HYDRO ONE LIMITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited)
For the three months ended March 31, 2019 and 2018
Three months ended March 31 (millions of Canadian dollars, except per share amounts) | 2019 | 2018 | ||||
Revenues | ||||||
Distribution (includes $69 related party revenues; 2018 - $67) (Note 24) | 1,321 | 1,145 | ||||
Transmission (includes $413 related party revenues; 2018 - $405) (Note 24) | 428 | 421 | ||||
Other | 10 | 10 | ||||
1,759 | 1,576 | |||||
Costs | ||||||
Purchased power (includes $554 related party costs; 2018 - $518) (Note 24) | 807 | 751 | ||||
Operation, maintenance and administration (Notes 4, 24) | 416 | 270 | ||||
Depreciation, amortization and asset removal costs (Note 5) | 212 | 197 | ||||
1,435 | 1,218 | |||||
Income before financing charges and income taxes | 324 | 358 | ||||
Financing charges (Notes 4, 6) | 163 | 88 | ||||
Income before income taxes | 161 | 270 | ||||
Income tax expense (recovery) (Note 7) | (16 | ) | 42 | |||
Net income | 177 | 228 | ||||
Other comprehensive income (loss) | (1 | ) | — | |||
Comprehensive income | 176 | 228 | ||||
Net income attributable to: | ||||||
Noncontrolling interest | 1 | 1 | ||||
Preferred shareholders | 5 | 5 | ||||
Common shareholders | 171 | 222 | ||||
177 | 228 | |||||
Comprehensive income attributable to: | ||||||
Noncontrolling interest | 1 | 1 | ||||
Preferred shareholders | 5 | 5 | ||||
Common shareholders | 170 | 222 | ||||
176 | 228 | |||||
Earnings per common share (Note 22) | ||||||
Basic | $0.29 | $0.37 | ||||
Diluted | $0.29 | $0.37 | ||||
Dividends per common share declared (Note 21) | $0.23 | $0.22 |
See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).
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HYDRO ONE LIMITED
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS (unaudited)
At March 31, 2019 and December 31, 2018
(millions of Canadian dollars) | March 31, 2019 | December 31, 2018 | ||
Assets | ||||
Current assets: | ||||
Cash and cash equivalents | 4 | 483 | ||
Accounts receivable (Note 8) | 638 | 628 | ||
Due from related parties (Note 24) | 263 | 255 | ||
Other current assets (Note 9) | 173 | 125 | ||
1,078 | 1,491 | |||
Property, plant and equipment (Note 10) | 20,783 | 20,687 | ||
Other long-term assets: | ||||
Regulatory assets (Note 11) | 1,835 | 1,721 | ||
Deferred income tax assets | 959 | 1,018 | ||
Intangible assets (net of accumulated amortization – $465; 2018 – $445) | 422 | 410 | ||
Goodwill | 325 | 325 | ||
Other assets (Note 12) | 34 | 5 | ||
3,575 | 3,479 | |||
Total assets | 25,436 | 25,657 | ||
Liabilities | ||||
Current liabilities: | ||||
Short-term notes payable (Note 15) | 1,850 | 1,252 | ||
Long-term debt payable within one year (Notes 15, 17) | 502 | 731 | ||
Accounts payable and other current liabilities (Note 13) | 997 | 956 | ||
Due to related parties (Note 24) | 16 | 89 | ||
3,365 | 3,028 | |||
Long-term liabilities: | ||||
Long-term debt (includes $849 measured at fair value; 2018 – $845) (Notes 15, 17) | 9,983 | 9,978 | ||
Convertible debentures (Notes 16, 17) | — | 489 | ||
Regulatory liabilities (Note 11) | 201 | 326 | ||
Deferred income tax liabilities (Note 7) | 59 | 58 | ||
Other long-term liabilities (Note 14) | 2,156 | 2,135 | ||
12,399 | 12,986 | |||
Total liabilities | 15,764 | 16,014 | ||
Contingencies and Commitments (Notes 26, 27) | ||||
Subsequent Events (Notes 1, 29) | ||||
Noncontrolling interest subject to redemption | 20 | 21 | ||
Equity | ||||
Common shares (Note 20) | 5,645 | 5,643 | ||
Preferred shares (Note 20) | 418 | 418 | ||
Additional paid-in capital (Note 23) | 53 | 56 | ||
Retained earnings | 3,493 | 3,459 | ||
Accumulated other comprehensive loss | (4 | ) | (3 | ) |
Hydro One shareholders’ equity | 9,605 | 9,573 | ||
Noncontrolling interest | 47 | 49 | ||
Total equity | 9,652 | 9,622 | ||
25,436 | 25,657 |
See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).
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HYDRO ONE LIMITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
For the three months ended March 31, 2019 and 2018
Three months ended March 31, 2019 (millions of Canadian dollars) | Common Shares | Preferred Shares | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Hydro One Shareholders’ Equity | Non-controlling Interest | Total Equity | ||||||||
January 1, 2019 | 5,643 | 418 | 56 | 3,459 | (3 | ) | 9,573 | 49 | 9,622 | |||||||
Net income | — | — | — | 176 | — | 176 | 1 | 177 | ||||||||
Other comprehensive income (loss) | — | — | — | — | (1 | ) | (1 | ) | — | (1 | ) | |||||
Distributions to noncontrolling interest | — | — | — | — | — | — | (3 | ) | (3 | ) | ||||||
Dividends on preferred shares | — | — | — | (5 | ) | — | (5 | ) | — | (5 | ) | |||||
Dividends on common shares | — | — | — | (137 | ) | — | (137 | ) | — | (137 | ) | |||||
Common shares issued | 2 | — | (2 | ) | — | — | — | — | — | |||||||
Stock-based compensation | — | — | (1 | ) | — | — | (1 | ) | — | (1 | ) | |||||
March 31, 2019 | 5,645 | 418 | 53 | 3,493 | (4 | ) | 9,605 | 47 | 9,652 |
Three months ended March 31, 2018 (millions of Canadian dollars) | Common Shares | Preferred Shares | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Hydro One Shareholders’ Equity | Non-controlling Interest | Total Equity | ||||||||
January 1, 2018 | 5,631 | 418 | 49 | 4,090 | (7 | ) | 10,181 | 50 | 10,231 | |||||||
Net income | — | — | — | 227 | — | 227 | 1 | 228 | ||||||||
Distributions to noncontrolling interest | — | — | — | — | — | — | (2 | ) | (2 | ) | ||||||
Dividends on preferred shares | — | — | — | (5 | ) | — | (5 | ) | — | (5 | ) | |||||
Dividends on common shares | — | — | — | (131 | ) | — | (131 | ) | — | (131 | ) | |||||
Stock-based compensation | — | — | 6 | — | — | 6 | — | 6 | ||||||||
March 31, 2018 | 5,631 | 418 | 55 | 4,181 | (7 | ) | 10,278 | 49 | 10,327 |
See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).
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HYDRO ONE LIMITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the three months ended March 31, 2019 and 2018
Three months ended March 31 (millions of Canadian dollars) | 2019 | 2018 | ||||
Operating activities | ||||||
Net income | 177 | 228 | ||||
Environmental expenditures | (8 | ) | (4 | ) | ||
Adjustments for non-cash items: | ||||||
Depreciation and amortization (Note 5) | 191 | 179 | ||||
Regulatory assets and liabilities | (170 | ) | 8 | |||
Deferred income taxes | (23 | ) | 35 | |||
Loss (unrealized gain) on foreign-exchange contract | 22 | (27 | ) | |||
Derecognition of deferred financing costs | 24 | — | ||||
Other | 20 | 3 | ||||
Changes in non-cash balances related to operations (Note 25) | (115 | ) | (46 | ) | ||
Net cash from operating activities | 118 | 376 | ||||
Financing activities | ||||||
Long-term debt repaid | (228 | ) | — | |||
Short-term notes issued | 2,110 | 1,172 | ||||
Short-term notes repaid | (1,512 | ) | (1,109 | ) | ||
Convertible debentures redeemed | (513 | ) | — | |||
Dividends paid | (142 | ) | (136 | ) | ||
Distributions paid to noncontrolling interest | (4 | ) | (3 | ) | ||
Net cash used in financing activities | (289 | ) | (76 | ) | ||
Investing activities | ||||||
Capital expenditures (Note 25) | ||||||
Property, plant and equipment | (280 | ) | (286 | ) | ||
Intangible assets | (24 | ) | (14 | ) | ||
Other | (4 | ) | 3 | |||
Net cash used in investing activities | (308 | ) | (297 | ) | ||
Net change in cash and cash equivalents | (479 | ) | 3 | |||
Cash and cash equivalents, beginning of period | 483 | 25 | ||||
Cash and cash equivalents, end of period | 4 | 28 |
See accompanying notes to Condensed Interim Consolidated Financial Statements (unaudited).
