Good day, ladies and gentlemen, and welcome to the Hydro One Limited third quarter 2019 analyst teleconference. At this time, all participant lines are in a listening mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Omar Javed, Vice President, Investor Relations at Hydro One. Please go ahead.
Good morning, everyone. Thank you for joining us. I'm here in Toronto with our President and Chief Executive Officer, Mark Poweska, and our Chief Financial Officer, Chris Lopez. First, Mark will share an overview of Hydro One's five-year strategy and a few highlights from the quarter. We will turn it over to Chris to review the financial results. Following these remarks, we will spend the remaining time answering as many of your questions as time permits. There are also several slides that illustrate our corporate strategy as well as some of the points we'll go over in a moment. They should be up on the webcast now, or if you're dialed into the call, you can also find them on Hydro One's website in the investor relations section under events and presentations. Today's discussions will likely touch on estimates and other forward-looking information.
You should review the cautionary language in today's earnings release and our MD&A, which we filed this morning, regarding the various factors, assumptions, and risks that could cause our actual results to differ as they apply to this call. With that, I turn the call over to our President and CEO, Mark Poweska.
Thank you, Omar, and thank you to everyone for joining us today on the call. I am delighted to have the opportunity to speak to you today about my vision for the company, a Hydro One that is customer-driven, sustainable, safe, efficient, and growing. I believe we have a lot to be optimistic about in Ontario, and I look forward to walking you through the priorities of our corporate strategy. After starting in May, I spent my first weeks and months in the role listening to people, employees, customers, industry partners, government, and investors. What I learned in those conversations were foundational to charting a clear course for the company. I learned that we're an amazing company with so much to be proud of and with so many opportunities for growth and success right here in Ontario.
Since 2015, Hydro One has been on the right path, achieving significant performance improvements on nearly every front. We have the highest residential and small business customer satisfaction in a decade. We've achieved nearly CAD 250 million in productivity savings since 2015, and we have made significant improvements to our system to improve reliability for our distribution customers. In fact, I'm pleased to say that we saw residential and small business customer satisfaction scores rise again in the third quarter to reach a new high of 87%. The strides we are taking to put our customers first also earned us two awards earlier this month. We were recognized for customer service and as a contributor of the year at the 2019 Ontario Energy Association Awards. I highlight these things because they represent some of the many achievements that I believe Hydro One should be proud of.
They also set the stage for our evolution and are the foundation for our future success. What I learned from listening to shareholders and others only confirmed what I suspected, having long watched the Hydro One story from B.C. We became distracted by opportunities beyond our borders. This outward focus narrowed our minds to the great opportunities that exist here at home. It's time for Hydro One to focus in on the things that matter. It's time for us to build on our strengths and seize opportunities right here in Ontario. For the next five years, we will not actively pursue any mergers or acquisitions outside of Ontario. Ontario is a prosperous, growing province that is the center of activity for Canada. This economic engine is geographically larger than Texas and more than double the size of California.
It accounts for 40% of Canada's economy, with a vibrant, young, and diverse population that is growing faster than some countries. Ontario's education system produces high-quality talent with over 40,000 STEM graduates annually. To continue this rapid pace of development, it requires an electricity grid that is safe, reliable, and sustainable. Significant investment is required to maintain and upgrade our systems that were built in the 1950s and fostered the traditional industries. That is our opportunity and our responsibility. With input from our stakeholders and in collaboration with our board of directors, my executive team and I have developed a clear new strategy to ensure the long-term success of Hydro One. Having received board approval, we will now begin executing on five strategic priorities that will make us a best-in-class North American utility by 2024.
Our five-year strategy will keep an intense focus on what matters most to our investors, customers, employees, and our partners, which is strong results in safety, efficiency, reliability, customer satisfaction, and growth. This strategy will enhance our ability to deliver value to shareholders and customers alike and shore up the growth rate we have achieved in the past. We're going to plan, design, and build a grid that meets the needs of Ontarians today and into the future. This means improving reliability through best-in-class asset management and investments in new technology that will allow us to automate our distribution network. Sustainability will be central to our strategy as we prepare for more severe storms. Climate change will be taken into consideration in our planning processes to increase resilience and lower our environmental footprint.
