Good day, ladies and gentlemen, and welcome to the Hydro One Limited fourth quarter 2018 analyst teleconference. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and the instructions will be given at that time. If anyone should require operator assistance, please press star then the zero key on your telephone keypad. 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, and thank you for joining us. I'm here in Toronto with Hydro One's leadership team, including our acting President and CEO, Paul Dobson; our acting Chief Financial Officer, Chris Lopez; our Chief Operating Officer, Greg Kiraly; our Chief Legal Officer, Jamie Scarlett; and our Chief Human Resources Officer, Judy McKellar. We'll provide some brief comments on our fourth 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 call, you can also find them on Hydro One's website in the Investor Relations section under Events and Presentations. Today's call discussions will likely touch on estimates and other forward-looking information.
You should review the cautionary language in today's earnings release and our annual MD&A, which we filed this morning, regarding the various factors, assumptions, and risks that could cause our actual results to differ as they are applied at this call. With that, I turn the call over to Paul Dobson.
Thank you, Omar. Thank you to everyone for joining and for dedicating your time to review our year-end results. If you don't get a chance to ask a question by the end of this call, please keep in mind that Omar and his team remain available to you. Chris will review the financial figures in a moment, let me start by highlighting that we ended both the quarter and the year on a strong note. 2018 was a year of change and transition. Despite the challenges we faced, the whole team at Hydro One demonstrated great resilience in responding and producing results for our shareholders and our customers. There is no better example of our continuing transition to a customer-focused organization than one in which all employees brave extreme conditions to ensure the heat and the lights stay on.
There is no better example of a commercially-oriented firm than one that continues to increase its productivity and reduce operating expenditures so that customers and shareholders alike can benefit. Hydro One is a resilient organization. Following on last year's strong performance on productivity, in 2018, we generated additional savings that drove costs out of our system. With approximately CAD 136 million of productivity savings in 2018, our total productivity savings from 2015 have reached a quarter of a billion CAD dollars. Without question, we are a more efficient organization. Whether it was execution on the innovative vegetation management program, better procurement, optimized fleet management, or finding competitive solutions to services such as information technology or cable locates, the organization left no stone unturned to become more productive. Our forestry teams completed nearly three times the distribution line work they did in 2017, but with only a marginal increase in cost.
We do more with less. We were also exceptional in our ability to do what we said we were going to do to maintain and strengthen the aging electrical infrastructure in the province. We deployed CAD 1.6 billion in capital expenditures and put into service CAD 1.8 billion worth of new assets that will go towards ensuring the long-term reliability of Ontario's electrical system. This was consistent with the CAD 1.8 billion of aggregate in-service plans we put forward to the Ontario Energy Board, proving a continuation of strong project discipline, execution in terms of scope, schedule, and budget adherence. We keep our promises. These efforts bore fruit. Residential and small business customer satisfaction was the highest in five years, while transmission customer satisfaction reached an all-time high. Billing accuracy also reached an all-time high, while overdue accounts receivable fell to half of what they were in 2015. We are customer-focused.
Despite the storms, three in which we had to reconnect over 1.4 million customers in aggregate, we improved our overall reliability of the distribution network by 14%. In our transmission business, our crews worked tirelessly and innovatively to quickly restore power following several storms. Merivale Station that serves the Ottawa region was destroyed by a tornado in late September. Our teams restored power within 48 hours with a temporary solution and rebuilt the facility within 12 weeks. We serve our communities. Following the tragic helicopter incident last year, we made a further commitment to safety. In 2018, we implemented the Journey to Zero safety initiative and achieved our target rate for safety incidents, which has improved by 35% since 2015. The teams are acutely focused on company safety performance, and safety is part of our daily conversation throughout the business. We learn and adapt.
