Hydro One Limited

Omar Javed - Director, Investor Relations Mayo Schmidt - President and Chief Executive Officer Chris Lopez - Senior Vice President of Finance Greg Kiraly - Chief Operating Officer Paul Barry - Executive Vice President of Strategy and Corporate Development FerioPugliese - Executive Vice-President of Customer Care & Corporate Affairs

Robert Catellier - CIBC World Markets Linda Ezergailis - TD Securities

Good morning everyone, and thank you for joining us. I am here in Toronto with Hydro One's President and CEO, Mayo Schmidt; our Senior Vice President of Finance, Chris Lopez, Greg Kiraly, our Chief Operating Officer, Paul Barry, our Executive Vice President of Strategy and Corporate Development, FerioPugliese, our Executive Vice-President of Customer Care & Corporate Affairs.

We’ll provide some some brief comments on our second quarter results, and then spend the majority of the call answering as many of your questions as time permits. There are also several slides which illustrate some of the points we’ll go over in a moment.

They should be up on the webcast now; or, if you are dialed into the teleconference you can find them on the Hydro One’s website in the Investor Relations section under Events & Presentation. As the discussion this morning will likely touch on estimates and other forward-looking information, you should review the cautionary language in today's earnings release and our quarterly MD&A, which we have filed this morning regarding the various factors, assumptions and risks, that cause our actual results to differ as they are all apply to this call.

With that, I will turn the call over to Mayo Schmidt.

Thank you, Omar and good morning everyone. As you are aware on July 19, we announced the acquisition of Avista Corporation a high, quality, strategic transaction to purchase a market leading transmission and distribution utility headquartered in Spokane, Washington.

We are very excited about the opportunities this acquisition creates to combine and leverage the strengths of two high performance companies to create additional value for our shareholders. I would like to talk to you more about this transaction in a moment, but first I’d like to highlight the achievements and results of the quarter.

We have continued to focus our efforts on cost saving initiatives and operational improvements as we manage our major influences in our business, the three most impactful factors affecting results for unseasonably mild weather and multiple storms, the time required for the Ontario Energy Board to process the decision on a transmission creek filing and a reduction in the regulatory allowed ROE associated with lower interest rates. While these factors are outside of our control, we have made good progress on a number of initiatives to affect the outcomes over which we have control.

Some highlights of the quarter include our continued demonstration of our extraordinary storm response capabilities to turn the power back on. Our crews worked around the clock to restore power during multiple heavy storms in this quarter.

They responded to six significant storms affecting over 580,000 customers in total working through difficult conditions to keep the lights on for our communities across the vast province of Ontario. We also fully launched on a timely basis Ontario’s Fair Hydro Plan.

We worked hard to successfully update our back end systems against aggressive deadlines set by the Province to ensure our customers would see an immediate benefit as of July 1. As a result of this successful implementation, the majority of our residential customers approximately 750,000 will see an average savings of 31% on their monthly bill, meaning an average annual savings of about $600.

Hydro One's transformation to a customer focus and commercially oriented organization continues to generate positive results and garner strong grades [ph] for our employees and customers. The strength of our senior leadership team put in place last year has significantly enhanced our executional capabilities and we are seeing positive results.

We have successfully implemented innovative ideas such as the move to mobile program launched in April that has now been fully rolled out across the province and has provided over 2000 staff with improved processes and tools that ultimately enhance customer service and drive down per unit cost. At the same time, we are making real improvements in finding an execution around capital deployment which enables us to meet our capital program targets with precision and accuracy.

In 2016, our teams executed on our transmission capital program with precision and achieved targets that were set out and agreed to by the OEB. Over the past quarters we have continued to see strong execution on a number of early stage initiatives which we’ve profiled recently that all serve to improve our customer experience while reducing our service and bad debt cost.

These include continued rapid updates by customers and the companies enhance paperless billing service, customized usage alerts and billing arrival notifications. We now have well in excess of 50,000 residential and small business customers already enrolled and this number is growing quickly.

Our teams are tracking to deliver over 150,000 customer enrolments by the end of the year, which amongst other things serves to reduce our billing and postage cost. I am also pleased to report to you that billing accuracy continues to surpass the Ontario Energy Board’s requirements and is the highest in the company’s history at 99.4%.

