about the
expected impact of excluding it, we're continuing to analyze that and then work through
that process, so more information will be forthcoming when we have it.
Linda Ezergailis
And have you had any discussions with the regulators in the U.S. with respect to the
change in the board and the CEO search that have given them an update or is it still all on
hold until the official processes that are scheduled in the future?
Paul Dobson
l'll ask Jamie to make a few comments here in a second, but I just want to reiterate that
we're going to fall around Avista, how the company Hydro One remains fully committed to
the merger with Avista. From our standpoint material fields of - material terms of the deal
have not changed. We do recognize that the regulators have extended the process and
have some questions for the new board. Jamie is there any other comments you'd like to
make in that regard?
Jamie Scarlett
Not really. I mean that's the essential message, These extensions that have been put on
by the authorities in the states are really as we understand it designed to have a better
understanding of the impact that these governance changes.
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At23t2O1B Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript lSeeking Alpha
We have provided them with written updates and we have scheduled to have hearings
with them later in the year October and November for Oregon and Washington, And we
had discussions with the regulatory staff and some of the interveners, but it's all being of
an informative and educational manner,
Linda Ezergailis
And I realize you might not be able to comment too much on the CEO search, but maybe
Judy can give us a sense of if the process has started or will that be something that the
new board will be kicking off shortly?
Judy McKellar
I'm happy to actually address that. That is certainly a matter for the new board that they
will be kicking off. I imagine they would be kicking off in the very near future. I imagine that
is a very high priority for them. And as I just said earlier, we look fonvard to working with
them to help them in that regard.
Operator
Our next question is from Robert Catellier with CIBC World Markets. Your line is open
Robert Catellier
Congratulations on the good quarter. Given the situation, I was wondering if it's fairly early
days obviously with the new board being appointed, but have you had a chance to
socialize the Avista acquisition with the new board? ln other words how do we know that
this new board is in alignment with Avista acquisition?
Paul Dobson
So, it's a good question. The new board was announced this morning and the process to
select the new board which was taken by not only the province, but their four nominees
but then the six nominees from the investors with the ad hoc committee.
The management team here has not been involved in that that was a matter for the
current board or the old board of Hydro One. And so we haven't been involved. So we
have not sat down with the new board and gone through the Avista transaction. We will
certainly as we go through and again be very supportive and committed to the merger. lt's
going to be the management standpoint with [indiscernible].
Robert Catellier
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812312018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript lSeeking Alpha
Sorry to hear about Ferio's news, but Paul what are you doing in the interim knowing you
have fairly limited scope, given your circumstances, but what are you doing to minimize
turnover at ELT 2level?
Pau! Dobson
Well, first of all I'd say the entire ELT including Ferio was committed to a smooth transition
So even as Ferio moves out of his role which we've known about for a while, we are
confident and are pleased that we have significant bench strength within the organization
to fill these roles and to cover these responsibilities.
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8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
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Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results -
Earnings Call Transcript
Aug. 14, 201811:23 AM ET | 1 Like
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Q2'. 07-19-1 8 Earnings Summary
S/ides T---\gl Neuvs
EPS of $0.32 | Revenue of $1.488 (+ 8.0% Y^r)
So we'll let them - we'll be looking to make an announcement in the near-term on Ferio's
replacement, And I imagine though to that retention is on the mind of folks and certainly,
will be a matter for the new board, there is tremendous talent here to go and my five or six
months here with the company, I have continued to be impressed every day with the depth
of talent that we have in the company and I believe it will be a very seamless transition as
we go fonruard.
Robert Catellier
tVly last question then is, do you have a sense of timing on Avista. A couple of dates were
pushed outto December 14. But, atthis point, ldaho has vacated their process and how
much time does the ldaho process require and are the sort of mid-December dates really
the way we should be looking at the transaction?
Paul Dobson
I think, mid-December is our latest target date for closing the transaction. Maybe l'll ask
Jamie to say if there could be some flexibility around that.
Jamie Scarlett
Washington is our largest state regulator and under their legislative regime, they have an
outside date which was August 14. They're pushed out by four months which they've
done. So that's why the December 14 date is there. We expect to be through by then.
We've got a schedule of other work that's being done at ease towards that date. I suppose
there's always the possibility of some kind of potential extension, but we haven't even
talked about that. Our expectation is that we'll be done by the end of the year.