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HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
For the three months ended March 31, 2019 and 2018
1. DESCRIPTION OF THE BUSINESS
Hydro One Limited (Hydro One or the Company) was incorporated on August 31, 2015, under the Business Corporations Act (Ontario). On October 31, 2015, the Company acquired Hydro One Inc., a company previously wholly-owned by the Province of Ontario (Province). The acquisition of Hydro One Inc. by Hydro One was accounted for as a common control transaction and Hydro One is a continuation of business operations of Hydro One Inc. At March 31, 2019, the Province held approximately 47.4% (December 31, 2018 - 47.4%) of the common shares of Hydro One. The principal businesses of Hydro One are the transmission and distribution of electricity to customers within Ontario.
Earnings for interim periods may not be indicative of results for the year due to the impact of seasonal weather conditions on customer demand and market pricing.
Rate Setting
The Company's transmission business consists of the transmission system operated by Hydro One Inc.’s subsidiaries, Hydro One Networks Inc. (Hydro One Networks) and Hydro One Sault Ste. Marie LP (HOSSM), as well as an approximately 66% interest in B2M Limited Partnership (B2M LP), a limited partnership between Hydro One and the Saugeen Ojibway Nation (SON) in respect of the Bruce-to-Milton transmission line. Hydro One’s distribution business consists of the distribution system operated by Hydro One Inc.'s subsidiaries, Hydro One Networks and Hydro One Remote Communities Inc. (Hydro One Remote Communities).
Transmission
On March 7, 2019, the Ontario Energy Board (OEB) issued a decision on its reconsideration of its decision and order on Hydro One Networks' 2017 and 2018 transmission rates revenue requirement dated September 28, 2017 (Original Decision) with respect to the rate-setting treatment of the benefits of the deferred tax asset resulting from the transition from the payments in lieu of tax regime under the Electricity Act 1998 (Ontario) to tax payments under the federal and provincial tax regimes which occurred when Hydro One became a public company listed on the Toronto Stock Exchange. See Note 11 - Regulatory Assets and Liabilities for additional information. On October 26, 2018, Hydro One filed a one-year inflation-based application with the OEB for 2019 transmission revenue requirement. Subsequent to the end of the first quarter, on April 25, 2019, the OEB issued its decision on Hydro One Networks’ 2019 transmission rate application, and set the revenue index at 1.4% on a final basis effective May 1, 2019.
On November 23, 2018, B2M LP filed a revised 2019 revenue requirement with the OEB using the updated cost of capital parameters. On December 20, 2018, the OEB issued its decision approving the requested 2019 revenue requirement of $33 million, effective January 1, 2019.
HOSSM is under a 10-year deferred rebasing period for years 2017-2026, as approved in the OEB Mergers Acquisitions Amalgamations and Divestitures (MAAD) decision dated October 13, 2016. On July 26, 2018, HOSSM filed a 2019 application for permission to include a Revenue Cap Escalator factor, which would allow for inflationary increases to its previously approved revenue requirement. The OEB decision is pending.
Distribution
In March 2017, Hydro One Networks filed an application with the OEB for 2018-2022 distribution rates. On March 7, 2019, the OEB rendered its decision on the distribution rates application. In accordance with the OEB decision, the Company filed its draft rate order reflecting updated revenue requirements of $1,459 million for 2018, $1,498 million for 2019, $1,532 million for 2020, $1,578 million for 2021, and $1,624 million for 2022. See Note 11 - Regulatory Assets and Liabilities for additional information.
On November 5, 2018, Hydro One Remote Communities filed an application with the OEB seeking approval for increased base rates of 1.8% effective May 1, 2019. On February 11, 2019, the OEB issued a draft decision approving the requested increase, which was later finalized on March 28, 2019.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
These unaudited condensed interim Consolidated Financial Statements (Consolidated Financial Statements) include the accounts of the Company and its subsidiaries. Inter-company transactions and balances have been eliminated.
Basis of Accounting
These Consolidated Financial Statements are prepared and presented in accordance with United States Generally Accepted Accounting Principles (US GAAP) for interim financial statements and in Canadian dollars.
The accounting policies applied are consistent with those outlined in Hydro One's annual audited amended consolidated financial statements for the year ended December 31, 2018, with the exception of the adoption of new accounting standards as described below and in Note 3. These Consolidated Financial Statements reflect adjustments, that are, in the opinion of management, necessary to reflect fairly the financial position and results of operations for the respective periods. These Consolidated Financial Statements
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HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
do not include all disclosures required in the annual financial statements and should be read in conjunction with the annual audited 2018 amended consolidated financial statements.
Leases
Effective January 1, 2019, the Company adopted Accounting Standards Codification (ASC) 842 - Leases using the modified retrospective transition approach using the effective date of January 1, 2019, as its date of initial application. In the Company's transition to ASC 842, the Company elected the package of practical expedients and the land easement practical expedient. As a result, there was a $27 million impact to the consolidated balance sheets and no adjustments were made to prior period reported financial statement amounts. There was no material impact to the consolidated income statement. On adoption, the Company did not identify any finance leases.
At the commencement date of a lease, the minimum lease payments are discounted and recognized as a lease obligation. Discount rates used correspond to the Company's incremental borrowing rates. Renewal options are assessed for their likelihood of being exercised and are included in the measurement of the lease obligation when it is reasonably certain they will be exercised. The Company does not recognize leases with a term of less than 12 months. A corresponding Right-of-Use (ROU) asset is recognized at the commencement date of a lease. The ROU asset is measured as the lease obligation adjusted for any lease payments made and/or any lease incentives and initial direct costs incurred. ROU assets are included in other long-term assets, and corresponding lease obligations are included in other current liabilities and other long-term liabilities on the consolidated balance sheets.
Subsequent to the commencement date, the lease expense recognized at each reporting period is the total remaining lease payments over the remaining lease term. Lease obligations are measured as the present value of the remaining unpaid lease payments using the discount rate established at commencement date. The amortization of the ROU assets are calculated as the difference between the lease expense and the accretion of interest, which is calculated on the effective interest method. Lease modifications and impairments are assessed at each reporting period to assess the need for a re-measurement of the lease obligations or ROU assets.