Just over a month ago, we reaffirmed our commitment to transparent public sustainability disclosures with the submission of our 2018 Carbon Disclosure Project report. We will also aspire to be the safest and most efficient utility. A focus on safety is core to me on a personal level, and it's something I'm deeply committed to. Each one of our employees must come home safe after a fulfilling day of work. I'm passionate about our safety culture because I care deeply about the well-being of every Hydro One employee and of every public member. I'm also passionate about it because something remarkable happens when we adopt a steadfast focus on safety. A mindset of ownership and accountability takes hold in every part of our organization. We become a company that's more careful, more systematic, more driven by proven repeatable process.
This makes us a better-managed business, I believe it'll make us a more efficient business. Good safety is good business. Focusing on efficiency means that we will continue to apply private sector discipline to our business. We will introduce new processes and technologies to enable our field and corporate staff to maximize productivity and efficiency. The productivity savings we've already delivered are powerful examples of this disciplined approach. You'll see us dig even further to generate efficiencies in both OM&A costs, as well as our capital delivery expenditures. We must become one of the most efficient utilities because I want Hydro One to be the utility of choice for customers, employees, investors, and all Ontarians. We will be a trusted partner to Indigenous peoples, industry stakeholders, government, communities, customers, and all Ontarians.
We will put a renewed focus on building and growing relationships to deliver greater value for our customers and shareholders. A terrific example of this is the completion of the CAD 135 million Niagara Reinforcement Line, along with our equity partners, Six Nations of the Grand River Development Corporation and Mississaugas of the Credit First Nation. This 76-kilometer double circuit, 230 kV transmission line was brought to completion by A6N, an Indigenous-owned contractor. In September, locally elected representatives in Orillia partnered with us to announce our plans to build our new Ontario Grid Control Centre in the area. This CAD 150 million investment will provide a new state-of-the-art facility, which will serve as one of the company's technology hubs. These are just a few examples of our renewed focus on building trust and strong partnerships. We will also advocate for our customers and help them make informed decisions.
To optimize the customer experience, we will build and enhance digital capabilities and offer new products and services to meet their energy needs. We also know that we must challenge ourselves to compete in an industry that is being disrupted by new technologies like distributed energy resources, artificial intelligence, and regulatory modernization. With change comes opportunity, and we will innovate to compete in our evolving marketplace. While we continue to invest responsibly in our core transmission and distribution business, we will pursue incremental regulated and unregulated business opportunities through our focus on Ontario. This will start with our Hydro One Telecom, which will transition from focusing on commoditized connectivity to a suite of value-added services for enterprise customers. In conclusion, we will continue to build on the positive momentum started after the IPO.
What's new is an intense focus on what matters most to our customers, employees, and stakeholders in Ontario. By executing against our five strategic priorities, we will be able to enhance our ability to deliver value to shareholders and customers alike and shore up our growth rate. I would also like to announce that we will hold an investor day in the first quarter of 2020 to give you an update on our progress, as well as showcase the team executing the strategy. Before I pass it over, I want to say that we look forward to answering your questions after Chris details financial highlights from the quarter. If you don't get a chance to ask a question, then please keep in mind that Omar and his team will remain available to you at all times. Chris, over to you.
Thank you, Mark. Good morning, everyone. We are all excited about the vision of Hydro One that Mark has just laid out. We believe an Ontario-focused strategy will deliver the outcomes that will benefit all stakeholders. In terms of our financial results for the quarter, the fundamentals of the business continue to be strong, and we are seeing the results of our focus on capturing efficiencies in operational costs. Earnings per share and adjusted earnings per share in the third quarter increased to CAD 0.40 compared to the third quarter last year, and CAD 0.33 and CAD 0.38 respectively. The increase was related to higher distribution rates, lower operation, maintenance, and administrative costs, lower financing charges, and lower income taxes, which were partially offset by less favorable weather and lower revenue due to the deferred tax asset sharing as mandated by the OEB and accelerated tax depreciation.
