Mr. Paul Dobson reports
HYDRO ONE REPORTS POSITIVE FOURTH QUARTER RESULTS
Hydro One Ltd. has provided its financial and operating results for the fourth quarter ended Dec. 31, 2018.
Fourth quarter highlights
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Favourable weather and lower taxes contributed to earnings per share (EPS) of 27 cents and adjusted EPS of 30 cents, compared with 26 cents and 29 cents, respectively, for the same period in 2017. For the full year, 2018 EPS of $1.31 and adjusted EPS of $1.35 demonstrate growth over $1.11 and $1.17 in 2017, respectively.
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A disciplined approach to project management resulted in $1.8-billion of assets being placed into service in the year, which was consistent with the $1.8-billion of aggregate in-servicing plans put forward to the Ontario Energy Board (OEB), providing a continuation of strong project execution in terms of scope, schedule and budget adherence.
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Continued positive outcomes from the company's new vegetation management program that reduces the tree trimming cycle from 10 years to three years. Forestry teams did three times as much work while holding operation, maintenance and administration (OM&A) costs at a nominal increase.
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Productivity savings of $135.5-million represent a 52-per-cent increase year over year. Total productivity savings since 2015 amount to $250-million.
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Distribution reliability improved year over year with a 1.1-hour (14.2 per cent) reduction in total outage duration over 2017.
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The company achieved its 2018 safety target with 1.1 recordable incidents per 200,000 hours worked, a 35-per-cent improvement compared with 2015.
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On Dec. 21, the company's Merivale transmission station was fully restored to normal status. The facility had been serving Ottawa area customers in a temporary operational state since a devastating storm and tornado destroyed the station in September.
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Quarterly dividend declared at 23 cents per share, payable March 29, 2019.
Recent events
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As required by legislation, the company posted its proposed reduced executive compensation framework on its website on Feb. 14, 2019, for approval by the Ontario government. The government has not approved the framework in the form posted. Discussion of the framework is continuing.
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Last month, Avista Corp. and Hydro One mutually agreed to terminate the merger agreement. Hydro One paid a termination fee of $103-million (U.S.) to Avista on Jan. 24.
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Hydro One was recognized in January with two awards from the Edison Electric Institute for restoring major outages due to storms. Hydro One also further solidified its international reputation by providing mutual support to California restoration efforts following devastating wildfires.
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Hydro One was recognized by Forbes as one of Canada's best employers for 2019.
"Hydro One had a strong fourth quarter and made considerable progress in driving down costs, improving service reliability and increasing operational efficiencies throughout 2018 as part of our commitment to deliver greater value to shareholders and customers," said Paul Dobson, acting president and chief executive officer. "With regard to Avista, given the regulatory circumstances, Hydro One and Avista mutually agreed to terminate the acquisition. Hydro One has been proudly serving customers for over 100 years, with excellent business fundamentals, and has a team of dedicated, engaged and resilient employees determined to innovate and improve all aspects of the business every day."
SELECTED CONSOLIDATED FINANCIAL AND OPERATING HIGHLIGHTS
(amounts throughout in millions of Canadian dollars, except as otherwise noted)
Three months ended Dec. 31, Year ended Dec. 31,
2018 2017 2018 2017
Revenues $1,559 $1,439 $6,218 $5,990
Purchased power 741 662 2,899 2,875
Revenues, net of purchased power 818 777 3,319 3,115
Net income attributable to common
shareholders 162 155 778 658
Costs related to acquisition of Avista,
after tax 14 15 29 36
Adjusted net income attributable to
common shareholders 176 170 807 694
Basic EPS $0.27 $0.26 $1.31 $1.11
Diluted EPS $0.27 $0.26 $1.30 $1.10
Basic adjusted EPS $0.30 $0.29 $1.35 $1.17
Diluted adjusted EPS $0.29 $0.28 $1.35 $1.16
Net cash from operating activities 399 523 1,575 1,716
Capital investments 467 431 1,575 1,567
Assets placed in service 952 733 1,813 1,592
Transmission: average monthly Ontario
60-minute peak demand (mw) 19,416 18,946 20,485 19,587
Distribution: electricity distributed
to Hydro One customers (gwh) 7,004 6,784 27,338 25,876
Key financial highlights
In the fourth quarter of 2018, the company reported net income attributable to common shareholders of $162-million (2017 -- $155-million), a 4.5-per-cent increase from last year, and EPS of 27 cents (2017 -- 26 cents). Adjusted EPS, which excludes the after-tax impact of costs ($14-million) related to the recently terminated Avista acquisition, was 30 cents for the quarter (2017 -- 29 cents).