3. NEW ACCOUNTING PRONOUNCEMENTS
The following tables present ASCs and Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board that are applicable to Hydro One:
Recently Adopted Accounting Guidance
Guidance | Date issued | Description | Effective date | Impact on Hydro One |
ASC 842 | February 2016 - January 2019 | Lessees are required to recognize the rights and obligations resulting from operating leases as assets (right to use the underlying asset for the term of the lease) and liabilities (obligation to make future lease payments) on the balance sheet. | January 1, 2019 | Hydro One adopted ASC 842 on January 1, 2019 using the modified retrospective transition approach using the effective date of January 1, 2019 as its date of initial application. See Note 2 for impact of adoption. The Company has included the disclosure requirements of ASC 842 for interim periods in Note 19 to the financial statements. |
ASU 2017-12 | August 2017 | Amendments will better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. | January 1, 2019 | No impact upon adoption |
ASU 2018-07 | June 2018 | Expansion in the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. Previously, ASC 718 was only applicable to share-based payment transactions for acquiring goods and services from employees. | January 1, 2019 | No impact upon adoption |
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HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
Recently Issued Accounting Guidance Not Yet Adopted
Guidance | Date issued | Description | Effective date | Anticipated impact on Hydro One |
ASU 2019-01 | March 2019 | This amendment carries forward the exemption previously provided under ASC 840 relating to the determination of the fair value of underlying assets by lessors that are not manufacturers or dealers. It also provides for clarification on cash-flow presentation of sales-type and financing leases and clarifies that transition disclosures under Topic 250 will not be applicable in the adoption of ASC 842. | January 1, 2020 | Under assessment |
ASU 2019-04 | April 2019 | This amendment clarifies, corrects and improves several aspects of the guidance under Topic 326 Financial Instruments - Credit Losses, Topic 815 Derivatives and Hedging and Topic 825 Financial Instruments. | January 1, 2020 | Under assessment |
4. BUSINESS COMBINATIONS
Avista Corporation Purchase Agreement
In July 2017, Hydro One reached an agreement to acquire Avista Corporation (Merger). On January 23, 2019, Hydro One and Avista Corporation announced that the companies have mutually agreed to terminate the Merger agreement. As a result of the termination of the Merger agreement, on January 24, 2019, Hydro One paid a US$103 million termination fee to Avista Corporation as required by the Merger agreement. On January 24, 2019, the Company cancelled the $1.0 billion non-revolving equity bridge credit facility and on January 25, 2019, Hydro One terminated the US$2.6 billion non-revolving debt bridge credit facility (Acquisition Credit Facilities). No amounts had been drawn on the Acquisition Credit Facilities. On February 1, 2019, Hydro One entered into a credit agreement for a $170 million unsecured demand operating credit facility (Demand Facility) for the purpose of funding the payment of the termination fee and other Merger related costs. On February 8, 2019, Hydro One redeemed the convertible debentures and paid the holders of the Instalment Receipts $513 million ($333 per $1,000 principal amount) plus accrued and unpaid interest of $7 million. The redemption of the convertible debentures was paid with cash on hand. As a result of the termination of the Merger agreement, no payment was due or receivable by Hydro One on the foreign-exchange contract.
The following amounts related to the termination of the Merger agreement were recorded by the Company during the three months ended March 31, 2019:
• | $138 million for payment of the US$103 million Merger termination fee recorded in operation, maintenance and administration costs; |
• | $22 million financing charges, due to reversal of previously recorded unrealized gains upon termination of the foreign-exchange contract; |
• | redemption of $513 million convertible debentures and payments of related interest of $7 million; and |
• | $24 million financing charges, due to derecognition of the deferred financing costs related to convertible debentures. |
See Note 16 - Convertible Debentures and Note 17 - Fair Value of Financial Instruments and Risk Management for details of the convertible debentures and the foreign-exchange contract, respectively.
5. DEPRECIATION, AMORTIZATION AND ASSET REMOVAL COSTS
Three months ended March 31 (millions of dollars) | 2019 | 2018 | |||||
Depreciation of property, plant and equipment | 164 | 158 | |||||
Amortization of intangible assets | 19 | 17 | |||||
Amortization of regulatory assets | 8 | 4 | |||||
Depreciation and amortization | 191 | 179 | |||||
Asset removal costs | 21 | 18 | |||||
212 | 197 |
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HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
6. FINANCING CHARGES
Three months ended March 31 (millions of dollars) | 2019 | 2018 | |||||
Interest on long-term debt | 111 | 106 | |||||
Interest on convertible debentures (Notes 4, 16) | 7 | 15 | |||||
Interest on short-term notes | 8 | 3 | |||||
Loss (unrealized gain) on foreign-exchange contract (Notes 4, 17) | 22 | (27 | ) | ||||
Derecognition of deferred financing costs (Notes 4, 16) | 24 | — | |||||
Other | 3 | 4 | |||||
Less: Interest capitalized on construction and development in progress | (11 | ) | (13 | ) | |||
Interest earned on cash and cash equivalents | (1 | ) | — | ||||
163 | 88 |
7. INCOME TAXES
As a rate-regulated utility company, the Company’s effective tax rate excludes temporary differences that are recoverable in future rates charged to customers. Income tax expense differs from the amount that would have been recorded using the combined Canadian federal and Ontario statutory income tax rate. The reconciliation between the statutory and the effective tax rates is provided as follows:
Three months ended March 31 (millions of dollars) | 2019 | 2018 | |||
Income before income taxes | 161 | 270 | |||
Income taxes at statutory rate of 26.5% (2018 - 26.5%) | 43 | 72 | |||
Increase (decrease) resulting from: | |||||
Net temporary differences recoverable in future rates charged to customers: | |||||
Capital cost allowance in excess of depreciation and amortization | (22 | ) | (12 | ) | |
Overheads capitalized for accounting but deducted for tax purposes | (6 | ) | (5 | ) | |
Interest capitalized for accounting but deducted for tax purposes | (4 | ) | (4 | ) | |
Pension and post-retirement benefit contributions in excess of expense | (1 | ) | (3 | ) | |
Environmental expenditures | (2 | ) | (2 | ) | |
Other | (5 | ) | (1 | ) | |
Net temporary differences | (40 | ) | (27 | ) | |
Incremental tax deductions from deferred tax asset sharing | (23 | ) | — | ||
Net permanent differences | 4 | (3 | ) | ||
Total income tax expense (recovery) | (16 | ) | 42 |
Effective income tax rate | (9.9 | )% | 15.6 | % |
8. ACCOUNTS RECEIVABLE
(millions of dollars) | March 31, 2019 | December 31, 2018 | |||
Accounts receivable – billed | 341 | 292 | |||
Accounts receivable – unbilled | 318 | 357 | |||
Accounts receivable, gross | 659 | 649 | |||
Allowance for doubtful accounts | (21 | ) | (21 | ) | |
Accounts receivable, net | 638 | 628 |
The following table shows the movements in the allowance for doubtful accounts for the three months ended March 31, 2019 and the year ended December 31, 2018:
(millions of dollars) | Three months ended March 31, 2019 | Year ended December 31, 2018 | |||
Allowance for doubtful accounts – beginning | (21 | ) | (29 | ) | |
Write-offs | 6 | 25 | |||
Additions to allowance for doubtful accounts | (6 | ) | (17 | ) | |
Allowance for doubtful accounts – ending | (21 | ) | (21 | ) |
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HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
9. | OTHER CURRENT ASSETS |
(millions of dollars) | March 31, 2019 | December 31, 2018 | ||
Regulatory assets (Note 11) | 86 | 42 | ||
Prepaid expenses and other assets | 66 | 41 | ||
Materials and supplies | 21 | 20 | ||
Derivative instrument - foreign-exchange contract (Note 17) | — | 22 | ||
173 | 125 |
10. PROPERTY, PLANT AND EQUIPMENT
(millions of dollars) | March 31, 2019 | December 31, 2018 | ||
Property, plant and equipment | 30,601 | 30,485 | ||
Less: accumulated depreciation | (11,056 | ) | (10,900 | ) |
19,545 | 19,585 | |||
Construction in progress | 1,081 | 947 | ||
Future use land, components and spares | 157 | 155 | ||
20,783 | 20,687 |
11. REGULATORY ASSETS AND LIABILITIES
Regulatory assets and liabilities arise as a result of the rate-setting process. Hydro One has recorded the following regulatory assets and liabilities:
(millions of dollars) | March 31, 2019 | December 31, 2018 | ||
Regulatory assets: | ||||
Deferred income tax regulatory asset | 988 | 908 | ||
Pension benefit regulatory asset | 539 | 547 | ||
Environmental | 158 | 165 | ||
Foregone revenue deferral | 66 | — | ||
Post-retirement and post-employment benefits - non-service cost | 47 | 39 | ||
Stock-based compensation | 45 | 43 | ||
Debt premium | 21 | 22 | ||
Pension cost differential | 12 | — | ||
Distribution system code exemption | 10 | 10 | ||
Conservation and Demand Management (CDM) deferral variance | 6 | — | ||
Other | 29 | 29 | ||
Total regulatory assets | 1,921 | 1,763 | ||
Less: current portion | (86 | ) | (42 | ) |
1,835 | 1,721 | |||
Regulatory liabilities: | ||||
Post-retirement and post-employment benefits | 130 | 130 | ||
Deferred income tax regulatory liability | 85 | 86 | ||
Green Energy expenditure variance | 50 | 52 | ||
Retail settlement variance account | 19 | 39 | ||
External revenue variance | 19 | 26 | ||
Pension cost differential | — | 55 | ||
2015-2017 rate rider | 6 | 6 | ||
Other | 21 | 23 | ||
Total regulatory liabilities | 330 | 417 | ||
Less: current portion | (129 | ) | (91 | ) |
201 | 326 |
Deferred Income Tax Regulatory Asset and Liability
Deferred income taxes are recognized on temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable income. The Company has recognized regulatory assets and liabilities that correspond to deferred income taxes that flow through the rate-setting process. In the absence of rate-
9 |
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
regulated accounting, the Company’s income tax expense would have been recognized using the liability method and there would be no regulatory accounts established for taxes to be recovered through future rates.