Revenues and the purchase power were lower year-over-year by 1.9%. While we had an uplift in revenue from the updated 2019 distribution rates, less favorable weather affected overall revenues. Milder weather led to the decline in average peak demand in Ontario by 7.9% when compared to the same quarter last year. In addition, there was a decline of 2.8% in electricity distributed to Hydro One customers. Apart from the weather effects, revenues were also affected by the deferred tax asset sharing and accelerated tax depreciation laws that got introduced in the 2019 federal and provincial budgets and enacted during the second quarter. As a reminder, both these impacts are net income neutral as there is a corresponding offset to tax expense. I'm pleased to report that operating costs were lower by 4.4% in this quarter versus the comparable quarter last year.
The reasons for the decline were lower corporate support costs and operational improvements, which were partially offset by insurance proceeds that we had received last year, as well as higher vegetation management costs. Similar to last quarter, we took advantage of the milder weather to enhance the reliability of the electricity infrastructure. This additional work is delivering results, and we are seeing ongoing improvements in reliability. Our financing charges this quarter increased by 7.3% year-over-year when adjusting for the one-time merger-related financing costs related to the convertible debentures and foreign exchange contract for Avista last year. This was primarily due to an increase in financing expense, resulting from a higher weighted average long-term debt balance outstanding following the CAD 1.5 billion debt issuance in April this year.
The accelerated tax depreciation laws enacted in the second quarter, as well as incremental tax deductions from deferred tax asset sharing, as mandated by the OEB, resulted in a decrease to income tax expense year-over-year. While these factors were net income neutral, combined with lower income before taxes in the quarter, they resulted in a decrease in income tax by CAD 27 million. As a result, the effective tax rate for the quarter was 5.4% versus 17.1% in the third quarter of last year. At this stage, we are not changing our previous guidance of approximately 2% for the effective tax rate for the 2019 year. Over the next five years, we continue to expect the effective tax rate will be in the range of 8%-11%.
While the decrease in effective tax rate will be net income neutral, it may have an impact on the timing of future cash flows. Moving on to investing activities, capital investments and assets placed in service were in line with our expectations and are tracking a similar path to last year. The increase in assets placed in service for the quarter was primarily due to the completion of major development work on the Niagara Reinforcement Line, which accounted for CAD 135 million in the quarter, as referenced by Mark earlier on this call. On the regulatory front, the oral hearings for our transmission rate application for transmission rates for the 2020 to 2022 period and the incentive rate-making framework ended on November 4th. We made a powerful case of investing in the grid to ensure our customers continue to receive electricity that is delivered safely, reliably, and efficiently.
Our aging assets do require additional investment, and we are confident that we have presented a strong case for that investment. The process is proceeding according to schedule, and we anticipate having a ruling in the first half of 2020. The OEB released the cost of capital update for 2020 on October 31st. Based on the formulaic methodology that used the prevailing interest rates and the credit spreads for the month of September, the resulting return on equity came out at 8.52%. To be clear, this ROE will only impact the transmission rate application, as the ROE for the distribution business was previously set at 9% for the duration of the rate case. As a reminder, with respect to deferred tax asset, we have filed an appeal with the Ontario Divisional Court, and the hearing is expected to take place on November 21st.
We expect a decision sometime in the first half of 2020. On the pension cost appeal, we made final arguments in July, and the decision on the motion is currently pending. We continue to work through both the Orillia Power Distribution and Peterborough Distribution merger applications. Technical conferences were held early in October, and an oral hearing will commence on December 4th. I'll stop there, and we'd be pleased to take your questions.
Thank you, Mark and Chris. We ask the operator to explain how she'd like to organize the Q&A polling process. Please go ahead, Jen.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Rob Hope with Scotiabank. Your line is open.