2018 also brought difficult circumstances for our neighbors south of the border. We are proud to send two teams of forestry technicians to Chico, California, and support a local utility in their restoration efforts following the devastating wildfires in the region. Our crews played an important role in system inspection and quality control over the course of about a month. We share and we help. I'm happy to report that our teams were recognized for their exceptional efforts. We won three Edison Electric Institute Emergency Recovery Award for outstanding power restoration efforts in Ontario and one Emergency Assistance Award for providing restoration support in the Northeast U.S. We were also humbled to learn Hydro One was recognized by Forbes on its list of Canada's best employers for 2019. The list was created from a survey of over 8,000 people working in businesses across Canada.
In light of all the challenges we faced in 2018, our performance in the survey showed our team has remained resilient, engaged, and continues to enjoy the role they play in this important company and in the province of Ontario. Last week, our Board of Directors released a new framework for executive compensation. The framework is designed to attract and retain an experienced leadership team with continuous focus on performance. Furthermore, appointing a President and CEO continues to be a top priority for the Board of Directors. Finally, I would like to take a moment to review Avista developments. After the Washington regulator issued a denial of our proposed merger transaction in December, and Idaho's regulator did the same in January, Oregon released a notice of abeyance. On January 23rd, Hydro One and Avista announced our mutual agreement to terminate the merger.
While this was not the outcome to which we were working, we can honestly say we put forward our best efforts and learned a tremendous amount. We also gained great relationships with the Avista team. We have nothing but respect for Avista and wish them all the success they deserve. Our focus for the future will remain as it has been in the past, continue our journey to achieve world-class health and safety performance, improve our customer experience, serve our communities, reduce our costs by driving efficiencies, and continuously raising the bar on reliability through improvements and innovation. We do this for the benefit of our customers, the communities we serve, and our shareholders. Before I turn it over to Chris to discuss the financials, I want to personally recognize Patrick Meneely and Judy McKellar for their outstanding contributions to Hydro One.
Pat announced recently that he will be leaving at the end of the month. I would like to acknowledge Pat for his impact across Hydro One. Pat was a key contributor during the time he was here, streamlining both the corporate development and strategy divisions and setting them up for continued success. Judy will be retiring at the end of March after an illustrious career at Hydro One spanning 37 years. Judy's dedication to the human resource function has made this company into one of Canada's best employers. She helped set the very foundation of the company's collaborative culture and paved the way for transition to a commercially-oriented, customer-focused organization. We wish you all the best in the next chapters of your career, Pat, and in your well-earned retirement, Judy. You both will be missed here at Hydro One.
We are fortunate to have a deep bench of well-qualified and experienced leaders who will continue Pat and Judy's good work. With that, I'll pass it over to Chris.
Thank you, Paul, and good morning, everyone. We saw an increase in both earnings per share and adjusted earnings per share compared to the fourth quarter last year. The positive results were primarily related to favorable weather, higher transmission revenues, and lower income taxes. Similarly, on a full-year basis, both metrics increased compared to 2017. Our fourth-quarter revenue net of purchased power was higher by 5.3% year-over-year, driven by both the transmission and distribution businesses. Transmission and distribution revenues were primarily affected by higher consumption of energy resulting from favorable weather. In addition, the transmission revenues reflected the increase in OEB-approved transmission rates that also took into account the formulaically adjusted return on equity for ROE, which increased from 8.78%-9% for 2018. The 2019 ROE has been set at 8.98%, reflecting the prevailing interest rates and the utility spreads during the rate-setting period.
There was a substantial shift in operating, maintenance, and administrative or OM&A costs for the fourth quarter. While the year-over-year increase in the quarter is large at 26%, this does not indicate an increase in run rate. Rather, the reasons for the shift are the deferral of expenses from prior quarters as the teams were busy with storm restoration efforts during the year, and expenses or recoveries of expenses that were one-time in nature. On a full-year basis, OM&A increased by 3.7% compared to 2017. The primary driver for the higher annual OM&A was increased vegetation management costs as the crews adopted the new program and delivered almost 30,000 km of work along power lines, which was nearly three times more than was done in 2017. There were a number of one-time costs or cost recoveries this year and last year that impact the comparability of OM&A.