Through the more our receivables are coming to trend down and are now at stable levels. We’ve also extended our winter relief program by an additional month, further enabling us and hope our customers currently in difficult financial positions move on the payment programs that they can afford while helping enroll them in government support programs for which they might qualify.

This is our thirst [ph] to achieve enhanced customer satisfaction and savings for the company by reducing call-center and collection cost all without increasing receivable levels. These initiatives are all specific examples of our ongoing focus on creating incremental improvements in customer satisfaction while at the same time operations streamlining our operations.

We also continue to champion capital programs with the Ontario Energy Board to ensure we are maintaining reliability in the system through appropriate investments and are approved to do the things necessary to continue to provide additional volume for our customers while lowering our cost. The work being done to transition both transmission and distribution businesses to an incentive based regulatory construct will benefit both customers and shareholders alike.

We are well underway, leading customer consultations and meeting the requirements associated with the five-year incentive rate setting mechanism or IRM finally for our distribution rate application submitted on March 31. For the transmission segment, we are expecting to receive a decision on our rate filing for the 2017 and 2018 during the third quarter.

At the same time, we are already working to procure the plan five-year IRM filing in that segment early next year. We intend to continue to invest in rate base to drive earnings in both our transmission and distribution businesses.

I would like to now take the opportunity to provide an overview of the Avista transaction announced on July 19, and briefly identify areas of interest to our investors. In addition, we’ve provided supporting information and the related rational and strategic benefits in the deck associated with the day’s second quarter results.

We utilized conservative leverage and a fully funded equity structure in our acquisition of Avista. Investor demand for the convertible debentures offered in our 1.4 million bought deal was over subscribed with strong demand from both retail and institutional investors.

The security sold out with an extremely short period, a great testament to the high level of investor support that we received on the Avista transaction, which is truly a historical achievement for Hydro One. Locking in our equity portion, we will be able to realize mid-single digit accretion in the first full year post close while retaining a strong investment grade rating for Hydro One.

Further, we anticipate an improvement in credit ratings at Avista. This is a compelling transaction that brings together two industry-leading regulated utilities with over 230 years of collective, operational experience as well as shared corporate cultures and values.

I am very impressed with the team that Scott Morris has assembled and Scott’s strong leadership while we look forward to collaborating on a respective best practices, including bringing Avista and Hydro One’s strong cultures to the North America footprint. The combination creates one of North America’s largest regulated utilities with over 32 billion in assets, and a leader in electricity transmission and distribution as well as natural gas local distribution businesses.

Through the transaction, Hydro One will expand in the complementary and diversified regulated assets, inclusive of natural gas local distribution. This expansion is a natural progression for Hydro One, and will allow us to increased regulated earnings in a constructive, regulatory jurisdiction.

Collectively, Hydro One and Avista will provide safe and reliable electricity and natural gas services to more than 2 million retail and industrial customers, and hold assets throughout North America including Ontario, Washington, Oregon, Idaho, Montana and Alaska. This transaction will not result in work force reductions.

We anticipate driving efficiencies through enhanced scale, innovation, shared IT systems and increased purchasing power which will provide cost savings for customers and continual improvement in customer service. Delivering value to customers is a core focus for both Hydro One and Avista together we are stronger.

I would like to emphasize our collective commitment to providing customers with the best possible experience. The transaction is accretive to EPS and gives us further headroom for continued dividend growth consistent with our long-term intention of continuing Hydro One’s dividend payout of 70% to 80% of earnings.

The combination gives us a strong position in the Pacific Northwest, which is a region of opportunity and experiencing growth. We do anticipate a closing date in the second half of 2018, on a total enterprise basis we will become a top 20 North American and best grown utility.

In summary, Avista and Hydro One are highly complementary. This transaction is a reflection of the discipline and collaborative approach both leadership teams undertook to efficiently and effectively build shareholder value by coming together to unlock the full potential of our collective strengths.

Now with that, I’d like to turn the call over to Chris Lopez for some additional color on the financial results. Chris?