Morning, everyone. Just want to start off on the relationship with the Ontario Government. Have you socialized the new strategy with them, and any updates on how they're looking at electricity price increasing in the context of Hydro One?
Yeah, it's Mark here. We have socialized and signaled to them where we were going with strategy with our focus on Ontario and on operational excellence. That does align, obviously, with the desires of the government as well as with our customers and other stakeholders. They are aware, not the details, but they're aware of the direction we were going. The part on safe, efficient execution obviously aligns with the desire of the government on finding cost-effective ways to help customers with affordability across the province. As we've said before, I believe there's a good alignment between what we're doing in our strategy and what all our stakeholders are looking for.
All right. Just moving over to your longer-term capital plan as well as your balance sheet. Did the strategic review alter how you're looking at the balance sheet or where you want to devote capital?
No, the primary focus is our investment in rate base and maintaining our current investment-grade credit rating. There is no change to the allocation. We have highlighted the fact that we will look at some unregulated assets, but that, I will remind everybody, is going to be a very small part of the investment going forward.
All right. Thank you.
Thank you. Our next question comes from Robert Kwan with RBC Capital Markets. Your line is open.
Great. Good morning. Chris, just maybe I'd start by following up on your unregulated investment commentary, and that it would be very small going forward. Is that related, though, to the telecom commentary that Mark was making earlier? Would you also be looking at unregulated assets in, say, the core kind of electric, either T&D, but electric business, and would you be looking for contracts?
It's Mark here. I'll take that first, and Chris can weigh in where appropriate. The primary focus on the unregulated business is on the telecom side. We do see there's an opportunity that we've really been offering the core services with our telecom assets, what we have, but there's an opportunity to add the more value-added services there. Most of the unregulated growth we're looking at coming from there. There is an opportunity for us to partner with others on energy management services type services for our larger industrial customers, and we'll be looking at that as well.
Got it. Then with the Ontario-focused part of the commentary, is there any contemplation, call it in the five-year period of investing outside of Ontario? Would that be in T&D, or could you be looking at regulated as well?
No, our focus is on Ontario, and our strategy is all built around a focus on Ontario.
Okay. That's great. If I can just finish with the commentary around Grid of the Future. There's some commentary in there around storm hardening. Do you see kind of the investments there as being a material driver of a potential increase in rate base growth? You also talked about technology. Do you see it as being capital light?
The investment in the Grid of the Future to make it more resilient, a lot of that's already built into our DX and our TX filing. It's really leveraging technology to harden the system as opposed to spending larger amounts of money on hardening the actual poles and wires. Things like sectionalizing the distribution system, technology to give us visibility into where we have faults so that we can more quickly respond. The investments in the Grid of the Future isn't looking for new capital outside of what we're asking for already in our DX filing and our TX filing.
Great. Thanks very much.
Thank you. Our next question comes from Linda Ezergailis with TD Securities. Your line is open.
Thank you. I'm wondering if you can help us understand the potential magnitude of your partnerships with Indigenous people following your successes in the Niagara Reinforcement Line.
Yeah.
Reflect-
we Sorry.
Sorry. Would that already be reflected net of your rate base growth, or would that be a gross number, your rate base growth?
I'll start with the magnitude of the partnerships and a recognition that the Indigenous peoples of this province have unique rights. There's obligations on us as a company to recognize those and to work with the nations as we develop new projects and new products throughout the province, as well as recognizing that our assets cross over almost all 133 nations within this province. The projects we've done to date where we've done equity partnerships with them, which is the Bruce to Milton and also our recently completed NRP. The growth in those projects is already in our growth, so it's net of their equity contributions.
Okay, that's-
Does that help, Linda?
Yes. Thank you. Just further on your new strategy, I'm wondering if you can help us understand how your LDC consolidation initiatives with Ontario might be a part of that or might change, and would that be dependent on the outcome, potentially, of your Orillia hearing process?