These include a reversal of provision for payments in lieu of property taxes following a favorable reassessment of regulations in 2017, project write-offs, and higher costs related to the Avista transaction, which are non-recurring. If we adjust for these one-time costs, the increase in OM&A from 2017 to 2018 is 1.2%. In other words, we've done more work for a marginal increase in expense. Since the IPO in 2015, this represents an overall reduction in OM&A of approximately CAD 41 million or 4%. This is closer to 10% if you adjust for inflation. This is reflective of the substantial work done to increase productivity and eliminate costs. Below the operating cost line, our quarterly financing charges increased by 3.4%.
The primary reason for the increase was higher interest expense on long-term debt resulting from an increase in the weighted average long-term debt balance outstanding, which was partially offset by an unrealized loss recorded in 2017 on the revaluation of a deal-contingent foreign exchange contract. On an annual basis, financing costs increased by 4.6%, primarily due to a full year of convertible debenture interest expense that were issued in August 2017. This convertible debenture was redeemed and installment receipts delisted as of February 8th, 2019. Income taxes for the quarter decreased by CAD 37 million. Lower income tax expense for the fourth quarter of 2018 compared to 2017 was primarily attributable to an increase in tax deductions arising from higher in-service additions, coupled with an increased allocation to a higher depreciation class, as well as higher pension and OPEB contributions for tax purposes.
The company is required to accrue taxes based on the tax liability without considering the temporary differences as prescribed by the regulators. On a full year basis, income tax expense increased by 4.5%. The effective tax rate for the full year was 12.6% compared to 14% in 2017. Moving over to investing activities, the company placed CAD 952 million of assets in service in the fourth quarter, which is 29.9% higher than last year. This increase reflects the timing of station sustainment investments for several transmission stations, as well as system capability reinforcement projects for the distribution network. For the full year, assets placed in service increased by 13.9% to more than CAD 1.8 billion, due primarily to substantial completion of major development work and an increase in the volume of work. This is consistent with the CAD 1.8 billion of aggregate in-servicing plans put forward to the Ontario Energy Board.
In terms of our regulatory updates, following Hydro One's motion to review and vary regarding a 2017 deferred tax asset ruling, the OEB announced it would be sending the motion back to an OEB panel for review and decision. We are waiting on the panel decision and continue to record revenue using a revenue requirement that is inclusive of 100% of the tax savings resulting from the Government of Ontario's decision to sell its ownership interest in Hydro One. On the transmission front, we filed our inflation-based application for 2019 rates on October 26th, 2018. On December 20, 2018, the OEB issued a decision declaring Hydro One's revenue requirement and uniform transmission rates for 2019 as interim. We expect to file our three-year 2020 to 2022 rates under the OEB incentive-based regulation in Q1 of 2019.
On the distribution side, the company on December 6, 2018, submitted its final submission on matters relating to the Accountability Act and its impact on the revenue requirement. We are expecting a decision on the distribution rate case. Similar to the treatment of the catch-up revenues in the transmission business in the third quarter of 2017, we expect, subject to OEB approval, to record catch-up revenues for the distribution business for four quarters of 2018 upon receipt of the decision. On January 31, 2019, the Minister of Energy, Northern Development and Mines issued a directive to the OEB to amend NextBridge's electricity transmission license and allow it to proceed with the East-West Tie transmission line. This development, unfortunately, ended our bid to build the Lake Superior Link project.
We're disappointed with this outcome, but we will continue to pursue similar projects that we believe will benefit all stakeholders, add value, and contribute to Ontario's economy. We want to thank everyone involved in the project. On the Peterborough Distribution acquisition, on November 14, 2018, the Competition Bureau issued a no action letter, meaning that the transaction can proceed from the Competition Bureau's position, pending OEB approval. For the Avista transaction, as Paul mentioned, both companies mutually agreed to terminate the transaction. Subsequent to the termination, the company paid to Avista the contractual termination fee as required by the merger agreement of $103 million or CAD 138 million. This charge, along with revaluation of the foreign exchange contract to nil and financing charges resulting from the redemption of the convertible debentures, will be recorded in the first quarter of 2019.