Revenues, net of purchased power, for the fourth quarter were higher than last year by 5.3 per cent. This reflects increased transmission and distribution revenues due to higher energy consumption resulting from favourable weather, as well as higher transmission revenues driven by increased OEB-approved transmission rates.
The comparability of fourth quarter earnings was impacted by higher vegetation management costs arising from a change to an improved vegetation program resulting in greater coverage and better reliability, higher non-recurring savings in 2017, including property taxes, HST recovery and insurance proceeds, and higher stations and lines maintenance costs.
Lower income tax expense for the fourth quarter of 2018, compared with 2017, was primarily attributable to an increase in tax deductions arising from higher in-service additions coupled with an increased allocation to a higher depreciation class, as well as higher pension and other postemployment benefit (OPEB) contributions for tax purposes. The company is required to accrue taxes based on the tax liability without considering the temporary differences as prescribed by the regulator.
Hydro One continues to invest in the reliability and performance of Ontario's electricity transmission and distribution systems, address aging power system infrastructure, facilitate connectivity to new load customers and generation sources, and improve service to customers. The company made capital investments of $467-million during the fourth quarter, and placed $952-million worth of new assets in service. For the full year, the company placed $1.8-billion of assets into service, which was consistent with the $1.8-billion of aggregate capital in-servicing plans put forward to the OEB. This was achieved due to considerable discipline throughout the year on project execution, scope, scheduling and budget controls.
For the year, the company reported net income of $778-million (2017 -- $658-million), an 18.2-per-cent increase from last year, and EPS of $1.31 (2017 -- $1.11). Adjusted EPS is $1.35 for the year. Year-to-date results were impacted by similar factors to those noted above.
In addition, year-to-date results were affected by higher project write-offs due to revision of asset replacement strategies and alternatives not pursued, and obsolete inventory and technology, savings related to the renewed information technology (IT) outsourced contract, and lower costs related to the recently terminated acquisition of Avista. Higher financing charges were driven by increased interest expense on the convertible debentures, partially offset by year-to-date revaluation of the foreign exchange contract.
Higher year-to-date income tax expense was primarily attributable to higher earnings in 2018, partially offset by higher temporary differences arising from higher in-service additions in 2018, compared with 2017.
Selected operating highlights
The increase in OM&A in the fourth quarter was associated with the company's new innovative vegetation management program that reduces the cycle time for tree trimming from 10 years to three years. By working the lines more frequently to address trees or other vegetation that could impact service, it improves the safety and reliability of the distribution network. In 2018, the company completed vegetation work on approximately 30,000 kilometres of lines, representing more than three times the work completed compared with 2017, but with only a marginal increase in cost. Adjusted for one-time costs, the increase in total OM&A costs was nominal.
The company built on its strong performance from last year with productivity savings of $135.5-million in 2018, primarily through initiatives such as better procurement, fleet reduction, lower IT costs and more efficient cable locate programs. The total productivity savings since 2015 increased to over $250-million.
Reliability of the company's distribution system improved with a 1.1-hour reduction in total average outage duration over the 2017 metric of 7.9 hours. This improvement was the result of the new vegetation management program discussed above, strategically applied upgrades to circuits, modernizing equipment in the grid and a more pro-active approach to storm preparation.
Management continued its focus on ensuring safety was top of mind for all employees. With 1.1 recordable incidents per 200,000 hours worked in 2018, the company extended the downward trend of safety incidents that has resulted in a 35-per-cent reduction since 2015.
Following a thunderstorm and multiple tornados in the Ottawa area on Sept. 23 that destroyed the company's Merivale transmission station, crews restored service to Hydro Ottawa and Hydro One customers in the area with an innovative, but temporary, solution within 48 hours. This was followed by a permanent restoration that was completed on Dec. 21, returning the station back to normal operation.
The Edison Electric Institute recognized Hydro One with two emergency recovery award awards for its efforts in 2018. The first award was for the company's response in restoring power after a May, 2018, windstorm while the second was for the above-mentioned thunderstorm and tornado event the following September.