From an Ontario perspective, I believe that there's a good opportunity for consolidation of the sector to drive out costs in the sector and help ratepayers overall. We will continue to look at that and to pursue opportunities to consolidate. The ones we're doing right now, they're taking longer than we would expect. Part of the OEB reform is to look at the MAAD process, which I think will help enable the ability to consolidate. It is part of our strategy going forward, part of our growth strategy, but also part of what I believe we need to do to help ratepayers of this province, and we will continue to pursue that where it makes economic sense for Hydro One.
Do you think there's an opportunity to potentially accelerate that, facilitated by the OEB reform or other approaches that you might take? Or do you think it'll be similar to the cadence we saw in the past?
Yeah. We're hopeful that there's an ability to accelerate that through the OEB reform as well as an alignment with, there is a desire, provincially, to see that consolidation for the benefit of the ratepayers. We will be working with all the stakeholders to try and accelerate that. Again, I believe that it is the right thing for the ratepayers and the people of the province, and it's an opportunity for us.
Okay, thank you. This is just a question regarding the quarter. Would it be possible to get some sort of sense of an approximation of the weather effect on the quarter's earnings? I know that it's temporal, it would help us in our forecasting.
I think, Linda, the team with Omar can take that offline after the call, but we can point to, again, the major driver being the change in the peak that's published, and we can probably point to some data that you can use to calculate that.
Thank you.
Thank you. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star then one on your touchtone telephone. Our next question comes from David Quezada with Raymond James. Your line is open.
Great. Thanks. Morning, everyone. My first question here, just on the topic of electricity rates in Ontario. They seem to be going a little higher more recently, and certainly appreciate that Hydro One's portion of the bill is pretty small. Just curious if you had any recent discussions with the government or the IESO on respect to reducing bills potential. Obviously, the global adjustment being a big part of that, or the blend and extend option with the IPPs is something that's been floated. Any thoughts there?
Yeah. We haven't had any direct discussions, or I haven't, with government on it other than to share our strategy, which is a focus on efficiency and doing our part in ensuring we're taking out costs out of the system as much as we can. There was the fall economic statement that came out yesterday from the government, which points to the things that they've done so far to achieve it, as well as they have directed the IESO to look at the contracts from the energy side to see if there's an opportunity as part of those to drive out some costs. As you know and you're aware, this is an industry-wide problem. We're 14% of the CAD 20 billion to run this electricity system. We're doing our part to try and reduce that. It is an industry-wide problem.
As I said, the Fall Economic Statement yesterday pointed to some of the things the government are doing. We expect they're also going to engage the industry going forward to look for solutions.
Okay, great. Thank you. That's helpful. Then just my only other question here, I guess maybe more broadly, when you look over the next three to five years. You've been in your seat now for, I think, about eight months, and you've got the new strategy out now. Any high-level thoughts you could give us on where you see the biggest opportunities for cost savings across your footprint?
Sure. Six-month anniversary yesterday. As I look out and I look at the company and the areas where we're focusing on, at least in the shorter term, three to five years, on reducing costs, there's a couple areas. One is to continue to build on the savings we're getting through our procurement organization. We're also looking at our properties and how we can better consolidate our property assets that we own to drive out some cost savings. The biggest area of focus for us in the near future is around how do we use innovation technology and process improvement to make us more productive as a company and remove barriers, particularly for our field people, so that we can increase their tool time so that they can do more of the things that we hired them to do and that they love to do, and less administrative-type work.
We have some good ideas on how we can drive out some of that administrative burden and some of those barriers and increase the capabilities of our field crews as well as our corporate support. It's really through rolling up our sleeves and process improvement, investing in technology and innovation to make us more productive.
I'd just add to that with Mark, is that our productivity push, which we've said already has saved CAD 250 million since the IPO, is really focused on absorbing the impact of inflation. We've done that since the IPO, and we believe we can continue to do that through the use of technology and improved work processes. If we do that for an extended period of time, the real cost of our service will come down, and that's really what we've challenged ourselves to do. I think when we look at how do you control electricity prices or try and hold them flat, that's one of the tools that we have in our bag to achieve that.