On September 28, 2017, the OEB issued its decision and order on Hydro One Networks' 2017 and 2018 transmission rates revenue requirements (Original Decision). In its Original Decision, the OEB concluded that the net deferred tax asset resulting from transition from the payments in lieu of tax regime under the Electricity Act 1998 (Ontario) to tax payments under the federal and provincial tax regime should not accrue entirely to Hydro One shareholders and that a portion should be shared with ratepayers. On November 9, 2017, the OEB issued a decision and order that calculated the portion of the tax savings that should be shared with ratepayers. The OEB's calculation would result in an impairment of a portion of both Hydro One Networks' transmission and distribution deferred income tax regulatory asset. In October 2017, the Company filed a Motion to Review and Vary (Motion) the Original Decision and filed an appeal with the Divisional Court of Ontario (Appeal). In both cases, the Company's position was that the OEB made errors of fact and law in its determination of allocation of the tax savings between the shareholders and ratepayers. On December 19, 2017, the OEB granted a hearing of the merits of the Motion which was held on February 12, 2018. On August 31, 2018, the OEB granted the Motion and returned the portion of the Decision relating to the deferred tax asset to an OEB panel for reconsideration.
On March 7, 2019, the OEB issued its reconsideration decision and concluded that their Original Decision was reasonable and should be upheld. Also, on March 7, 2019 the OEB issued its decision for Hydro One Networks’ 2018-2022 distribution rates, in which it directed the Company to apply the Original Decision to Hydro One Networks’ distribution rates. As a result, as at December 31, 2018, the Company recognized an impairment charge of Hydro One Networks' distribution deferred income tax regulatory asset of $474 million and Hydro One Networks' transmission deferred income tax regulatory asset of $558 million, an increase in deferred income tax regulatory liability of $81 million, and a decrease in the foregone revenue deferral regulatory asset of $68 million. The reduction in Hydro One Networks' distribution and transmission deferred tax regulatory assets, and increase in deferred income tax regulatory liability continue to be reflected in the respective regulatory accounts. Notwithstanding the recognition of the effects of the decision in the financial statements, on April 5, 2019, the Company filed an appeal with the Ontario Divisional Court with respect to the OEB's deferred tax benefit decision.
Foregone Revenue Deferral
The foregone revenue deferral account records the difference between revenue earned based on distribution rates approved by the OEB in Hydro One Networks' 2018-2022 distribution rates application, effective May 1, 2018, and revenue earned under the interim rates until the approved 2018 and 2019 rates are implemented. The Company has requested the balance of this account to be recovered from ratepayers over an 18-month period ending December 31, 2020.
Pension Cost Differential
As part of its March 2019 decision on Hydro One Networks' 2018-2022 distribution rates, the OEB denied Hydro One's request to recover pension costs. On March 26, 2019, Hydro One filed a Motion to Review and Vary to the OEB and on April 5, 2019, an appeal to the Ontario Divisional Court was filed in respect to the recovery of pension contributions. The Company's position in the aforementioned motion and appeal is that the OEB made errors in its decision to disallow the recovery of Hydro One's pension contributions. Therefore, the Company has reflected the impact of this position in the Pension Cost Differential regulatory account. The appeal is being held in abeyance pending the outcome of the motion.
Post-Retirement and Post-Employment Benefits - Non-Service Cost
Hydro One applied to the OEB for a regulatory asset account to record the components other than service costs relating to its post-retirement and post-employment benefits that would have previously been capitalized to property, plant and equipment and intangible assets prior to adoption of ASU 2017-07. In May 2018 and March 2019, the OEB approved the regulatory asset account for Hydro One Networks' Transmission Business and Distribution Business, respectively. Hydro One has recorded the components other than service costs relating to its post-retirement and post-employment benefits that would have been capitalized to property, plant and equipment and intangible assets, in the Post-Retirement and Post-Employment Benefits - Non-Service Cost regulatory asset.
12. OTHER LONG-TERM ASSETS
(millions of dollars) | March 31, 2019 | December 31, 2018 | |||
ROU assets (Note 19) | 25 | — | |||
Other | 9 | 5 | |||
34 | 5 |
10 |
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
13. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
(millions of dollars) | March 31, 2019 | December 31, 2018 | ||
Accounts payable | 141 | 179 | ||
Accrued liabilities | 600 | 590 | ||
Accrued interest | 120 | 96 | ||
Regulatory liabilities (Note 11) | 129 | 91 | ||
Lease obligations (Note 19) | 7 | — | ||
997 | 956 |
14. OTHER LONG-TERM LIABILITIES
(millions of dollars) | March 31, 2019 | December 31, 2018 | ||
Post-retirement and post-employment benefit liability (Note 18) | 1,437 | 1,417 | ||
Pension benefit liability (Note 18) | 539 | 547 | ||
Environmental liabilities | 132 | 139 | ||
Lease obligations (Note 19) | 18 | — | ||
Long-term accounts payable | 10 | 12 | ||
Asset retirement obligations | 10 | 10 | ||
Other liabilities | 10 | 10 | ||
2,156 | 2,135 |
15. DEBT AND CREDIT AGREEMENTS
Short-Term Notes and Credit Facilities
Hydro One meets its short-term liquidity requirements in part through the issuance of commercial paper under Hydro One Inc.’s Commercial Paper Program which has a maximum authorized amount of $2.3 billion. These short-term notes are denominated in Canadian dollars with varying maturities up to 365 days. The Commercial Paper Program is supported by Hydro One Inc.’s committed revolving credit facilities.
At March 31, 2019, Hydro One’s consolidated committed, unsecured and undrawn credit facilities (Operating Credit Facilities) totalling $2,550 million included Hydro One's credit facilities of $250 million and Hydro One Inc.'s credit facilities of $2.3 billion. At March 31, 2019, no amounts have been drawn on the Operating Credit Facilities.
On February 1, 2019, Hydro One entered into a credit agreement for a $170 million unsecured demand operating credit facility (Demand Facility) for the purpose of funding the payment of the Merger termination fee payable and other Merger-related costs. Drawings under the Demand Facility are repayable on demand and the Demand Facility can be canceled at any time. At March 31, 2019, $170 million was drawn on the Demand Facility and is included in short-term notes payable on the Consolidated Balance Sheet.
The Company may use the credit facilities for working capital and general corporate purposes. If used, interest on the credit facilities would apply based on Canadian benchmark rates. The obligation of each lender to make any credit extension under its credit facility is subject to various conditions including that no event of default has occurred or would result from such credit extension.
Subsidiary Debt Guarantee
Hydro One Holdings Limited (HOHL) is an indirect wholly-owned subsidiary of Hydro One that may offer and sell debt securities. Any debt securities issued by HOHL are fully and unconditionally guaranteed by the Company. At March 31, 2019, no debt securities have been issued by HOHL.