Thank you, Mayo and good morning everyone. Turning to the second slide, our second quarter revenue, net of purchase power was lower by 2.8% year-over-year.

This is reflective of a few exogenous factors. First, the decision on our 2017-18 transmission falling on May 31, 2016 is anticipated in the near term.

As a result, the increase in revenue associated with our planned capital and maintenance spend for the current year will be realized once a decision has been received. Since it is expected to be retroactive through January 1, 2017.

We anticipate recognizing the catch up to revenues expanded improving the system during the first, second and third quarter quarters -- in the third quarter of this year. Second, as Mayo mentioned milder weather coupled with spring storms resulted in weak demand and moderate increase in costs.

The mild weather in the second quarter of this year impacted Ontario peak demand in the transmission segment. Additionally, our considerable efforts to restore power to 580,000 customer funds and businesses due to multiple spring storms was greatly appreciated affected our cost in the distribution business.

Lastly, as a reminder the OEB approved allowed return on equity to formulaically adjust downward like last year reflecting the prevailing interest rate at that time. The allowed ROE declined from 9.19 in 2016 to 8.78 in 2017, which results in lower earnings to both the distribution and transmission segments.

Since then, these rates have been steadily increasing. If we were to calculate the ROE today based on the formulaic mechanism which includes the current long bond rates and utilities spreads, the ROE would be approximately 9%.

On the OM&A front, costs increased by 4.6% from last year, as a result of the previously mentioned higher storm restoration costs and the acquisition of Hydro One Sault Ste. Marie formerly known as Great Lakes Power in the fourth quarter of 2016.

We continue to offset these costs with the operational improvement initiatives that were discussed earlier. Follow the operating cost line the higher financing charges were result of an increased weighted average long-term debt portfolio including long-term debt assumed as part of the Hydro One Sault Ste.

Marie acquisition and higher depression due to rate base growth in 2016. Moving on to investing activities, asset placed in-service are up $42 million for the first six months compared to the same period last year, while we placed $327 million of assets into service this quarter, it is marginal down on year-over-year comparison, as we had successful placed two major local area supply projects; Guelph Area Transmission Refurbishment and Toronto Midtown Transmission Reinforcement project during the second quarter of 2016.

These investments with further augmented by completion of the previously mentioned Move to Mobile wireless field automation platform which has equipped our field employees with wireless tablets connecting them in the company's core operating system. Our overall year-on-year capital investments decreased by 2.6% in the second quarter, the investing in the transmission segment increased by 5.9%, the largest driver of this increase was the work on the Leamington transmission station project to address the electricity needs in the Windsor and Essex County's.

The capital project execution program is an area that has been enhanced over the last year and was the primary reason for achieving planned capital expenditures and assets placed in-service in 2016 with accuracy and decision. On the next slide, we have two regulatory updates.

As mentioned last quarter on March 31st we completed a five-year rate filing for our distribution segments under the OEB’s custom incentive regulatory framework for the 2018 to 2022 period. On June 7th, we filed a blue page updated application which result in a change in the average annual impact on distribution rates over the five-year terms of the rate application from an increase of 3.7% to an increase of 3.5%.

In addition the productivity and stress factor has been revised from 0.6% to 0.45%.This represents a positive outcome for both ratepayers and shareholders alike. On the transitions as mentioned earlier we are expecting a decision from the OEB in the third quarter associated with the 2017, 2018 rate application that we filed back on May 31, 2016.

As reminder, this was a two-year filing and the next transmission filing which we expect to make in late first quarter next year will be a five-year rate filing under the OEB incentive regulatory model for 2019 to 2023 term. In terms of financial strength, as we see on slide seven that we continue to have a very strong balance sheet with conservative leverage.

Our weighted average cost of debt is low at 4.3%, our redemption schedule is fairly smooth with an average term of 15.4 years and we also have a significant liquidity. On July 19, 2017 S&P and Moody's affirm the A level credit rating of Hydro One Inc, and S&P affirmed its rating of Hydro One Limited.

[Indiscernible] provides outlook to make a difference table as a result of pending Avista acquisition. Our commitment to a strong balance sheet allows us to maintain a conservative cost of capital and provide substantial strategic benefit towards the organic and inorganic growth of a company.