Operator
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8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
Our next question is from David Galison with Canaccord Genuity. Your line is open.
David Galison
So I'd also like to talk about the Avista acquisition. So besides the governance changes
that were being discussed - is the extensions offer up or will they be including additional
negotiations with the regulators or those all complete and now you're just waiting for the
approval process?
Paul Dobson
Maybe I'll ask Jamie to talk about
Jamie Scarlett
As I said we've had some discussions not with ldaho but with staff but with Oregon staff
and with Washington staff and certainly my understanding in our operating premises that
all of the extensions are really around helping the regulators to get their minds around the
change of governance both at the board and at CEO level. There has been no suggestion
that the settlements themselves would change in any respect that there will be new you
know items added to them and that's not my expectation.
David Galison
And then we can negotiate our discussions with the provinces they offered an opinion on
Avista acquisition or one way or the other?
Paul Dobson
Not to my knowledge as the province. We have met with the certain folks within the
Ministry of Energy just as introductory meetings. Certainly there are very aware of the
Avista transaction, but you know they are anxious to learn more about it and inform
Iind iscernible].
Jamie Scarlett
And let me just add one little point. lt's Jamie Scarlett again just for completeness sake it
has always been the case that when you get orders out of these various state regulatory
bodies they can always add elements to their approval in those orders, so that's always
out there that hasn't changed because of this extension.
Operator
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812312018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
Our next question is from Ben Pham with BlVlO. Your line is open.
Ben Pham
On the $0.03 or $0.04 you highlighted on the compensation, is that - can you talk about
how you're calculating that? ls that just based on last year's number and then is there
anything you can do to mitigate that impact perhaps O&M savings that you're seeing a
little bit coming a little bit better than expected?
Paul Dobson
I think we certainly will continue to look at all on OM&A costs per efficient team and driving
it down as we hopefully, everybody appreciate that and we've demonstrated that. The
$0.03 or $0.04 comes from basically executive compensation as per the legislation VPs
and above. And so I think that a lot of that information or some of that information certainly
is in proxy circulars for the executive team and the remainder is for VPs and ex-VPs.
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8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
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Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results -
Earnings Call Transcript
Aug. 14, 201811:23 AM ET | 1 Like
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Q2'. 07-19-18 Earnings Summary
S/ides T---\gl News
EPS of $0.32 I Revenue of $1.48B (+ 8.0% Y/Y)
So, that's our estimate is $0.03 to $0.04 probably closer to $0.03 than $0.04 at this stage
and we're going to continue to analyze that and look for ways that we can mitigate that
and make it file.
Ben Pham
And then on some of the credit rating changes, whether it's expected or not? Could you
comment on maybe any change in credit spreads you've seen and does that impact in any
way the expected accretion on Avista?
Paul Dobson
We have not really seen any major changes in credit spreads. I think if you refer you to the
releases from both [Moody's and S&Ps, but I think they've done - they've had a pretty clear
description of where the ratings are and where they could move to based on their criteria.
But in terms of spreads, I don't think we've seen much movement at all.
Ben Pham
And then lastly maybe nay update on the income tax variance file and where is that at the
moment?
Paul Dobson
I assume you're referring to the pretax asset issue in front of the OEB
Ben Pham
That's right.
Paul Dobson
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At23l2O18 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
So we have not yet heard from them. So, if you recall we've filed a motion to review and
vary in October 2017 I believe. We had a hearing with them in February of this year to
review the merits of the motion and a decision from that hearing is still pending. We're
expecting something - I think we're expecting something this year, but it is up to the OEB.
Operator
Our next question is from Andrew Kuske with Credit Suisse. Your line is open
Andrew Kuske
I think the first question is for Paul and you mentioned your anticipation over Avista closing
Q4 really in December. Can you just clarify the outside date on the convertible debentures
that you issued just to give you some buffer?
Paul Dobson
The outside date I believe for the convertible debenture it's May I believe - March 2019
Andrew Kuske
That's helpful. And then just shifting gears a little bit, just on the OM&A and the
Paul Dobson
Sorry, l've been corrected again. lt's the end of April 30, 2019
Andrew Kuske
April 30? Okay, Thank you. And then just shifting gears into the OM&A, it continues to cost
side of the - out of the company, but one thing I just like a little clarity on that you had in
the TX, now also thinking the DX higher project write-offs due to some investments that
you're pursued originally than effectively called. How much impact was that on the cost
reductions?
