Operator
Good morning, ladies and gentlemen, and welcome to Hydro One Limited's first quarter 2026 analyst teleconference. At this time, all participants are in a listening mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. As a reminder, the call is being recorded. I would now like to introduce your host for today's conference, Mr. Waseem Khalil, Director of Investor Relations at Hydro One. Please go ahead.
Good morning and thank you for joining us for our quarterly earnings call. Joining me on the call today are our current President and CEO, David Lieberner, our Chief Financial and Regulatory Officer, Harry Taylor, and also joining us is our current Chief Operating Officer, Megan Telfer. On the call today, we'll provide an overview of our quarterly results and then we'll answer as many questions as time permits during our question and answer session. As a reminder, today's discussion will likely touch on estimates and other forward-looking information. Listeners should review the cautionary language in today's earnings release and our MD&A, which we filed this morning regarding the various factors, assumptions, and risks that could cause our actual results to differ as they all apply to this call. With that, I'll turn the call over to our President and CEO, David Lieber.
Thank you, Wasim. This morning, I'll provide an update on our recent activities and accomplishments during the quarter. Then Harry will take you through the financial results. As always, I'll begin with the safety news. Last month, our employees achieved a significant milestone, working two years without a high-energy serious incident. When this achievement is considered alongside our top quartile, low recordable injury frequency, I'm confident in our ability to create a workplace with zero life-altering injuries or fatalities. As I have said many times on these calls, a safe workplace is the essential foundation of operational excellence. The same factors which create safe workplaces also lead to efficient, low-cost operations. As announced on February 26, 2026, I made the decision to retire as President and CEO of Hydro One, effective June 9, 2026. This was a thoughtful decision which best met the needs of my family and Hydro One. At the same time, we announced that Megan Telford, our current Chief Operating Officer, will assume the role of President and CEO upon my retirement. Megan is a highly respected and proven leader who joined Hydro One in 2020. As a key member of the Executive Leadership Team, she has played a pivotal role in delivering our strong performance. During her time at Hydro One, Megan has held executive responsibility for health and safety and environment, strategy, system planning, growth, distribution and transmission operations, human resources, labor relations, indigenous relations, corporate affairs and customer care. Her values, breadth of experience at Hydra One and extensive leadership expertise position her well-being of the organization into its next chapter. Hydra One is entering a period of significant change. Ontario's growing population, electrification and economic expansion are fundamentally reshaping electricity demand across the province. Hydro One is positioned to support this transformation through significant investments in transmission and distribution infrastructure, strong partnerships with First Nations, Unions, Municipalities and others, plus an unwavering focus on system reliability, resilience and affordability. I leave with great confidence in the future of this organization. The leadership team is strong and focused, the strategy is sound and the culture remains grounded in safety, customer service, and execution excellence. As mentioned previously, Ontario's demand for reliable, resilient, and affordable electricity continues to grow. Across the province, strong population growth, industrial investment, and accelerating electrification are reshaping how communities live, work, and move. Meeting this rising demand is critical to sustaining the province's long-term competitiveness and prosperity. As a trusted leader in transmission development, Hydro One is well positioned to support this We continue to play a central role in Ontario's grid expansion, working with government, First Nations partners, industry stakeholders and local communities, we continue to advance and build the critical infrastructure required. In addition to meeting today's demands, these investments ensure the electricity grid is fit for the purpose for decades by replacing aging infrastructure, reducing congestion and enabling clean energy integration to support economic expansion and community growth. As new transmission projects are planned and awarded, we are pleased to be selected to develop and construct these critical lines. As previously announced, we were designated to develop and obtain all necessary approvals for the Greenstone transmission line in northern Ontario, as well as the Sudbury-Berry transmission line in north-central Ontario. Both projects are expected to enter into service in 2032. More recently, Hydro-1 was designated to develop and construct the Red Lake transmission line in northwestern Ontario, north of Dryden. This proposed priority project consists of a new double-circuit 230 kV transmission line extending from the Dryden transformer station to the Ears Falls transformer station, including associated station facilities.