11 |
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
Long-Term Debt
The following table presents long-term debt outstanding at March 31, 2019 and December 31, 2018:
(millions of dollars) | March 31, 2019 | December 31, 2018 | ||
Hydro One Inc. long-term debt (a) | 10,345 | 10,573 | ||
HOSSM long-term debt (b) | 167 | 168 | ||
10,512 | 10,741 | |||
Add: Net unamortized debt premiums | 13 | 13 | ||
Add: Unrealized mark-to-market gain1 | (1 | ) | (5 | ) |
Less: Unamortized deferred debt issuance costs | (39 | ) | (40 | ) |
Total long-term debt | 10,485 | 10,709 | ||
Less: Long-term debt payable within one year | (502 | ) | (731 | ) |
9,983 | 9,978 |
1 The unrealized mark-to-market net gain relates to $50 million of the Series 33 notes due 2020, $500 million Series 37 notes due 2019, and $300 million Series 39 notes due 2021. The unrealized mark-to-market net gain is offset by a $1 million (December 31, 2018 - $5 million) unrealized mark-to-market net loss on the related fixed-to-floating interest-rate swap agreements, which are accounted for as fair value hedges.
(a) Hydro One Inc. long-term debt
At March 31, 2019, long-term debt of $10,345 million (December 31, 2018 - $10,573 million) was outstanding, the majority of which was issued under Hydro One Inc.’s Medium Term Note (MTN) Program. The maximum authorized principal amount of notes issuable under the current MTN Program prospectus filed in March 2018 is $4.0 billion. At March 31, 2019, $2.6 billion remained available for issuance until April 2020.
During the three months ended March 31, 2019 and 2018, no long-term debt was issued. During the three months ended March 31, 2019, $228 million of long-term debt was repaid (2018 - $nil) under the MTN Program.
(b) HOSSM long-term debt
At March 31, 2019, HOSSM long-term debt of $167 million (December 31, 2018 - $168 million), with a principal amount of $143 million (December 31, 2018 - $143 million) was outstanding. During the three months ended March 31, 2019 and 2018, no long-term debt was issued or repaid.
Principal and Interest Payments
Principal repayments, interest payments, and related weighted-average interest rates are summarized by year in the following table:
Long-term Debt Principal Repayments | Interest Payments | Weighted Average Interest Rate | |||
Years | (millions of dollars) | (millions of dollars) | (%) | ||
Remainder of 2019 | 502 | 360 | 1.5 | ||
2020 | 654 | 429 | 2.9 | ||
2021 | 803 | 411 | 2.1 | ||
2022 | 603 | 393 | 3.2 | ||
2023 | 131 | 379 | 6.1 | ||
2,693 | 1,972 | 2.6 | |||
2024-2028 | 850 | 1,806 | 2.9 | ||
2029 and thereafter | 6,945 | 4,315 | 5.1 | ||
10,488 | 8,093 | 4.3 |
12 |
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
16. CONVERTIBLE DEBENTURES
The following table presents the change in convertible debentures during the three months ended March 31, 2019 and the year ended December 31, 2018:
(millions of dollars) | Three months ended March 31, 2019 | Year ended December 31, 2018 | ||
Carrying value - beginning | 489 | 487 | ||
Amortization of deferred financing costs | — | 2 | ||
Derecognition of deferred financing costs (Notes 4, 6) | 24 | — | ||
Redemption | (513 | ) | — | |
Carrying value - ending | — | 489 | ||
Face value - ending | — | 513 |
As a result of the termination of the Merger agreement (see Note 4 - Business Combinations), on February 8, 2019, Hydro One redeemed the Convertible Debentures and paid the holders of the instalment receipts $513 million ($333 per $1,000 principal amount) plus accrued and unpaid interest of $7 million.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Non-Derivative Financial Assets and Liabilities
At March 31, 2019 and December 31, 2018, the Company’s carrying amounts of cash and cash equivalents, accounts receivable, due from related parties, short-term notes payable, accounts payable, and due to related parties are representative of fair value due to the short-term nature of these instruments.
Fair Value Measurements of Long-Term Debt
The fair values and carrying values of the Company’s long-term debt at March 31, 2019 and December 31, 2018 are as follows:
March 31, 2019 | December 31, 2018 | |||||||
(millions of dollars) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||
Long-term debt measured at fair value: | ||||||||
$50 million of MTN Series 33 notes | 50 | 50 | 49 | 49 | ||||
$500 million MTN Series 37 notes | 497 | 497 | 495 | 495 | ||||
$300 million MTN Series 39 notes | 302 | 302 | 301 | 301 | ||||
Other notes and debentures | 9,636 | 11,087 | 9,864 | 10,820 | ||||
Long-term debt, including current portion | 10,485 | 11,936 | 10,709 | 11,665 |
Fair Value Measurements of Derivative Instruments
At March 31, 2019, Hydro One Inc. had interest-rate swaps with a total notional amount of $850 million (December 31, 2018 - $850 million) that were used to convert fixed-rate debt to floating-rate debt. These swaps are classified as fair value hedges. Hydro One Inc.’s fair value hedge exposure was approximately 8% (December 31, 2018 - 8%) of its total long-term debt. At March 31, 2019, Hydro One Inc. had the following interest-rate swaps designated as fair value hedges:
• | a $50 million fixed-to-floating interest-rate swap agreement to convert $50 million of the $350 million MTN Series 33 notes maturing April 30, 2020 into three-month variable rate debt; |
• | two $125 million and one $250 million fixed-to-floating interest-rate swap agreements to convert the $500 million MTN Series 37 notes maturing November 18, 2019 into three-month variable rate debt; and |
• | a $300 million fixed-to-floating interest-rate swap agreement to convert the $300 million MTN Series 39 notes maturing June 25, 2021 into three-month variable rate debt. |
At March 31, 2019 and December 31, 2018, the Company had no interest-rate swaps classified as undesignated contracts.
In October 2017, the Company entered into a deal-contingent foreign-exchange forward contract (foreign-exchange contract) to convert $1.4 billion Canadian to US dollars at an initial forward rate of 1.27486 Canadian per 1.00 US dollars, and a range up to 1.28735 Canadian per 1.00 US dollars based on the settlement date. The contract was contingent on the Company closing the proposed Merger (see Note 4 - Business Combinations) and was intended to mitigate the foreign currency risk related to the portion of the Merger purchase price financed with the issuance of Convertible Debentures. This contract was an economic hedge and did not qualify for hedge accounting. It has been accounted for as an undesignated contract with changes in fair value being recorded in earnings as they occurred. As a result of the termination of the Merger agreement (see Note 4 - Business Combinations) in January 2019, the foreign-exchange contract was terminated and previously recorded unrealized gains of $22 million were reversed in financing charges. No payment was due or payable by Hydro One related to the foreign-exchange contract.
13 |
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
Fair Value Hierarchy
The fair value hierarchy of financial assets and liabilities at March 31, 2019 and December 31, 2018 is as follows:
March 31, 2019 (millions of dollars) | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||
Assets: | ||||||||||
Cash and cash equivalents | 4 | 4 | 4 | — | — | |||||
Derivative instruments | ||||||||||
Fair value hedges - interest-rate swaps | 2 | 2 | — | 2 | — | |||||
6 | 6 | 4 | 2 | — | ||||||
Liabilities: | ||||||||||
Short-term notes payable | 1,850 | 1,850 | 1,850 | — | — | |||||
Long-term debt, including current portion | 10,485 | 11,936 | — | 11,936 | — | |||||
Derivative instruments | ||||||||||
Fair value hedges - interest-rate swaps | 3 | 3 | — | 3 | — | |||||
12,338 | 13,789 | 1,850 | 11,939 | — |
December 31, 2018 (millions of dollars) | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||
Assets: | ||||||||||
Cash and cash equivalents | 483 | 483 | 483 | — | — | |||||
Derivative instrument | ||||||||||
Foreign-exchange contract | 22 | 22 | — | — | 22 | |||||
505 | 505 | 483 | — | 22 | ||||||
Liabilities: | ||||||||||
Short-term notes payable | 1,252 | 1,252 | 1,252 | — | — | |||||
Long-term debt, including current portion | 10,709 | 11,665 | — | 11,665 | — | |||||
Convertible debentures | 489 | 491 | 491 | — | — | |||||
Derivative instruments | ||||||||||
Fair value hedges - interest-rate swaps | 5 | 5 | — | 5 | — | |||||
12,455 | 13,413 | 1,743 | 11,670 | — |
Cash and cash equivalents include cash and short-term investments. The carrying values are representative of fair value because of the short-term nature of these instruments.
