Good day, ladies and gentlemen, and welcome to the third quarter 2018 Hydro One Limited analyst teleconference. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and 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. Please go ahead.
Thank you, Christie. Good morning, everyone, and thank you for joining us. I'm here in Toronto with members of Hydro One's leadership team, including our acting President and CEO, Paul Dobson, our acting Chief Financial Officer, Chris Lopez, our Chief Corporate Affairs and Customer Care Officer, Jason Fitzsimmons, and our Chief Human Resources Officer, Judy McKellar. We'll provide some brief comments on our third 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're dialed into the call, you can access them on the 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 quarterly MD&A, which we have 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'll turn the call over to Paul Dobson.
Thank you, Omar. Thank you to everyone for joining. We appreciate the time you're dedicating today so we can review Hydro One's strong third-quarter results. We'll briefly provide an update on the Avista transaction, followed by a discussion on our businesses in Ontario and our positive financial results. While we will have time for questions near the end of this call, please keep in mind that Omar and his team remain available to you if you don't get a chance to speak. Your feedback is important to us as we continue to drive our business forward. Before we begin, it's important for all of us to recognize that Remembrance Day is this weekend.
We've asked everyone in this room, and indeed everyone at Hydro One, to take a moment on Sunday morning to remember all those that risked and sacrificed their own futures so that all of us could have a better one. It's all too easy to take the freedom we enjoy for granted. For one day a year, we pay tribute to those that served and continue to serve so that we indeed have such a luxury. Lest we forget. Thank you. I would like to start with a clarification of roles that was announced within the quarter and Omar referenced at the start of this call. Chris Lopez, who previously served as Senior Vice President of Finance at Hydro One, was appointed Acting Chief Financial Officer early September. This change has allowed me to focus more fully on my role as the Acting President and Chief Executive Officer.
Chris will be speaking in a few moments to review our Q3 financial performance, while I will give you a broader overview. With respect to Avista, pre-closing activities relating to the transaction continue to proceed well. The end date for the merger transaction has been extended to March 29th, 2019. Hydro One also filed several testimonies in support and secured a new schedule for all three remaining state regulators. Washington has a statutory deadline to issue its decision by December 14th, and Oregon has set a target decision date aligned with this timeframe. In late October, we also participated in an evidentiary hearing in Washington. There's been substantial progress with respect to the Avista transaction, there have been a number of recent developments, on which Chris will further elaborate, which have impacted our current perspective on the financial metrics of the transaction.
At this point, we expect the transaction to be low-single-digit dilutive for the first full year after close. Disappointing, the company remains fully committed to the Avista merger and sees a long-term potential for all stakeholders. The most significant element that initially motivated the merger discussions we had with Avista remains unchanged, and that is diversification. Following the transaction, the combined entity will be operating in more jurisdictions and service areas. It will also allow for expanded operations into natural gas distribution and electricity generation. Those earnings will be under the purview of more than one regulator, unlike how Hydro One operates today. Avista is a strong, innovative company with a rich history. Combined, Hydro One and Avista will be able to leverage their scale as a larger player in the utility industry to the benefit of both our customers and stakeholders.
As we approach the close of the transaction, there's a real sense of excitement across all levels of the organization. We're looking forward to this major milestone and welcoming Avista into the Hydro One family. In Ontario, Hydro One took advantage of opportunities and overcame challenges in Q3, consistently endeavored to put our customers first. Our research shows customers approve of the company's direction. A survey of residential and small business customers revealed that satisfaction with Hydro One has reached 76%, up five percentage points since last year, and the highest in five years. The details in the survey show that customers recognize the company's efforts most predominantly in customer service, brand, price or billing, and reliability.
While a higher residential customer satisfaction score on its own is cause to be recognized, when paired with a survey of transmission customer satisfaction that yielded a company record 90%, it demonstrates a consistent effort to set a high standard for all customer service experiences. During the quarter, the company filed two applications with the OEB related to the announced acquisition of the assets of Peterborough Distribution and Orillia Power Distribution. In the coming months, these will proceed in accordance with the usual OEB process. The end of the quarter also marked an operational integration milestone, bringing Hydro One Sault Ste. Marie into Hydro One Networks. While Networks has assumed accountability for the day-to-day operation and maintenance of Sault Ste. Marie infrastructure, it remains a standalone licensed transmitter in Ontario.