Okay, we'll give David a minute here, I'm going to continue on. and we're talking about the Dryden transformer station to the ear falls transformer station including associated station facilities and continuing to connect to the Red Lake switching station this project is expected to be in service by the early 2030s the addition of the Red Lake transmission line increases our inventory to 15 transmission lines under development and construction, and positions Hydro One with a strong and visible growth profile through our next regulatory period. Across each of these projects, our 50-50 First Nation Equity Partnership model ensures that proximate First Nations share directly in the long-term value created by the transmission line infrastructure. The generational ice storm in late March 2025 caused widespread spread damage across many areas of Ontario and impacted more than 600,000 customers. Hydro One crews, alongside 30 Canadian utility partners and contractors, worked safely day and night in freezing rain, snow and wind to restore power to those impacted by the storms. As a result of the storm, Hydro One filed a Z-factor application with the Ontario Energy Board. Subsequent to the quarter end, we received a decision from the OEB regarding our Z-factor application, denying the recovery of $69 million of incremental revenue related to the costs incurred in the ice storm. While we're disappointed with the outcome, I want to be clear that the decision does not deter our efforts with respect to our joint rate application filing. Hydro One has completed its customer engagement process, receiving significant support for our proposal, and our teams are finalizing the application. We remain on track to file it with the OEB in Q3, 2026.
Thank you, Eric, for stepping in. my apologies Debbie a springtime cold seems to have taken over my body our employees are a heartbeat of Hydra one and their dedication expertise and professionalism drives our success every day that is why we are so pleased to see the collective agreement reached with the Society of United Professionals on January 13th 2026 ratified by union members the agreement covers engineering supervisory and other professional roles reflects our shared approach on collaboration, stability, and long-term success. The collective agreement took effect on October 1st, 2025. It runs through March 31st, 2028, providing certainty for our workforce as we continue to execute on strategic priorities and support Ontario's growing needs. I'm also pleased to report that reached a tentative agreement with our construction union, the Canadian Union of Skilled Workers, which represents construction line persons and and electricians working on critical projects across the organization. This agreement is subject to ratification by CUSW members, and once ratified, will replace the current agreement that expired on April 30th, 2026. I would like to thank all bargaining teams for negotiating in good faith to reach agreements that support our employees, our customers, and the long-term health of our company. At Hydro One, we have built a culture rooted in dedication, passion, inclusion, empowerment and a strong sense of belonging the work people do every day drive strong performance and our teams continue to receive recognition for their efforts recently the company was recognized by electricity human resource Canada with its excellence in workplace culture award this recognition acknowledges a hydro one step-up program which supports open conversations around inclusion allyship and physical psychological safety we also received the electrical distributors associations sustainability excellence award Recognizing our leadership in building sustainable partnerships, Hydro One and the Five Nation partners were honored for their collaborative and sustainable approach behind the construction of the Chattel Lakeshore transmission line, the first to be complete under our First Nations equity partnership model. Finally, we were again named the Globe and Males Women Lead Here Annual Benchmark, which recognizes gender diversity within executive teams across corporate Canada. us. This recognition reflects our continued efforts to build a strong, diverse executive leadership team that is well positioned to lead Hydro One into the next phase of its corporate evolution. Before I turn the call over to Harry to review the financial results, I have a few closing observations, as this will be my final call as President and CEO of Hydro One. Serving as the President and CEO of Hydro One has been the privilege of a lifetime. This organization plays a vital role in the lives of every Ontarian and we needed has been both a profound responsibility and an honor together we together we have redefined our safety culture advanced operational excellence rebuilt trust with our customers partners stakeholders and all levels of government and positioned hydro one for the future when I reflect on my time here I am most proud of the professionalism and dedication our people bring to work every day every store wants every safety milestone every customer restored and every project delivered reflects their care for one another and for the people of Ontario. Together we successfully navigated unprecedented challenges including COVID, extreme weather events, electrification and a trade war by focusing on people, following our strategy and keeping our values front and centre. I want to express my sincere gratitude to our employees, our board, our shareholders, partners, the communities we proudly serve and those joining us on the call today. It's been a lot of fun, and I'll miss you all. Over to you, Harry.