The fair value of the hedged portion of the long-term debt is primarily based on the present value of future cash flows using a swap yield curve to determine the assumption for interest rates. The fair value of the unhedged portion of the long-term debt is based on unadjusted period-end market prices for the same or similar debt of the same remaining maturities.
Changes in the Fair Value of Financial Instruments Classified in Level 3
The following table summarizes the changes in fair value of financial instruments classified in Level 3 for the three months ended March 31, 2019 and the year ended December 31, 2018:
(millions of dollars) | Three months ended March 31, 2019 | Year ended December 31, 2018 | ||||
Fair value of asset (liability) - beginning | 22 | (3 | ) | |||
Unrealized gain (loss) on foreign-exchange contract included in financing charges | (22 | ) | 25 | |||
Fair value of asset - ending | — | 22 |
There were no transfers between any of the fair value levels during the three months ended March 31, 2019 and the year ended December 31, 2018.
Risk Management
Exposure to market risk, credit risk and liquidity risk arises in the normal course of the Company’s business.
Market Risk
Market risk refers primarily to the risk of loss which results from changes in costs, foreign exchange rates and interest rates. The Company is exposed to fluctuations in interest rates, as its regulated return on equity is derived using a formulaic approach that takes anticipated interest rates into account. The Company is not currently exposed to material commodity price risk.
14 |
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
The Company uses a combination of fixed and variable-rate debt to manage the mix of its debt portfolio. The Company also uses derivative financial instruments to manage interest-rate risk. The Company utilizes interest-rate swaps, which are typically designated as fair value hedges, as a means to manage its interest rate exposure to achieve a lower cost of debt. The Company may also utilize interest-rate derivative instruments to lock in interest-rate levels in anticipation of future financing.
A hypothetical 100 basis points increase in interest rates associated with variable-rate debt would not have resulted in a material decrease in Hydro One’s net income for the three months ended March 31, 2019 and 2018.
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the Consolidated Statements of Operations and Comprehensive Income. The net unrealized loss (gain) on the hedged debt and the related interest-rate swaps for the three months ended March 31, 2019 and 2018 was not material.
Credit Risk
Financial assets create a risk that a counterparty will fail to discharge an obligation, causing a financial loss. At March 31, 2019 and December 31, 2018, there were no significant concentrations of credit risk with respect to any class of financial assets. The Company’s revenue is earned from a broad base of customers. As a result, Hydro One did not earn a material amount of revenue from any single customer. At March 31, 2019 and December 31, 2018, there was no material accounts receivable balance due from any single customer.
At March 31, 2019, the Company’s provision for bad debts was $21 million (December 31, 2018 - $21 million). Adjustments and write-offs are determined on the basis of a review of overdue accounts, taking into consideration historical experience. At March 31, 2019, approximately 5% (December 31, 2018 - 5%) of the Company’s net accounts receivable were outstanding for more than 60 days.
Hydro One manages its counterparty credit risk through various techniques including: entering into transactions with highly rated counterparties; limiting total exposure levels with individual counterparties; entering into master agreements which enable net settlement and the contractual right of offset; and monitoring the financial condition of counterparties. The Company monitors current credit exposure to counterparties on both an individual and an aggregate basis. The Company’s credit risk for accounts receivable is limited to the carrying amounts on the Consolidated Balance Sheets.
Derivative financial instruments result in exposure to credit risk since there is a risk of counterparty default. The credit exposure of derivative contracts, before collateral, is represented by the fair value of contracts at the reporting date. At March 31, 2019 and December 31, 2018, the counterparty credit risk exposure on the fair value of these interest-rate swap contracts was not material. At March 31, 2019, Hydro One’s credit exposure for all derivative instruments, and applicable payables and receivables, had a credit rating of investment grade, with four financial institutions as the counterparties.
Liquidity Risk
Liquidity risk refers to the Company’s ability to meet its financial obligations as they come due. Hydro One meets its short-term operating liquidity requirements using cash and cash equivalents on hand, funds from operations, the issuance of commercial paper, and the Operating Credit Facilities. The short-term liquidity under the Commercial Paper Program, Operating Credit Facilities, and anticipated levels of funds from operations are expected to be sufficient to fund normal operating requirements.
On June 18, 2018, Hydro One filed a short form base shelf prospectus (Universal Base Shelf Prospectus) with securities regulatory authorities in Canada. The Universal Base Shelf Prospectus allows Hydro One to offer, from time to time in one or more public offerings, up to $4.0 billion of debt, equity or other securities, or any combination thereof, during the 25-month period ending on July 18, 2020. On November 23, 2018, HOHL filed a short form base shelf prospectus (US Debt Shelf Prospectus) with securities regulatory authorities in Canada and the US. The US Debt Shelf Prospectus allows HOHL to offer, from time to time in one or more public offerings, up to US$3.0 billion of debt securities, unconditionally guaranteed by Hydro One, during the 25-month period ending on December 23, 2020. At March 31, 2019, no securities have been issued under the Universal Base Shelf Prospectus or the US Debt Shelf Prospectus.
18. PENSION AND POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
Estimated annual Pension Plan contributions for the years 2019, 2020, 2021, 2022, 2023 and 2024 are approximately $78 million, $77 million, $78 million, $79 million, $81 million and $83 million, respectively. The most recent actuarial valuation was performed effective December 31, 2017, and the next actuarial valuation will be performed no later than effective December 31, 2020. Contributions are payable one month in arrears. All of the contributions are expected to be in the form of cash. Employer contributions made during the three months ended March 31, 2019 were $18 million (2018 - $18 million).
15 |
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
The following table provides the components of the net periodic benefit costs for the three months ended March 31, 2019 and 2018:
Pension Benefits | Post-Retirement and Post-Employment Benefits | |||||||
Three months ended March 31 (millions of dollars) | 2019 | 2018 | 2019 | 2018 | ||||
Current service cost | 37 | 44 | 14 | 12 | ||||
Interest cost | 76 | 71 | 15 | 14 | ||||
Expected return on plan assets, net of expenses1 | (116 | ) | (117 | ) | — | — | ||
Amortization of actuarial losses | 14 | 21 | 1 | 1 | ||||
Net periodic benefit costs | 11 | 19 | 30 | 27 | ||||
Charged to results of operations2 | 8 | 9 | 12 | 12 |
1 | The expected long-term rate of return on pension plan assets for the year ending December 31, 2019 is 6.5% (2018 - 6.5%). |
2 | The Company accounts for pension costs consistent with their inclusion in OEB-approved rates. During the three months ended March 31, 2019, pension costs of $19 million (2018 - $21 million) were attributed to labour, of which $8 million (2018 - $9 million) was charged to operations, $5 million (2018 - $nil) was recorded as regulatory assets, and $6 million (2018 - $12 million) was capitalized as part of the cost of property, plant and equipment and intangible assets. |
19. LEASES
Hydro One has operating lease contracts for buildings used in administrative and service-related functions and storing telecommunications equipment. These leases have typical terms of between three and five years with renewal options of additional three to five year terms at prevailing market rates at the time of extension. Renewal options are included in the lease term when their exercise is reasonably certain. During the three months ended March 31, 2019, the Company's total lease cost was $2 million for its operating leases.