Paul Dobson
On a year-to-date basis that was about $10 million. We didn't really have - I don't believe
we had much of that in the second quarter, but on a year-to-date basis about $10 million.
Andrew Kuske
And then, where would you classify your cost reduction strategy right now just in the test
of time? Are you in the third inning, fifth inning? Where abouts are you?
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8t23t2018
Paul Dobson
Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
l'm not - l'm more of a hockey fan than a baseball fan, but l'd say
Andrew Kuske
Okay. First period, second period then
Paul Dobson
I don't think we are - yes, we're somewhere in the - coming out of the first period into the
second period, I would say. We continue to see good opportunities around this because
it's a very - it's a large substantial business with different opportunities and with certainly
an experienced management team and even the new board I'm sure are going to come in
with other ideas as well. So yes, I'd say ending the first coming into the second period.
Operator
Our next question is from Robert Kwan with RBC Capital Markets. Your line is open
Robert Kwan
Just in terms of a couple of the regulatory processes you talked about the deferred tax
R&D as well as the distribution rate case. Just, is there anything you can do to kind of pin
down the timing other than just sometime this year? ls there any kind of expectation
bonded wise?
Paul Dobson
Afraid it's in the hands of the OEB. We've had the hearing. We submitted our Argument-in-
Chief. We're going to make our final submissions by the end of this year and expect their
decision thereafter, we can't dictate or even guess what the timing is. We're certainly very
hopeful that it will be this year.
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8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript lSeeking Alpha
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Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results -
Earnings Call Transcript
Aug. 14, 201811:23 AM ET | 1 Like
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Q2'. 07 -19-1 B Earnings Summary
S/ides r---\
tcrl Neurs
EPS of $0.32 | Revenue of $1.488 (+ 8.0% Y/Y)
Robert Kwan
And just with the change in government, have you noticed any changes in your
interactions with the OEB or are you expecting any changes with respect to the OEB?
Paul Dobson
I don't think we've seen any changes. No, I mean the OEB is an independent board of the
government, acting in the best interests of ratepayers overall. I wouldn't expect to see a
difference in their and their posture towards us as a result the change in government.
Robert Kwan
lf I can just come back to a question asked earlier around Avista and just for greater
clarity, the Q2 statements that came out today, the new board did not participate in the
preparation of the Q2 fUD&A in financials, is that correct?
Paul Dobson
That's correct
Robert Kwan
And if I can just finish, it looks like the rate base figures and growth are down slightly. ls
that just Clarington coming in under budget or is there something else going on?
Paul Dobson
There's a little bit of that, but I think our spending in our in-service is ahead of last year.
The spending is a bit lumpy though, you have to appreciate. These are very large projects,
it's very - you know it's a large transmission, with the very large distribution assets that
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8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
we're putting in place
So there is timing certainly plays a factor in the ups and downs with the rate case. But you
know overall when you look over the long term, there is you know 4oh lo 5% rate case
groMh that we continue to exPect.
Operator
[Operator lnstructions] Our next question is from [Vlona Nazir with Laurentian Bank. Your
line is open.
Mona Nazir
l'm just wondering firstly about - or if you could speak to the level of influence and
involvement that the government has. I remember prior conversations with the
management team surrounded the organization running pretty autonomously and that
government did not see press releases or were not involved with this strategy in
operations. I'm just wondering to what degree this has changed if at all?
Paul Dobson
I don't think it has changed substantially. I think the government has acted within the
parameters by and large of the governance agreement and I would expect them to
continue to do that, that going forward as well. The new board coming on place will
certainly look to that governance agreement and the way they operate and interact with
the government as well going fonruard. So we see that being still in place.
Mona Nazir
And then secondly should the Avista transaction approval get pushed out pass the April
2019 kind of final installment notice date. Can you comment on the financing of the 1.5
billion of convertible debentures, is it possible to extend or would you have to do some
sort of refinancing?
Paul Dobson
We certainly would look at all of our various options to refinance at that point in time. But I
just want to reiterate too that we remain fully committed to the Avista transaction. We
believe the material terms of the deal are - are still in place in the strategic rationale for
doing the deal still remains. But Jamie is there any other points you want to make around
that?