I’ll stop there and we’ll be pleased to take your questions.

Thank you, Mayo and Chris. Before we ask the operator to explain how she’d like to organize the Q&A polling process, I’d like to note that we understand a large majority of the sell side research analyst that cover Hydro One are currently restricted on their coverage in light of their convertible debenture offering which recently announced associated with the Avista transaction.

Accordingly we expect there will be few questions that we usually receive on these quarterly calls. So with that, please go ahead, Christi [ph] and explain how the following process will work.

Hi, Good morning. I wondered if you could start by talking about the dividend, so as you know there was no specific announcement that was made with the Avista acquisition, but the payout ratio guidance was maintained.

So, could you give us a little bit more color on what the attentions -- the intentions might be for the dividend at the close of that acquisition? So, what I'm thinking is, is there a possibility of an increase at the close or would you consider a larger annual increase once we start to realize the expected synergies?

Hi, Rob, it’s Mayo. The board will be reflecting on that.

We have about 12 months anticipated plus or minus to get to close, so I think they’re certainly going to take them under consideration, but the intent certainly is to maintain the 70% to 80% focus that we have today. We’ll certainly take your point and it will be discuss at the board at the time I guess over the next coming months -- next coming quarters.

Okay. And just on the change of the productivity factor, could you walk us through what let to that decision in the distribution rate case?

Not sure, Robert, I understand your question. So you’re talking about the DX rate case and the productivity in terms of what sort of…?

Yes, the productivity factor that was implies 0.6 to 0.45.

Robert, its Chris Lopez here. So, in terms of the green sheet update or blue sheet update that we do, we reflect on a number of items.

Then what we reflect on there is we’ve already include a number of productivity improvements in our base numbers that have gone into the application. So 0.6 rate factor is for those entities that require additional savings to get to a long-term average debt within the average of the industry and we believe that we don't need the 0.6, we need 0.45 to achieve the same long-term average.

Okay. And then my final question is on the rate base CAGR, I noticed there was a change in the time line for some of the top transmission projects notably the Linux circuit breaker replacement, while we just moved to 2023 that's outside the five-year CAGR period, yet the rate base CAGR is unchanged?

Could you just walk us through how we should be looking at the interplay of those two items?

Robert, its Chris again, that would be one item. We approach our capital spend profile over the five years as a whole, so the CAGR that you’re seeing today reflects the current rate cases that are in front of the OEB and our current long-term business plan.

So adjusting for one-off projects we don’t update the CAGR, but we would expect the CAGR to still stay within that range.

So you have other projects that could possibly make it up?

Yes.

Okay. Thank you.

Thank you. Just some questions on your costs, your OM&A is $12 million year-over-year.

I’m wondering if you could help us understand how much might be related to the labor agreement that was effective May 1st, and how much might be related form costs and maybe other timing differences as well?

Hi, Linda, Chris Lopez here. So the two largest items that are affecting that $12 million increase, the cost associated with storm restoration and the second item is the acquisition of Sault Ste.

Marie. That was not in our numbers last year at the same period.

So those two items together make up about 80% of the cost increase.

Okay. And can you just as a follow-up walk us through the major attribute of your labor agreement and how that might affect your OM&A over time or is there not to be much of an increase?

Yes. I don’t think there is really any update to that.

I mean, we certainly look at annual changes year-to-year on our employee cost. However there's nothing anticipated out of the ordinary course, it just sort of looking at the material for living, but I think you'll see that the pretty steady.

Okay. That’s helpful.

And just to understand the quarter a little bit better as well from a revenue perspective. Can you give us loosely some estimate of the effect of mild weather perhaps on revenue in the quarter?

Linda, Chris Lopez here. So, the revenue difference that you see there about half of that was made up mild weather and half that was the ROE adjustment.

And is that revenue net of power costs or…?

Yes.

Okay, great. Thank you.

Thank you, Christi. The management team here at Hydro One, thanks everyone for investing their time with us this morning.

We know it’s a busy period. We appreciate your interest and to the extent if you have any questions that weren’t answered, please feel free to reach out and we’ll get them answered for you.

Thanks again and enjoy the rest of your day.