I'll stop there and will be pleased to take your questions.
Thank you. Following Chris, I will request the operator to please explain how she'd like to organize the Q&A polling process. Please go ahead, Christy.
Certainly. Ladies and gentlemen, if you have a question at this time, please press star then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, to ask a question, that's star one. Our first question is from the line of Linda Ezergailis with TD Securities. Your line is open.
Thank you. I'm wondering if you could give us an update on your discussions with the rating agencies in lieu of some of the recent developments and how they're, you know, your perception of their focus on various considerations, like your corporate strategy going forward and the termination of the Avista merger, and your refocusing on other things potentially, as well as your CEO search and corporate governance considerations.
I think, Chris, I'll let you talk to any specific discussions with the rating agencies.
Okay. I think, Linda, most of it's out there in the public already. I think the S&P have been fairly clear that they will monitor the relationship between the company and the province, so they're looking at that angle of it. They're very keen to see the CEO put in place and a strategy confirmed. That's really where S&P sits. Moody's haven't really put out anything as of late in terms of areas of focus. I suggest they're the two main points at the moment, is the naming of the CEO, confirmation of the strategy, that it has not changed or it has not changed dramatically. Then S&P specifically have talked about monitoring the relationship between the province of Ontario and the company.
Just as a follow-up, more broadly, and I realize some of it's unknowable and maybe you can't comment on it entirely, but what are the legal and practical steps to getting to a conclusion on executive compensation in the CEO search? I'm not really able to point to precedent, so maybe you can help us out a bit.
Sure. Yeah, sure, Linda. As you know, it has been a top priority for the board since they started executive compensation and the CEO search. You can appreciate that both of those items is the exclusive responsibility of the board, and that neither myself nor my colleagues on the management team have been directly involved. I can tell you that active discussions between the board and the province are underway, and we expect that we will see a resolution very soon. Other than that, I can tell you that the board is working extremely hard on this priority. We'll have to wait and see.
Thank you. I'll jump back in the queue.
Thank you. Our next question is from Ben Pham with BMO Capital Markets. Your line is open.
Okay. Thanks. Good morning. I'm wondering, when you think about some of the cost savings you surfaced in 2018, and if you were to assume limited regulatory lag, then where were you guys on the realized ROE? Were you above the allowed on distribution transmission?
Chris, you want to take that?
Yeah. On transmission, we were above the allowed. On distribution, it would be marginally above, I would expect. The transmission itself was above.
Okay. All right. Thanks for that.
Let me just clarify there. The main driver of that, as we've seen in the results, cost performance has been as expected, but the weather this year has been very favorable, so that has contributed to that outcome.
Okay. That assumes you get what you applied for in the distribution rate case for 2018.
No, actually, we don't have the distribution revenues for 2018 in these results, so we haven't recorded those at this point.
Okay. I guess if you were to get the rate case and you walk back, then it looks like both your segments actually did quite strongly in 2018.
Correct. Again, the main contributor to that would be the favorable weather.
Okay, that's great. Maybe just staying on the cost side. I remember a big part of the IPO was O&M as a % of assets were quite high in distribution, maybe even in line in transmission relative to North America. I'm just wondering now, as you surface CAD quarter of a billion of costs, what's the thought process going forward? Are you close to industry averages now, or is there still a lot of low-hanging fruit that you can surface the next few years?
Well, I think the team has done, as we've emerged from being a Crown corporation for the past three years, putting a much more commercially focused lens on the business, been able to surface a lot of these savings and bring these ideas to bear. I think there are probably more to go for. As I said in my remarks, we've looked at a lot of things, but there's a lot of things that we can still look at, and so expect to see those savings continuing and doing our best to surface those savings into the future. I don't know if, Greg, there are other specific initiatives that you want to talk to give the people a sense of what we're doing. Yeah, sure. I can highlight a couple of things. We've seen some really nice unit cost gains and some project cost savings.