That's great. Thanks, guys. Appreciate that commentary. I'll get back in the queue.
Thanks.
Our next question comes from Patrick Kenny with National Bank. Your line is open.
Good morning, guys. Looks like the DTA appeal is being heard on November 21st. I'm just curious when we might expect a decision there. Given the initial impact on FFO from that decision, and now with the reduced ROE on transmission, just wanted to get your thoughts on how we should be thinking about dividend growth into 2020.
Yeah. Thanks, Pat. The hearing, as you said, was on November 21st or will be on November 21st. We expect a decision in the first half of 2020. I can't be more specific than that. They don't really lay out those timelines. The first half of 2020, if we are successful, I'll remind everybody, we've already written this asset off, so if we are successful, it will result in a one-time write-up of CAD 885 million and an FFO benefit of CAD 50 million-CAD 60 million per year thereafter. It is all upside from here on that particular item. How would that affect the dividend? It would certainly make our financing ratios more comfortable. We are targeting to maintain our investment-grade credit rating at the current level, so it would provide a little more space for growth there.
I don't see it affecting the dividend payout at this point in time. We are comfortable in the range that we've highlighted, which is we're growing rate base at 5%, we're growing earnings at 5%, and we'll grow the dividend per share at 5%. All things that we've done since the IPO, and they will continue.
Okay, that's great. Just on the corporate strategy here, I was wondering if we can get a bit more color on incorporating the distributed energy resources and how that might have an impact on rate base growth going forward.
Yeah, we recognize that distributed energy resources is part of the grid of the future for Ontario and many jurisdictions. What we're looking at there is how do we facilitate enabling companies to bring distributed energy resources onto the system and how do we make sure that where we're placing these things and where we're adding new resources to the system serve more than one purpose, more than just supplying energy. It can help improve reliability of the system, can help improve voltage support, things like that. For example, putting a DER on the end of a radial line can help with reliability in case of an outage that you have some supply at the end of that line.
Our focus is really around making sure that we're working with the industry and other partners who are adding DERs to the system to make sure they're in the right locations, and they're providing broader support to the system than just adding new resources.
Okay, that's great. Thank you.
Thank you. Our last question comes from Mark Jarvi with CIBC Capital Markets. Your line is open.
Hi, good morning, everyone. Maybe this question is for Mark, given you kind of came in with a fresh set of eyes, how would you say that the corporate strategy was defined, given the fact that you've come in with a new perspective and sort of things that you really brought to the table in terms of defining this corporate strategy?
Yeah. I would say that the focus on operational excellence has been part of the DNA of Hydro One for the last several years, and it's representative in the cost savings we've got, the reliability improvements, the customer improvements. I think, as I said in my opening, that we got distracted with trying to go outside of the province, and we took our eye off of the things we need to do here at home, including the relationships with our partners in the electric sector. What this strategy is about is a refocus on Ontario, a refocus on building those relationships or reestablishing those and doubling down on the operational excellence so that we can deliver for all our stakeholders.
Okay. Maybe just any commentary you guys can say around testimony and hearings for the transmission rate case in terms of what you guys provided, were always put forth, any surprises or how you guys think that'll inform the decision with the OEB?
Yeah. The hearings were done, the oral hearings now. The next steps are really going to final arguments in that. During the oral hearings, I think the team did a great job of putting a good case forward for the things that we need to do to invest in the system. I would say there was no real surprises in the questions. The standard things that you would expect from intervenors and from the regulator, which is expected and needed as part of the process. I didn't see anything significant. I think there is a wide acceptance on our need to invest in our aging infrastructure that we have on the transmission grid, and the fact that we're 98% of the transmission in the province, and that our transmission customers in particular are looking for confidence in the reliability of that system necessitates investments.
I would say that there was no real big surprises during the oral hearings.