Other information related to the Company's operating leases was as follows:
Three months ended March 31 (millions of dollars) | 2019 | ||||
Cash flows from operating leases | 2 | ||||
March 31, 2019 | |||||
Weighted average remaining lease term | 4.7 years | ||||
Weighted average discount rate | 2.9 | % |
At March 31, 2019, future minimum operating lease payments were as follows:
(millions of dollars) | |||||
Remainder of 2019 | 6 | ||||
2020 | 11 | ||||
2021 | 4 | ||||
2022 | 1 | ||||
2023 | 1 | ||||
2024 | 1 | ||||
Thereafter | 3 | ||||
Total undiscounted minimum lease payments | 27 | ||||
Less: discounting minimum lease payments to present value | (2 | ) | |||
Total discounted minimum lease payments | 25 |
At December 31, 2018, future minimum operating lease payments were as follows:
(millions of dollars) | |||||
2019 | 7 | ||||
2020 | 11 | ||||
2021 | 4 | ||||
2022 | 1 | ||||
2023 | 1 | ||||
Thereafter | 4 | ||||
Total undiscounted minimum lease payments | 28 |
16 |
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
Hydro One presents its ROU assets and lease obligations on the Consolidated Balance Sheets as follows:
(millions of dollars) | March 31, 2019 | ||||
Other long-term assets (Note 12) | 25 | ||||
Accounts payable and other current liabilities (Note 13) | 7 | ||||
Other long-term liabilities (Note 14) | 18 |
20. SHARE CAPITAL
Common Shares
The Company is authorized to issue an unlimited number of common shares. At March 31, 2019, the Company had 596,011,696 common shares issued and outstanding (December 31, 2018 - 595,938,975).
The following table presents the changes to common shares during the three months ended March 31, 2019.
(number of shares) | |||||
Common shares - December 31, 2018 | 595,938,975 | ||||
Common shares issued - LTIP1 | 72,721 | ||||
Common shares - March 31, 2019 | 596,011,696 |
1 During the three months ended March 31, 2019, Hydro One issued from treasury 72,721 common shares in accordance with provisions of the Long-term Incentive Plan (LTIP).
Preferred Shares
The Company is authorized to issue an unlimited number of preferred shares, issuable in series. At March 31, 2019 and December 31, 2018, two series of preferred shares were authorized for issuance: the Series 1 preferred shares and the Series 2 preferred shares. At March 31, 2019 and December 31, 2018, the Company had 16,720,000 Series 1 preferred shares and no Series 2 preferred shares issued and outstanding.
21. DIVIDENDS
During the three months ended March 31, 2019, preferred share dividends in the amount of $5 million (2018 - $5 million) and common share dividends in the amount of $137 million (2018 - $131 million) were declared and paid.
22. EARNINGS PER COMMON SHARE
Basic earnings per common share (EPS) is calculated by dividing net income attributable to common shareholders of Hydro One by the weighted-average number of common shares outstanding.
Diluted EPS is calculated by dividing net income attributable to common shareholders of Hydro One by the weighted-average number of common shares outstanding adjusted for the effects of potentially dilutive stock-based compensation plans, including the share grant plans and the LTIP, which are calculated using the treasury stock method.
Three months ended March 31 | 2019 | 2018 | ||||
Net income attributable to common shareholders (millions of dollars) | �� | 171 | 222 | |||
Weighted average number of shares | ||||||
Basic | 595,961,260 | 595,386,711 | ||||
Effect of dilutive stock-based compensation plans | 2,354,970 | 2,322,393 | ||||
Diluted | 598,316,230 | 597,709,104 | ||||
EPS | ||||||
Basic | $0.29 | $0.37 | ||||
Diluted | $0.29 | $0.37 |
The common shares contingently issuable as a result of the Convertible Debentures are not included in diluted EPS for the three months ended March 31, 2019 and 2018, as conditions for closing the Merger were not met. As a result of the termination of the Merger agreement (see Note 4 - Business Combinations), the Convertible Debentures were redeemed on February 8, 2019.
17 |
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
23. STOCK-BASED COMPENSATION
Share Grant Plans
There were no changes in share grants under the Share Grant Plans during the three months ended March 31, 2019 and 2018. See Note 29 - Subsequent Events for common shares issued in April 2019.
Directors' Deferred Share Units (DSU) Plan
A summary of DSU awards activity under the Directors' DSU Plan during the three months ended March 31, 2019 and 2018 is presented below:
Three months ended March 31 (number of DSUs) | 2019 | 2018 | ||||
DSUs outstanding - beginning | 46,697 | 187,090 | ||||
Granted | 12,523 | 27,753 | ||||
Settled | (24,015 | ) | — | |||
DSUs outstanding - ending | 35,205 | 214,843 |
At March 31, 2019, a liability of $1 million (December 31, 2018 - $1 million) related to Directors' DSUs has been recorded at the closing price of the Company's common shares of $20.76 (December 31, 2018 - $20.25) and was included in other liabilities on the Consolidated Balance Sheets.
Management DSU Plan
A summary of DSU awards activity under the Management DSU Plan during the three months ended March 31, 2019 and 2018 is presented below:
Three months ended March 31 (number of DSUs) | 2019 | 2018 | ||||
DSUs outstanding - beginning | 108,296 | 67,829 | ||||
Granted | 23,436 | 36,809 | ||||
Settled | (52,345 | ) | — | |||
DSUs outstanding - ending | 79,387 | 104,638 |
At March 31, 2019, a liability of $2 million (December 31, 2018 - $2 million) related to outstanding DSUs has been recorded at the closing price of the Company's common shares of $20.76 (December 31, 2018 - $20.25) and was included in other liabilities on the Consolidated Balance Sheets.
LTIP
Performance Share Units (PSU) and Restricted Share Units (RSU)
A summary of PSU and RSU awards activity under the LTIP during the three months ended March 31, 2019 and 2018 is presented below:
PSUs | RSUs | |||||||
Three months ended March 31 (number of units) | 2019 | 2018 | 2019 | 2018 | ||||
Units outstanding - beginning | 605,180 | 429,980 | 442,470 | 393,430 | ||||
Granted | — | 427,940 | — | 332,440 | ||||
Vested and issued | (77,232 | ) | — | (20,976 | ) | — | ||
Forfeited | (8,968 | ) | (13,220 | ) | (6,924 | ) | (9,880 | ) |
Settled | (34,550 | ) | — | (17,270 | ) | — | ||
Units outstanding - ending1 | 484,430 | 844,700 | 397,300 | 715,990 |
1 Units outstanding at March 31, 2019 include 190,290 PSUs and 147,820 RSUs that may be settled in cash if certain conditions are met. At March 31, 2019, a liability of $6 million has been recorded with respect to these awards and is included in accrued liabilities on the Consolidated Balance Sheet.
No awards were granted during the three months ended March 31, 2019. The fair value of awards granted during the three months ended March 31, 2018 was $16 million. The compensation expense related to the PSU and RSU awards recognized by the Company during the three months ended March 31, 2019 was $5 million (2018 - $2 million).
18 |
HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
Stock Options
A summary of stock options activity during the three months ended March 31, 2019 and 2018 is presented below:
Three months ended March 31 (number of stock options) | 2019 | 2018 | ||||
Stock options outstanding - beginning | 949,910 | — | ||||
Granted | — | 1,450,880 | ||||
Stock options outstanding - ending1 | 949,910 | 1,450,880 |
1 During the three months ended March 31, 2019, 350,497 stock options have vested. At March 31, 2019, 599,413 stock options remain non-vested.
At March 31, 2019, the unrecognized compensation expense related to stock options not yet vested was $1 million (December 31, 2018 - $1 million).
24. RELATED PARTY TRANSACTIONS
The Province is a shareholder of Hydro One with approximately 47.4% ownership at March 31, 2019. The Independent Electricity System Operator (IESO), Ontario Power Generation Inc. (OPG), Ontario Electricity Financial Corporation (OEFC), and the OEB, are related parties to Hydro One because they are controlled or significantly influenced by the Province. Ontario Charging Network LP (OCN LP) is a joint-venture limited partnership between a subsidiary of Hydro One and OPG.