We do a lot of benchmarking, and certainly our unit costs are coming down, whether it's in vegetation or corrective maintenance, preventive maintenance, et cetera. We think there's more upside potential. We have saved quite a bit in our procurement. We've reduced our fleet by over 1,000 vehicles. We are applying technology. All of our linemen out in the field have electronic tablets now, and that's how they receive their work. We've eliminated a lot of back-office kind of paperwork and the administrative work associated with that, and there's more upside to that. We've actually factored literally CAD hundreds of millions into our both distribution rate case as well as our transmission rate case going forward. That's out there in the public domain as well.
All right. That's great. Thanks for the call, everybody.
Thank you. Our next question is from Andrew Kuske with Credit Suisse. Your line is open.
Thank you. Good morning. The question really relates to your capital program on a longer-term basis. If I look in 2021 and beyond, you forecasted this CAD 2 billion-plus number with a skew to sustaining capital. When we look at your net plan, you're about give or take CAD 20 billion of net plan. How do you think about just the sustainability of that CapEx on a longer-term basis? What kind of productivity improvements do you anticipate to have from that sustaining capital?
I'll start, and maybe I'll ask either Chris or Greg to comment on that. When we look at our capital programs, we're very conscious of the impact of adding capital and the impact on rates. We're really trying to find the balance between what it is the system needs for reliability and safety purposes, because it is an aging system. We need to invest in the system. What is the balance between that and the impact on rates? I think we've come up with a plan, a future plan and a projection that are prudent investment and really represent only what we need, and that the impact on customer bills is as small as we can make it. Maybe I'll ask either Chris or Greg to comment a little bit further on the capital plan.
The only comment I would have in there is, I think, Andrew, you're getting at where are the other productivity savings embedded in there? There are some productivity savings already embedded in those plans, and you can see those in our OEB submissions. They're clearly laid out about how much productivity is already included. Will we get more? We're going to certainly strive to get more and look to refine that plan as and when we can. There is already a substantial amount of productivity in there. A lot of the sustainment is driven by end-of-life assets. At the end of the day, a significant portion of the assets in the transmission fleet or the distribution fleet are approaching end-of-life. The investment that we're asking for is to sustain that level of aging. We're not improving on it. We're actually sustaining it.
That's really where it's coming from, is a required replacement of end-of-life assets.
Okay.
That's again what we consider to be the right balance between rates and investment that the system absolutely needs.
Okay. That's helpful. Excuse me, just more specifically on the distribution improved reliability that you saw in the quarter. How much of that was really attributable to weather versus just underlying operating improvements?
Maybe I'll let Greg talk to that one.
Sure. We're excited about that. That represents the most potential that we have. Currently, we're fourth quartile in distribution reliability, but we're extremely focused about improving reliability for our customers. We reduced our SAIDI, or average duration of outages, by over an hour. Over an hour of reduction in 2018. We're shooting for another hour this year as well, and then an hour in the year after that. We've got our new vegetation management program that has contributed to that. We've focused on some of our worst-performing electric distribution circuits in doing corrective maintenance, and we're also doing grid modernization. Much of our distribution grid, unlike our transmission grid, is not automated. As we put smart switches out there and modernize that distribution grid, we're going to reduce the quantity of outages, and we're going to improve the duration of outages.
This is proven over and over the decades when you look through the utility industry. We're doing best practices in terms of distribution reliability, and we're very excited about it. It's having a positive impact.
Okay. That's great. Thank you.
Thank you. Our next question is from Robert Hope with Scotiabank. Your line is open.
Good morning, everyone. I want to go back to the ROEs for both distribution and transmission. I know there's a lot of moving parts, but could you give us maybe an understanding of how much of the ROE outperformance was related to weather versus cost savings?
Sure. I'll ask Chris to address that.
I would say a substantial amount. We don't provide the guidance on weather. I think you know that, Rob. Overall, I would say a substantial amount came from weather. The cost was as we expected. The weather was really driving a significant part of that performance.
When you take a look at if you did have the 2018 rates in effect, how much of a benefit would that have been relative to your existing ROE that you did in 2018?