Thank you, David. Good morning again, everyone, and thank you for joining us today. In the first quarter, we delivered basic earnings per share of $0.65 compared to $0.60 in the first quarter of 2025. Net income attributable to common shareholders in the quarter was higher by 9.2% compared compared to the same period from a year ago. The key drivers behind the result this quarter include higher volumes in both distribution and transmission, higher revenue net of purchase power from higher OEB-approved 2026 rates, and higher average monthly peak transmission demand. Lower OM&A costs, primarily due to lower work program expenditures, including vegetation management, and lower income tax expense due to higher deductible timing differences, partially offset by higher pre-tax earnings. These were partially offset by a higher interest expense due to an increase in long-term debt outstanding, and higher depreciation, amortization, and asset removal costs, primarily due to the growth in capital assets. Our first quarter revenue, net of purchase power, increased year over year by 3%. Transmission revenues increased by 4.4%, primarily due to higher average monthly one-hour peak demand that was 0.8% higher, and higher revenues from OEB-approved 2026 rates. Distribution revenues net of purchased power increased by 0.9%, mainly due to a 0.9% increase in customer count. Both the transmission and distribution segments had regulatory adjustments that had offsetting entries and thus are net income neutral. On the cost front, operating, maintenance, and administration expenses in the quarter decreased by approximately 0.9% year-over-year. In the transmission segment, costs were higher by 3.1%, mainly due to higher corporate support costs, partially offset by lower work program expenditures attributable to facilities maintenance and information technology initiatives. In the distribution segment, cost decreased by 5%, mainly due to lower work program expenditures, including vegetation management. Depreciation, amortization, and asset removal expenses during the quarter were higher by 3.4%. The increase was primarily due to the growth in capital assets as the company continues to place new assets and service, partially offset by lower asset removal costs. With respect to financing activities, we saw an 8% increase in interest expense year over year. This was mainly due to the increase in our outstanding long-term debt following the additional issuances we executed in 2025, partially offset by higher capitalized interest. Our balance sheet continues to be in excellent shape, along with our credit worthiness. Our FFO to net debt ratio as of March 31, 2026, was 13.9% and remains well above the threshold limits the rating agencies use to trigger a credit rating review. Turning to taxes, our income tax expense in the quarter was $41 million compared to $68 million in the same quarter last year. The decrease year over year was primarily due to higher deductible timing differences than the previous year, including additional tax deductions from the reintroduction of accelerated capital cost allowance that are offset by a corresponding reduction in revenue and therefore net income neutral. This was partially offset by an increase in pre-tax earnings. As a result, our effective tax rate this quarter was 9.4% compared to 15.9% a year ago. Turning to our capital expenditures, in the first quarter, we invested $715 million, which was a decrease of 2.7% over the same period in 2025. The decrease resulted from a lower volume of station refurbishments and equipment replacements, as well as a lower spend on customer connections within the transmission segment. Also contributing to the decrease was a lower spend on the St. Clair transmission line and a lower volume of wood pole replacements in both the transmission and distribution segments. These were partially offset by an increase in the investment in equipment to support our long-term growth projects. Increased investments in the Advanced Metering Infrastructure, or AMI 2.0, system, as well as the Ontario Broadband Initiative. Looking at our assets placed in service, in the first quarter, we placed $484 million in service for our customers, which was an increase of 14.4% compared to the prior year. In the transmission segment, we saw an increase of 39% year-over-year, primarily due to investments for a high-voltage underground cable replacement, and investments for station refurbishments and replacements. These were partially offset by the absence of in-service additions relating to a customer connection project at a transmission station that occurred last year. In the distribution segment, in-service additions decreased by 4.3% from the prior year, mainly due to the overlap of investments related to the Aurelia Operations Center in-serviced in the prior year, and a lower volume of wood pole replacements. These were partially offset by higher investments in the broadband initiative and the AMI 2.0 system. Looking ahead, we continue to expect earnings per share to grow between 6% and 8% annually for this rate 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 $0.35.31 per share payable to common shareholders of record on June 10, 2026. With that, we'll open the phone lines and be happy to take questions.
Thank you, David and Harry. we will now open the call for questions the operator will explain the Q&A polling process as always we ask that you limit your questions to one question and one follow-up if you have additional questions we request that you rejoin the queue in case we can't address your questions today my team and I are always available to respond to follow-up questions please go ahead Shannon thank you as a reminder to ask a question please press star when one of your telephone and wait for your name to be announced to withdraw your question Please press star 1-1 again.