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8t23t2018
Jamie Scarlett
Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 20'18 Results - Earnings Call Transcript I Seeking Alpha
I think that's good answer on the financing question
Mona Nazir
And just lastly from for me, is it possible that FERC and approved states of Alaska and
[Vontana reverse their decisions at all? And are you having any conversations with them
currently or is that chapter is kind of closed from the Avista transaction perspective?
Paul Dobson
So, I think overall - I'll throw it over to Jamie here in a sec, but I don't think that we've
heard anything from either about the person decisions, I think it would be highly unusual to
see that, we're not anticipating that. ls there anything else you want to add Jamie?
Jamie Scarlett
That's correct, Paul. I mean Alaska and Montana are important states. They're not where
the bulk of the business lies and I don't think there's anything in the approvals that they've
given that would suggest they're going back to us.
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8t23t2018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
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Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results -
Earnings Call Transcript
Aug. 14, 201811:23 AM ET | 1 Like
by: SA Transcripts
Q2'. 07 -19-1 8 Earnings Summary
S/ides T---\gl News
EPS of $0.32 | Revenue of $1.488 (+ 8.0% Y/Y)
ln terms of the Federal approvals there are some time limits around the approvals around
HSR. And I think the Federal Communications Commission, but those are pretty straight
fonvard approvals and if we have to get them refresh we'll do that without an incident.
Operator
Our next question is from David Casado with Raymond James. Your line is open
David Casado
lVly first question here just on the topic of LDC consolidation in Ontario. I'm wondering if
you expect to see any change in the government's stance or procedure with respect to
approving those transactions going fonruard?
Paul Dobson
l'll maybe ask Pat to make a few comments on LDCs, but I think overall we believe that
consolidating LDCs in Ontario certainly in many instances can make economic and
operational sense as it has for Peterborough and Orillia provincial goal at the moment is
your stated goal is to consolidate. And so, we'll continue to look at LDCs when it makes
sense from both the customer and shareholder perspective. Pat, is there is anything else
you want to add around the LDC consolidation?
Patrick Meneley
No, David. Just to clarify we don't have any indication at all of any change in the
government's perspective on this. And we are looking at these where we can add value as
for repairs and for community and for Hydro One and we see for both Peterborough and
Orillia wherever we surround those LDCs completely from an operational perspective.
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8t2312018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
There are opportunities to really deliver on all of those criteria and have it beneficial to
shareholders as well. So, our perspective is that we'll continue to monitor those
opportunities and pursue them as it makes sense for all parties and have no indication at
this point that the government's perspective is changing.
Operator
Our next question is from Jeremy Rosenfield with lndustrial Alliance. Your line is open
Jeremy Rosenfield
Just following up on the LDC consolidation issue for Peterborough specifically does the
rate base from Peterborough roll into Hydro One's rate base or is that going to stay
separate for a period of time?
Paul Dobson
Well, there's a period of time where we jointly filed a MAAD application and that will go
through the OEB process and that will be subject to the OEB approval timelines. Certainly,
I believe those assets come into our rate base, but there are procedures in place into the
TMAAD process which provide for monitoring. The undeftakings have been made by the
parties in those transactions. So, from a fundamental perspective as part of our rate base
but we do monitor it as we go fonruard through the process,
Jeremy Rosenfield
And then just turning back to the Avista acquisition. Paul or Jamie, the agreement itself
with Avista, I think has an expiration date. Does that need to be extended? Are you in
discussions with Avista right now to extend that agreement?
Jamie Scarlett
There is an outside closing date of September 30, but either party has the right to extend it
for six months. lt does not need consent of both parties so.
Jeremy Rosenfield
So it's unilateral on one side. Okay
Jamie Scarlett
Either side. Yes
Operator
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812312018 Hydro One Ltd (HRNNF) CEO Paul Dobson on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
[Operator lnstructions] I'm not showing any further questions. I'd like to turn the call back
over to Omar Javed for any further remarks.
Omar Javed
Thank you, Christie. The management team at Hydro One thanks everyone for their time
with us this morning during what is definitely a busy period. We appreciate your interest
and your ownership. lf 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.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does
conclude today's program and you may all disconnect. Everyone have a great day.
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