I would echo Mark's comments. I'd say that when you go for a distribution hearing or a transmission hearing, they're very different to the LDC hearing because they're very routine in nature. The intervenors know who we are, we know what is important to them and to our customers. They tend to go a lot more as expected. We work together in a very collaborative and I think a way that works for the electricity system in Ontario overall. I'd echo Mark's comments. It was as expected, and we expect a positive outcome in the near future.
Okay. My last question is, when you talk about safety and efficiency, are there certain benchmarks you guys can provide us with on how we should think about how you're going to deliver against that, one of your pillars of your corporate strategy in terms of how we should evaluate you or what you guys are internally measuring yourself to?
Yeah. On safety, we measure ourselves against the normal things that you see other industries on, recordable injuries. We're also going to have a focus on serious injuries because we've seen an increase in serious injuries, even though we're first quartile in all injuries. Efficiency, we're going to continue to focus on productivity and driving costs out of the system.
Okay. Thanks, guys.
Thank you. We have a question from Ben Pham with BMO Capital Markets. Your line is open.
Okay, thanks. Good morning. Just some of your commentary on the acquisition landscape, focusing on Ontario. I think you've been getting a lot of support for that thought and that focus. I guess when you think about acquisitions outside of Ontario, I'm curious. You don't want to go there, I guess. Is it more you're looking at the Avista transaction, just a lot of the regulatory friction you face with the government on Ontario? Is that why you're not looking outside Ontario? I'm just going to flip the question, just to kind of get your thoughts on why not outside Ontario.
Yeah. No, I would say we see opportunities right here in Ontario, that we don't need to go outside of Ontario. We see nice, steady, low-risk growth by focusing on what we've outlined in the strategy right here in Ontario. We don't see a need to go outside of Ontario.
Would you say then that your BD team now, it's really kind of a stripped-down team where you're not necessarily keeping an eye on acquisitions out of Ontario, where if something really compelling comes up that you would maybe consider it. Is that the right way of thinking about it?
No, I would say our BD team really is going to focus on the things we outlined, which is the opportunities in the province on LDC acquisition, where we might be able to partner on energy management services and really focusing on the strategy. You'll see in the top-level org chart, we don't have a BD corporate development team on my direct report. That is representative of the fact that it's deprioritized from us, and we don't have a big team that's going to be looking outside of the province here.
Okay. Lastly, just on the commentary about unregulated, keeping it small, and you're really just levering a position that you have now. I think it's 1% of your business now. Is there any sort of percentages you have in mind that you want to be below, like below 5% unregulated? Is there something that you've really pinned down there?
I think it will always be a smaller part of our business, less than 10% of our net income at all times. This five-year period, I would suggest it's going to be less than that, so under 5%. We already have telecom today. It's 1% of revenues that we are going to focus on, and that will grow. It will grow from one to potentially two or three. Mark just outlined some adjacent energy management services that make sense, that we're being asked for by customers today that are more aligned to the transmission business. They're just not in the regulated space at this point in time. We'll have a look at those. Again, it's going to be a very small part of the business compared to our rate base.
Okay. Sorry, I just want to clarify. It's really, when you think about a small portion, up to 10% from your definition is still a small portion.
Yeah. That's really driven by the fact that we are a transmission lines and distribution company first and foremost and a regulated one at that. We will stay there. Less than 10% of our net income and really FFO to debt is the main target there to maintain the right credit rating that we have targeted will be our focus. That's the reason why we have that guideline there. But in this five-year period, we will not approach that limit or anywhere close to that. It'll be under 5%.
Okay. All right. Makes a lot of sense. Thanks, guys.
Thank you. That does conclude our Q&A session for today. I'd like to turn the call back over to Omar Javed for any further remarks.
Thanks, Shannon. The management team at Hydro One thanks everyone for their time with us this morning during what is a busy period and a busy day. We appreciate your interest and your ownership. If you have any questions that weren't addressed on the call, please feel free to reach out and we'll get them answered for you. Thank you again, and enjoy the rest of your day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone have a great day.