I don't have that specifically with me here. It's probably something we can handle offline, but you could probably calculate it based on the revenue requirements that's been posted with the OEB. Our revenue would have increased by CAD 75 million.
All right. Thank you. I'll hop back in the queue.
Thank you. Our next question is from Robert Catellier with CIBC World Markets. Your line is open.
Hi. Good morning. I just want to get back to the executive compensation issue. There's a line item in the letter from the board to the government about top management under retention agreements and the likelihood that they might depart after those agreements expire in two and a half months. Has there been any update that you can provide us there? Have there been any indications that the management team will depart when these retention agreements expire?
Well, other than what we've already announced around Pat and then Judy's retirement, there's been no other developments there. I will say, though, that we have developed very viable succession plans, and we've got good bench strength, as I mentioned in my opening remarks, at the leader, at the VP level. We've identified good internal candidates as replacements, even if that's on an interim basis in some cases while search is commenced. We are feeling that the company is going to be able to certainly continue on while the search and the placement of the CEO comes in, and then that new team is formed.
Do you expect that the resolution of that particular file will improve the odds of some of these executives staying with the company?
I think those are really personal choices that each of the executives will need to make. I can't comment on what each individual person is going to do. I do think, though, that people will look at not just compensation, but look at a number of other factors and dimensions when they're thinking about whether they stay or whether it's time for them to move on, such as the people they're working with, the strategy of the company, and whether there's an opportunity here to make a real difference, and then how they'll develop as leaders as well. There's a lot of things that'll go into their personal decision about whether they stay or they don't.
Yeah, that's a fair comment. Just on the province's initiative to reduce power costs, what are you hearing or what's the sense you're getting of what direction that might take?
Yeah, we've had a number of discussions and brought forward ideas to government on that topic. The OEB sets the rates throughout the province, but we certainly, and I've said this before, we fully agree and support the province's commitment to reduce power rates in Ontario. You've seen the data. I think everybody on the call has probably seen the data. The people in Ontario have seen power rates rise by something like 70% over the past 10 years, mainly due to the Global Adjustment. This is an industry-wide issue to tackle. Here at Hydro One, we only make up a small portion, a very small portion of the customer bills. The transmission is about, which is most of our business, is about 7% of bills. A very small portion.
Over time, when you look at our rates over the past 10 years, our rates have not really increased much more than inflation. Whereas again, Global Adjustment cost of energy has increased substantially. That's why this is an industry-wide issue. We are still contributing. The executive and board compensation not being included in the rates is contributing. The dividend that the province gets from Hydro One contributes to rates. Rate reduction as well, that's about CAD 250 million. In some ways, we've contributed significantly already. We're not stopping there. We've been working hard on being more efficient and productive. Our own OM&A cost has actually reduced over time even against inflation. There's more that we're going to continue to contribute to that cause because I think it's the right cause, and we will continue to work with government on those ideas.
Okay. Finally, just congratulations on the safety improvements. That's it for me.
Well, thank you very much. We are proud of the strides that we've made. Having said that, too, we know we're not where we want to be. We know that there is more that we can do in safety, and it is a goal of this company to be world-class in safety performance. We've got ideas and plans and investments we're going to make in safety well into the future. It'll be a continuous strive towards that goal. Thank you for the comment.
Yeah. Thank you.
Excuse me, it's Chris Lopez here. Just a clarification for the last question I received from Robert Hope. The number I've quoted, CAD 75 million, was the net income number. The revenue number is higher than that. The net income number is CAD 75 million.
Thank you. Our next question is from Robert Kwan with RBC Capital Markets. Your line is open.
Good morning. Just with the Avista deal now terminated, I'm just wondering if you can update or make additional comments just on your U.S. strategy going forward?