Three months ended March 31 (millions of dollars) | |||||||
Related Party | Transaction | 2019 | 2018 | ||||
Province | Dividends paid | 70 | 67 | ||||
IESO | Power purchased | 550 | 513 | ||||
Revenues for transmission services | 413 | 405 | |||||
Amounts related to electricity rebates | 138 | 137 | |||||
Distribution revenues related to rural rate protection | 58 | 57 | |||||
Distribution revenues related to the supply of electricity to remote northern communities | 9 | 8 | |||||
Funding received related to CDM programs | 15 | 12 | |||||
OPG | Power purchased | 3 | 4 | ||||
Revenues related to provision of services and supply of electricity | 2 | 2 | |||||
OEFC | Power purchased from power contracts administered by the OEFC | 1 | 1 | ||||
OEB | OEB fees | 2 | 2 | ||||
OCN LP | Investment in OCN LP | 2 | — |
Sales to and purchases from related parties are based on the requirements of the OEB’s Affiliate Relationships Code. Outstanding balances at period end are interest-free and settled in cash.
25. CONSOLIDATED STATEMENTS OF CASH FLOWS
The changes in non-cash balances related to operations consist of the following:
Three months ended March 31 (millions of dollars) | 2019 | 2018 | ||||
Accounts receivable | (10 | ) | 48 | |||
Due from related parties | (8 | ) | 10 | |||
Other assets | (26 | ) | (11 | ) | ||
Accounts payable | (37 | ) | (31 | ) | ||
Accrued liabilities | 3 | 33 | ||||
Due to related parties | (73 | ) | (120 | ) | ||
Accrued interest | 24 | 17 | ||||
Long-term accounts payable and other liabilities | — | 1 | ||||
Post-retirement and post-employment benefit liability | 12 | 7 | ||||
(115 | ) | (46 | ) |
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HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
Capital Expenditures
The following tables reconcile investments in property, plant and equipment and intangible assets and the amounts presented in the Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018. The reconciling items include net change in accruals and capitalized depreciation.
Three months ended March 31, 2019 (millions of dollars) | Property, Plant and Equipment | Intangible Assets | Total | |||||||
Capital investments | (290 | ) | (21 | ) | (311 | ) | ||||
Reconciling items | 10 | (3 | ) | 7 | ||||||
Cash outflow for capital expenditures | (280 | ) | (24 | ) | (304 | ) |
Three months ended March 31, 2018 (millions of dollars) | Property, Plant and Equipment | Intangible Assets | Total | |||||||
Capital investments | (293 | ) | (12 | ) | (305 | ) | ||||
Reconciling items | 7 | (2 | ) | 5 | ||||||
Cash outflow for capital expenditures | (286 | ) | (14 | ) | (300 | ) |
Supplementary Information
Three months ended March 31 (millions of dollars) | 2019 | 2018 | ||||
Net interest paid | 99 | 105 | ||||
Income taxes paid | 13 | 6 |
26. CONTINGENCIES
Legal Proceedings
Hydro One is involved in various lawsuits and claims in the normal course of business. In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Hydro One Inc., Hydro One Networks, Hydro One Remote Communities, and Norfolk Power Distribution Inc. were defendants in a class action suit commenced in 2015 in which the representative plaintiff was seeking up to $125 million in damages related to allegations of improper billing practices. In March 2019, the plaintiff’s application for leave to appeal the lower court’s refusal to certify the lawsuit as a class action was denied by the Ontario Court of Appeal, which means that the lawsuit has effectively ended.
There were four putative class action lawsuits filed by Avista Corporation shareholders in relation to the Merger. The plaintiffs in the four lawsuits were, respectively, Fink, Jenß, Samuel and Sharpenter. All of these class action lawsuits have now been dismissed.
27. COMMITMENTS
The following table presents a summary of Hydro One’s commitments under leases, outsourcing and other agreements due in the next 5 years and thereafter:
March 31, 2019 (millions of dollars) | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Thereafter | ||||||
Outsourcing and other agreements | 148 | 97 | 10 | 2 | 3 | 11 | ||||||
Long-term software/meter agreement | 20 | 12 | 2 | 1 | 2 | 1 | ||||||
Operating lease commitments | 8 | 10 | 4 | 1 | 2 | 3 |
The following table presents a summary of Hydro One’s other commercial commitments by year of expiry in the next 5 years and thereafter:
March 31, 2019 (millions of dollars) | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Thereafter | ||||||
Operating Credit Facilities | — | — | 250 | 2,300 | — | — | ||||||
Letters of credit1 | 176 | — | — | — | — | — | ||||||
Guarantees2 | 330 | — | — | — | — | — |
1 Letters of credit consist of letters of credit totalling $163 million related to retirement compensation arrangements, a $7 million letter of credit provided to the IESO for prudential support, $5 million in letters of credit to satisfy debt service reserve requirements, and $1 million in letters of credit for various operating purposes.
2 Guarantees consist of $325 million prudential support provided to the IESO by Hydro One Inc. on behalf of its subsidiaries, and guarantees totalling $5 million provided by Hydro One to the Minister of Natural Resources relating to OCN LP.
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HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
28. SEGMENTED REPORTING
Hydro One has three reportable segments:
• | The Transmission Segment, which comprises the transmission of high voltage electricity across the province, interconnecting more than 70 local distribution companies and certain large directly connected industrial customers throughout the Ontario electricity grid; |
• | The Distribution Segment, which comprises the delivery of electricity to end customers and certain other municipal electricity distributors; and |
• | Other Segment, which includes certain corporate activities and the operations of the Company’s telecommunications business. |
The designation of segments has been based on a combination of regulatory status and the nature of the services provided. Operating segments of the Company are determined based on information used by the chief operating decision maker in deciding how to allocate resources and evaluate the performance of each of the segments. The Company evaluates segment performance based on income before financing charges and income taxes from continuing operations (excluding certain allocated corporate governance costs).
Three months ended March 31, 2019 (millions of dollars) | Transmission | Distribution | Other | Consolidated | ||||
Revenues | 428 | 1,321 | 10 | 1,759 | ||||
Purchased power | — | 807 | — | 807 | ||||
Operation, maintenance and administration | 99 | 146 | 171 | 416 | ||||
Depreciation and amortization | 113 | 98 | 1 | 212 | ||||
Income (loss) before financing charges and income taxes | 216 | 270 | (162 | ) | 324 | |||
Capital investments | 206 | 103 | 2 | 311 |
Three months ended March 31, 2018 (millions of dollars) | Transmission | Distribution | Other | Consolidated | ||||
Revenues | 421 | 1,145 | 10 | 1,576 | ||||
Purchased power | — | 751 | — | 751 | ||||
Operation, maintenance and administration | 105 | 145 | 20 | 270 | ||||
Depreciation and amortization | 103 | 92 | 2 | 197 | ||||
Income (loss) before financing charges and income taxes | 213 | 157 | (12 | ) | 358 | |||
Capital investments | 190 | 114 | 1 | 305 |
Total Assets by Segment:
(millions of dollars) | March 31, 2019 | December 31, 2018 | ||
Transmission | 14,104 | 13,973 | ||
Distribution | 9,441 | 9,325 | ||
Other | 1,891 | 2,359 | ||
Total assets | 25,436 | 25,657 |
Total Goodwill by Segment:
(millions of dollars) | March 31, 2019 | December 31, 2018 | ||
Transmission | 157 | 157 | ||
Distribution | 168 | 168 | ||
Total goodwill | 325 | 325 |
All revenues, assets and substantially all costs, as the case may be, are earned, held or incurred in Canada.
29. SUBSEQUENT EVENTS
Dividends
On May 8, 2019, preferred share dividends of $4 million and common share dividends of $144 million ($0.2415 per common share) were declared.
Share Grant Plans
On April 1, 2019, Hydro One issued from treasury 462,942 common shares to eligible employees in accordance with provisions of the Share Grant Plans.
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HYDRO ONE LIMITED
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
For the three months ended March 31, 2019 and 2018
Long-Term Debt
On April 5, 2019, Hydro One Inc. issued long-term debt totalling $1.5 billion under its MTN program as follows:
• | $700 million Series 42 notes with a maturity date of April 5, 2024 and a coupon rate of 2.54%; |
• | $550 million Series 43 notes with a maturity date of April 5, 2029 and a coupon rate of 3.02%; and |
• | $250 million Series 44 notes with a maturity date of April 5, 2050 and a coupon rate of 3.64%. |
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