Operator
Our first question comes from the line of Mark Jarvie with CIBC. Your line is now open.
Yeah, good morning, everyone. First, congratulations to me again, and all the best to you, David. It's been a pleasure getting to know you over the last couple of years. Maybe here, just on the broadband investment, you just reiterated the EPS growth guidance. Can you just kind of unpack how that incremental spend on broadband flows through earnings? Is it because a lot of it in 27 doesn't come until really 2028?
Mark, good morning. Our guidance hasn't changed in terms of the in-service, if you will, of broadband. It's still in the early innings in terms of getting into the rate base between 300 and 700. We're trending well on that, and so it will flow through into earnings once in-service. So we'll see impact more in the back half of this year and into next year. But at this point, no, not enough to take us over or outside the range of the EPS guidance.
Okay. And then just as you think about the JREP coming up, just in terms of where you guys will start to communicate to the street, is the plan here once you file the application to revise the CAPEX and provide visibility through 2032? and how do you would you figure in maybe some of the transmission projects that haven't gone through section 92 in terms of how you communicate the overall growth if that's the plan to give an update this fall mark I would love to give an update this fall we will file on or before October 1st of this year and then what we are proposing will be public publicly available and visible we
will not be able to give any specific guidance or updates until we're through and have the application approved much as I'd like to as I say we have to go through the application and until it's approved we don't want to create any expectations without the confidence knowing that our application and proposals have been approved so the last time that your app was you know submitted, then you kind of did at least give the CapEx plan, just taking the numbers in the submission.
Is that what we'll see when you're just saying you don't give us EPS guidance?
Correct. You'll see everything that's in the proposal, and we can summarize that for you. Beyond what's in there, we can't do any more.
Understood. Okay. Thanks, Eric.
Operator
Thank you. Our next question comes from the line of John Mould with TD Cowan.
Your line is now open. hi morning everybody um a couple questions on the regulatory front maybe starting with some pulse uh panel on ldc's that was launched in october wondering when you're expecting an update from that process what kind of engagement you've you've potentially had with it and then you know just more broadly how you're thinking about the ldc consolidation opportunity right now morning john david liebener here uh the pulse panel as you know filed their results in early this year and the government's had them they've reviewed them they haven't actually made any indication when they're going to make them public or even if they're going to move forward those recommendations i would suggest right now given we have municipal elections coming up in ontario
in the in october of this year you're not going to see any ldc consolidation for probably the next 18 to 24 months and that's probably why the government is sitting on those they want to wait and see what comes out of the election now i'm hypothesized i'm not the government but um I wouldn't expect if they were going to release those results that we wouldn't see them until the end of the year.
Okay, that's very helpful. And then the OEB's next generation rate framework, I realize it's early in that consultation, but can you maybe just put that into context with how, if at all, it might play into the JRAP process, how that's progressing from your perspective and the engagement that your company's had?
John, it's Harry here. We are involved in the consultations. The indications are right now that it won't take effect, whatever comes from it, until 2029. So our rate application will be filed under the current framework, and we expect it to go through the process and get approved at the beginning of 2028.
And John, we do not expect it to be retroactive at this point, So it wouldn't impact us until 2033 in our subsequent rate period.
Okay. Okay. Great. Thanks for that context. I'll get back in the queue, but David, just to echo Mark's comments, it's been great working with you and all the best in your retirement. And Megan, best wishes as you step into the CEO role.
Thank you to both of you.
Operator
Thank you. Our next question comes from the line of Maurice Choi with RBC Capital Markets. Your line is now open.
Thank you, and good morning, everyone. I just wanted to pick up on a comment you made in your prepared remarks that you have completed your customer engagement for JRAP and received significant support for your proposal. I assume when you say significant support, that refers to your proposals to expand the network and improve reliability. And if so, where have you seen the biggest need to adjust your proposal given the feedback that you've received?