Sure. Sure, Robert. Any new strategy or M&A will certainly be under the purview of a new CEO as they develop the strategy going forward. It wouldn't be really appropriate for me as an interim CEO to speculate on what that strategy may or may not be. I can tell you that we are not looking at anything at the moment. Anything in the U.S., any large M&A in the U.S., we're not looking at anything. I would expect, though, as the new CEO develops their strategy, many of the elements of our existing strategy and our values certainly would be consistent around, like we just talked about, safety or being customer-focused, improving reliability. I imagine those planks of the strategy will continue. M&A will be a question as to how the new CEO and the board want to take that forward.
Got it. If maybe I just think about then just general growth or general acquisition strategies, recognizing, again, the new CEO is not in place yet. With the management team, as well as whatever you socialized with the new board, can you just talk about overall, what did you learn from the Avista process? What would you do differently going forward? And any specific comments on the use of leverage in the balance sheet, as well as targeted accretion levels?
Sure. Yeah. One of the benefits of the deal and the whole experience with Avista is we definitely took away a lot of learnings from that, which would be certainly useful going forward. I think just learning from the Avista team and what they do in terms of innovation, how they invest in the community, the relationships that they have with their stakeholders, is certainly something that we've taken from them. We'll continue to have dialogue with them, I expect, into the future. In terms of, again, future M&A, leverage on the balance sheet, those sorts of accretion, et cetera, all of those deals will have to be looked at on a case-by-case basis. We want to make sure that they create value, not only for shareholders, certainly we need to consider all of the risks associated with those transactions.
It creates value not only for shareholders, but it creates value for customers as well. The customers at the end of the day are better off as well. Those are the main things that I took away from that transaction.
Okay. Maybe just turning and finishing here with the Ontario side of things. Paul, you mentioned the Global Adjustment is one of the biggest problems in the bill. Recognizing it's not you, but in terms of the discussions you've had with the government, do you get the sense that the government is most focused on this factor and not so much focused on the utility side or just across the board actions to reduce the bill in terms of all components?
Well, I can't really comment for the government on what they are looking at. I think, though, the data is out there. They certainly have smart people in government who are looking at all aspects of hydro rates in Ontario. The data out there tells us that the biggest cost and the rise in the cost has been the Global Adjustment. I'm quite sure they're aware of that. We all know that to make an impact on customer rates, you really do have to impact that to some degree. The government also, I would imagine, is also thinking about their other priorities, especially around being open for business in the province and making sure that we've got a very reliable and competitive electricity system in Ontario that'll attract more business in here.
Certainly, when we talk to any big customers, whether they're mining companies up north or other industries, Leamington or others, reliability of the system is a key thing for them. They absolutely want to make sure the system is reliable. That's certainly a part that we can play there as well.
That's great. Thank you.
Thank you. Our next question is from Mona Nazir with Laurentian Bank. Your line is open.
Good morning, and thank you for taking my questions. Firstly, I was just wondering, net net, what would be the total cost that the Avista transaction loss would have had on you? There's the U.S., just over $100 million break fee financing. Is there anything else? I was just looking for a total.
Sure, Mona. Maybe I'll ask Chris to talk to that.
Hi, Mona. Yeah, we've disclosed it in the statements. There's the historical cost that's disclosed in the financial statements of CAD 89 million, and there's a forecast of costs that are required to complete the transaction in Q1 or to complete the termination of around CAD 190 million. In total, it's around CAD 280 million pre-tax, and post-tax, that would be around CAD 210 million.
Okay, perfect. That's very helpful. Just secondly, I was wondering if you could go into a possible scenario analysis if an agreement on executive compensation is not reached. From my understanding, then the government could kind of force their CAD 1.5 million base. Would that be correct?
Well, again, as I said earlier, Mona, I'm not directly involved in the discussions, but I imagine the range of outcomes could be a few different things. I wouldn't really want to speculate on it, but in talking with Tom, who is closer to it, the board could possibly agree, or the government, they could negotiate with the government and some flexibility above CAD 1.5 million. The province could also send a directive as well. There's a range of outcomes here. I wouldn't really want to speculate on what the outcome is. We're not directly involved.
Okay, that's very helpful. Thank you.