Subject to approval by the management board of the cabinet, a new framework for executive compensation was released by Hydro One on Feb. 14, 2019. The program was developed by the company's independent board of directors, is competitive and will support efforts to both attract as well as retain an experienced leadership team, including president and chief executive officer. Further, the framework continues to support the company's commitment to driving exceptional customer service, improved reliability, cost reductions and greater shareholder value.
Following denials from the Washington Utilities and Transportation Commission in December and the Idaho Public Utilities Commission in January regarding the company's Avista merger proposal, the Oregon Public Utility Commission issued a notice of abeyance. On Jan. 23, both companies announced they had mutually agreed to terminate the merger agreement.
Hydro One brand recognition was heightened internationally after the company supported a California-based utility after devastating wildfires affected the electrical system in the state. Two teams of approximately 20 forestry technicians each worked in central California for system inspection and quality control to support restoration efforts from Nov. 26 to Dec. 20.
On Jan. 29, Forbes recognized Hydro One on its list of Canada's best employers for 2019. Based on a survey of over 8,000 people working at Canadian businesses with over 500 employees, the company's performance demonstrates its efforts to create an engaged work force and positive working environment.
Common share dividends
Following the conclusion of the fourth quarter, on Feb. 20, 2019, the company declared a quarterly cash dividend to common shareholders of 23 cents per share to be paid on March 29, 2019, to shareholders of record on March 13, 2019.
CONSOLIDATED INCOME STATEMENTS
(millions of dollars, except per share amounts)
Three months ended Dec. 31, Year ended Dec. 31,
2018 2017 2018 2017
Revenues
Distribution $1,138 $1,049 $4,422 $4,366
Transmission 410 379 1,754 1,578
Other 11 11 42 46
1,559 1,439 6,218 5,990
Costs
Purchased power 741 662 2,899 2,875
Operation, maintenance and administration 308 244 1,105 1,066
Depreciation and amortization 217 214 837 817
1,266 1,120 4,841 4,758
Income before financing charges and taxes 293 319 1,377 1,232
Financing charges 123 119 459 439
Income before taxes 170 200 918 793
Income taxes 1 38 116 111
Net income 169 162 802 682
Other comprehensive income 2 - 4 1
Comprehensive income 171 162 806 683
Net income attributable to
Non-controlling interest 2 2 6 6
Preferred shareholders 5 5 18 18
Common shareholders 162 155 778 658
169 162 802 682
Comprehensive income attributable to
Non-controlling interest 2 2 6 6
Preferred shareholders 5 5 18 18
Common shareholders 164 155 782 659
171 162 806 683
Basic EPS $0.27 $0.26 $1.31 $1.11
Diluted EPS $0.27 $0.26 $1.30 $1.10
Basic adjusted EPS $0.30 $0.29 $1.35 $1.17
Diluted adjusted EPS $0.29 $0.28 $1.35 $1.16
Quarterly investment community teleconference
The company's fourth quarter 2018 results teleconference with the investment community will be held on Feb. 21, 2019, at 8 a.m. ET, a webcast of which will be available at
the company's website. Members of the financial community wishing to ask questions during the call should dial 1-855-716-2690 prior to the scheduled start time and request access to Hydro One's fourth quarter 2018 results call, conference ID 4376998 (international callers may dial 1-440-996-5689). Media and other interested parties are welcome to participate on a listen-only basis. A webcast of the teleconference will be available at the same link following the call. Additionally, investors should note that from time to time Hydro One management presents at brokerage sponsored investor conferences. Most often, but not always, these conferences are webcast by the hosting brokerage firm, and when they are webcast, links are made available on Hydro One's website and are posted generally at least two days before the conference.
About Hydro One Ltd.
The company is Ontario's largest electricity transmission and distribution provider with almost 1.4 million valued customers, over $26.4-billion in assets and 2018 annual revenues of over $6.2-billion. Its team of approximately 8,600 skilled and dedicated employees proudly builds and maintains a safe and reliable electricity system which is essential to supporting strong and successful communities. In 2018, Hydro One invested almost $1.6-billion in its 30,000 circuit km of high-voltage transmission and 123,000 circuit km of primary distribution networks, and injected approximately $1.3-billion into the economy by buying goods and services in Ontario.
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