Actually, Maurice, the way that we take our customers through, well, first of all, it's an unprecedented for us level of customer engagement. Well over 100,000 customers of all types, from residential customers to large transmission-connected customers throughout, and reviewed, put them through exercises in terms of here's what the proposals are, here are the rate impacts. Do you support it? And then it takes them through some trade-offs about if you'd like more improvements in either reliability or investments in growth, here's what the rate impact would be. Are you prepared to pay that? Yes, no, et cetera. And you'll see this in the evidence that we file with the rate application. A plurality or a strong majority is in support of what we're proposing and or more, not less. And so that gives us confidence that we are putting together a strong rate application with the support of our customers, knowing full well the bill impacts from the investments and the spending that we're proposing.
Laurie's just added a bit more color to that. Over two-thirds of the customers, and this is all different customer segments, that regardless of the segment, over two-thirds were supportive of the draft plan that we've prepared. And the areas they're most interested in are reliability, resilience, and anything we can do to promote economic activity in the province.
Facts that you received have been at all surprising or pretty much down the fairway based on your initial?
There's nothing that we've seen that was either a surprise or a concern.
It's comforting. If I could just finish off with the discussion about that factor, I think you mentioned previously that you're reviewing the decision and will determine the appropriate next steps. I wonder if you could share what these next steps could be. And just more philosophically speaking, do you sense that this decision represents a different approach by the regulator versus prior decisions?
Marisa, at this point, we've reviewed everything, and we want to proceed with our rate application. That's the most important thing for us to do from a regulatory point of view this year. The read-through, if you will, to the rate application is very low. This was a very specific set of circumstances. The interpretation of the commissioners who heard our application was fairly narrow in terms of They interpreted one of the conditions being it didn't materially disrupt our operation from a financial point of view. Our ROEs were so strong last year that they didn't feel there was any incremental revenues that were worthy of being authorized to compensate us for the cost and the disruption operationally that we endured. So it was strictly based on the strong financial performance we had last year. They didn't feel anything else was worthy. That has nothing to do with 28 through 32. This is all about just the things David articulated, improving reliability, investing in the resiliency of the grid, promoting economic development in the province, and delivering on electrification within the province.
Thank you very much for that, and Harry, hopefully you feel better, and best of luck to you and your family. Megan, congratulations.
Operator
Thank you. Our next question comes from the line of Robert Hope with Scotiabank. Your line is now open.
Morning everyone. A bit of a longer term question. So the federal government continues to speak on greater electric connectivity between the provinces and Ontario's spoken about the national energy corridor. So what is your thinking on Hydro One can benefit from this at all as well as any potential thoughts on timing?
Morning Robert and thanks for that question. It's a really interesting hypotheses on building out east-west transmission across the province. There's certainly areas where it does make sense across the country to have stronger ties. The two that come to mind most quickly for a meter between Manitoba and Ontario and between Quebec and Ontario. And should that materialize and what that would likely mean is more transmission investment for Hydro One. We already have inner ties with both those provinces and we already have right-of-ways.
So to the extent we're able to use those right-of-way to add additional capacity or circuits that would certainly position us well to be the lead developer on those new transmission lines i think we have to wait and see when the federal government really releases our electrification policy which they're going to be opening up to getting feedback from industry and provinces later on this year all right thanks for that um and then maybe just moving on to ontario so you know hydro one's been very successful in getting transmission projects allocated to it over the last year uh it appears the government's largely cleared the backlog of its projects pending allocation you know so do you expect to slow down in projects allocated to hydro one or
is there a next wave of projects that you have visibility on well a lot of the projects as as you know were driven by economic activity starting with the greenhouse sector so the agricultural sector then following on with electrification in southwestern southern ontario and now it's moving into developing the resource sector in Ontario so the two or three areas I would pay attention to of course there's the ring of fire and any expansion of any mineral processing up in Timmins as well comes to mind so ring of fire Timmins come to mind for mining expansion electrification is going to continue I'd be thinking about what are the steel mills going to do in Hamilton they're going to have to probably follow similar path to Algoma and then of course there's a recent announcement by the government and Bruce Power looking at advancing Bruce C. to the next stage of that development with an intent to come back by 2030, I believe is the date, and make a decision on that. So obviously, if Bruce C. were to go ahead and get the green light or final investment decision, there'd be significant transmission investment that would have to be made to bring the power from Bruce Peninsula down to GTA and the Golden Horseshoe. And then there's Wesleyville as well, which is further out that the Ontario government as well as OPG are looking at, and that would be double the size of Bruce Sea. So we do see projects coming down the horizon in the shorter term. So probably in the next five years, I'd be looking at mineral exploitation and development in the Ring of Fire and up around the Timmins area and other parts. Longer term, I might be thinking about some hydroelectric up towards the base of James Bay, as well as nuclear development in the Bruce Peninsula and along the North Shores east of Toronto at Wesleyville. All right.