Thank you. As a reminder, ladies and gentlemen, if you wish to ask a question at this time, please press star one. Our next question is from Patrick Kenny with National Bank. Your line is open.
Yeah, good morning, guys. Just back to the discussion. Wondering if you could walk us through your debt funding requirements here for 2019. How much capital you're looking to raise this year for-
Both your capital program as well as any refinancings coming up.
Sure. Maybe I'll ask Chris to address that.
Yeah. As you gathered from last year, we didn't do a lot of our funding for the capital program in the market last year, so we'll be in the market this year. We'll be in there sometime in the first half and then possibly in the second. We'll be raising somewhere between CAD 1.5 billion and CAD 2 billion this year in the market.
Okay, that's great. Not sure how much you guys can comment on the details of the new compensation framework, but just looking at the short-term incentives, I'm wondering if the net measure is based on aggregate levels or per share amounts. In other words, could there be an incentive here under this framework to grow net income through M&A, even if the deals are, say, neutral or dilutive to EPS?
We'd have to take that question, Patrick, and look at it. Certainly, that's potentially possible. We think that the program, certainly the board has worked on it. It's been their priority to work on it. It's designed around making sure it's the right level of incentive for the strategy and for what the board wants to do both in a short-term and long-term basis. Sorry, Judy's signaling me here, she has a few comments to add.
Hi. I just want to explain, in the compensation framework, there are two incentive programs. The first is the short-term incentive, which is the annual program, and that's always based on a balanced scorecard. Net income is always, of course, one of the components of that, in addition to our other top priorities like safety, productivity, reliability, customer service. The second incentive program is our long-term incentive program. That's based, of course, on things like our EPS or TSR and the like, and that's over the three years. Those two incentive programs are based, the three components plus base pay are what you see in the compensation framework. Net income, of course, is always going to be a factor in both of those programs. Does that help?
Okay. That's very helpful. Thank you very much. That's all I had.
Sure.
Thank you. Our next question is from David Galison with Canaccord Genuity. Your line is open.
Good morning, everyone. Just a quick question on the CapEx spend. Over the next four years, it looks like it's down around 3%. I'm just wondering if that's more timing-related, if there's any certain projects that were impacted.
Okay. Yeah, sure. Maybe I'll let Chris talk to that.
Yeah. I think overall, you'll see our CapEx spend over time going up in terms of the end-of-life assets. Any lumpiness that you see in there is in relation to large specific projects that are being completed within the year. That's the only reason. Other than that, it is going up on average. Our rate base is going up roughly five%, so you'd expect to see the CapEx doing the same.
Okay. Thank you.
Thank you. Our last question is from Jeremy Rosenfield with Industrial Alliance. Your line is open.
Yeah, thanks. Just a last question here on sort of approach to managing the relationship with the Ontario Energy Board. From my perspective, in any case, it seems like it's taking a little bit longer than usual for the OEB to reach decisions on rate cases, and I'm wondering if there's anything that could be planned or could be done in the future to sort of expedite the process going forward. If there's any thoughts on that?
Sure. Well, yeah. I think with the OEB, with respect to us and the OEB, we've got a good relationship. We've heard their feedback about things that we can do better. We've certainly given them feedback as well, and I think both of us are striving to improve. We think we put forward very strong cases, well-considered filings, and we've been very responsive. For what the OEB has underway or had underway, certainly the modernization effort that they put underway to look at both their processes and timelines and how they adjudicate these filings, we participated in that, and I think there were some good ideas generated there. The OEB also has the Advisory Committee on Innovation, which is looking to remove any kind of disincentives for filings, encouraging market-based solutions, and simplifying regulation to the extent they can.
We are very happy to participate in those efforts with the OEB and expect that we will see improvements in process going forward.
Okay. Thanks for that.
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.
Thank you, Christy. The management team here at Hydro One thanks everyone for their time with us this morning during what is definitely a busy day. We appreciate your interest, your ownership, and if you have any other 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 does conclude today's program, and you may all disconnect. Everyone, have a great day.