Appreciate that. David, all the best, and Megan, congrats. Thank you, Al. Thanks, Robert.
Operator
Thank you. Our last question comes from the line of Benjamin Pham with BMO. Your line is now open.
Hey, thanks. Good morning. First off, also, congratulations, David, on your retirement as well. I wanted to start off on the storm cost impact, the ZF factory, and maybe you can reaffirm the EPS tagger guidance, and it doesn't sound like the storm disallowance is impacting your earnings per share, but could you clarify if that's correct or not? And how do you think about the Z factor going forward, just really the applicability of it? Does it make sense at all? And how do you think about recovering storm costs of that magnitude going forward?
Ben, there's a few questions there. Let me go one by one. The denial of our request for incremental revenue doesn't affect the EPS guidance. We hadn't built it into the EPS guidance. And so the fact we're not getting incremental revenue is a wash for us, if you will. How do we think about it? It was a very narrow set of facts and a narrow application. We have normal course storm restoration expenses, expenditures, not just expenses, capital expenditures as well, in our base. This was something that was extraordinary, and we believed it met all the tests for the Z factor and therefore brought the application. But it doesn't mean that we will not have normal course storm restoration, either costs in OM&A and capital expenditures in rate-based. That's normal course for us. So this was a truly extraordinary event with an extraordinary decision that isn't something that is the beginning of a pattern or a change in how storm restoration is impacted. one of the things that we need to think about in our rate application is putting in something like a deferral and variance account for extraordinary storm expenditures that would likely meet the test but maybe not and so that's something that we're considering at this point okay got it i totally understand and um maybe get next next go to the if you can maybe qualitative compare and contrast
the the growth differences between the current jrap and jrap 2.0 i know i know specifically you've mentioned that eps is poised to accelerate but i'm i'm just curious more uh the building blocks that eps you get the current guidance of six percent jrap plus two percent uh plus on these various different levers. Can you comment on going forward, really, if those variances could potentially be increasing over time? Do you expect to be a plus 2% and sustain that?
As much as I would love to, Ben, I can't. We have to, A, finalize the application, and then get it approved. And once we do, we will hold an investor day, lay out all the expectations. Once we file, as Mark had asked, we will can summarize based on what's in the filing impact on capital expenditures, et cetera. But until the application is approved, we can't really give any guidance because it is dependent on what is ultimately approved in the application.
And maybe if I can just try it a different way. I mean, let's say you got approved for a 6% JRAP again. Is the next five-year period, when you think about the priority transmission projects, the LDC opportunities, the broadband and rate-based, is it a much more positive outlook than how you view the current JRAP, where it's at 6% going up to 8% potentially?
Well, I can't at this point. The one technical piece is our joint rate application is for Hydro One Networks, Inc. Transmission lines will all be affiliate transmission partnerships. That's the term we use. They'll have their own rate application once they're ready to be energized. And they'll go through the rate application process as well. So Hydro One Limited will be more than just, I'll say just, more than what is in the rate application. This is why we will hold the investor day once the rate application is approved, lay everything out. We'll give as much context as we can post filing, but we have to be very careful. we do not want to get ahead of the application process because that is so important to make sure that we have a chance to make our case to the interveners and the commissioners before we go public with any specific guidance that you're looking for I wish I could give you a better answer but I can't okay I got it okay okay well thanks a lot thanks for the color you're welcome thank you and that does conclude our q a session for today i'd like to turn the call back over to wasin khalil for any further remarks thank you shannon uh the management team
of hydro one thanks everyone for their time with us this morning we appreciate your interest and your continued support uh if you have any questions that we weren't able to address on the call today please feel free to reach out and we'll get them answered for you we look forward to seeing everyone at our second quarter conference call in August. 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 disconnect. Have a great day.