Late last month, the Independent Electricity System Operator sent us a request to begin the development work for the Northwest Bulk Transmission Line, a new line between Thunder Bay and Atikokan. The request at this stage will look at preliminary engineering designs, budget, consultation, and an environmental assessment, among others. Projects like these demonstrate the role Hydro One plays in supporting both the economic growth and vibrant communities across the province. The Ontario Energy Board also announced in August a ruling following our motion to review and vary submission regarding the allocation of the deferred tax asset. In October 2017, the company filed a motion to review and vary the OEB's decision and filed an appeal with the Divisional Court of Ontario.
In both cases, the company's position is that the OEB made errors of fact and law in its determination of the allocation of the tax savings between shareholders and ratepayers. An OEB hearing on the merits of our motion was held this past February. On August 31st, the OEB granted the motion and returned the decision relating to the deferred tax asset to a panel for reconsideration. We look forward to supporting the supplemental review. As many of you are aware, it's been a challenging year for storms in Ontario. On September 21st, wind, rain, and tornadoes swept through the province, affecting both our distribution and transmission business, leaving more than half a million of our customers without power. One of the tornadoes directly hit our Merivale transmission station, causing significant damage and disrupting power to the national capital region served by Hydro Ottawa.
This is the fifth major storm event in 2018. Mother Nature yet again tested the resolve of our field crews. Yet again, our crews delivered. Approximately 97% of the customers were restored within two days after the storm, and this included some innovative thinking to reroute service and return power to Hydro Ottawa. Our line workers and forestry crews have an unwavering commitment to getting the power flowing again after a storm. Their dedication is a constant source of inspiration for all of us at Hydro One. While not in the quarter, at the end of October, we applied to the Ontario Energy Board for a one-year inflationary adjustment to our transmission rates for 2019. This was done to help ensure we continue to deliver safe, reliable electricity at the lowest possible cost.
Next year, we plan to file an application under the OEB's Custom Incentive Rate framework for 2020 to 2022, following a thorough review of our transmission investment plan. Finally, I would like to briefly touch upon the changes to our board. In mid-August, the company announced it had completed a seamless transition to a new 10-member board of directors. Highly engaged in all aspects of the Hydro One business, the board appointed Tom Woods to serve as the new Chair in early September. The board has been getting up to speed quickly on matters related to Hydro One. From debating strategy and nuances of the core business in Ontario to acknowledging and affirming their commitment to the Avista transaction. This board has been working tirelessly.
They also have two big tasks before them, namely, establishing a framework for executive compensation and successfully concluding the search for a new President and CEO. While we don't have any concrete updates or definitive timelines to provide to you at this time, I can say both tasks are well underway, and our board is dedicating the time and diligence that projects of this caliber demand. On this note, the Hydro One management team and I have enjoyed getting to know our new board as they have got to know the finer details of the company. They have brought a fresh perspective to our business, and we have certainly benefited from the depth and breadth of their experience. With that, I'll pass it over to Chris.
Thank you, Paul, and good morning, everyone. Before I go over the details of our results for the quarter, I'll discuss the Avista merger, particularly the impact of developments on accretion since the acquisition was announced in July 2017, as Paul mentioned. These developments by themselves are either public or have been previously disclosed by us. The matters that have impacted us on this transaction include exercise of the over-allotment option for the convertible debentures, changes to the U.S. tax laws, the timing and additional amount of rate credits, and increased financing costs as a result of rising interest rates, which further impact accretion by approximately CAD 0.03 per share. The impact of these developments on a combined basis results in the Avista transaction being low single digits dilutive to earnings in the first full year after closing.
We are encouraged by the advanced discussions we've had with the three remaining regulators and continue to anticipate to close the transaction in late December. Hydro One is fully committed to successfully completing the transaction, and we look forward to engaging with our colleagues at Avista to create value for our combined company. I'll now turn back to Hydro One's third-quarter financials. While we saw a decrease in both earnings per share and adjusted earnings per share compared to the third quarter last year, I would describe the past quarter as a positive one. Let me explain further. The decline was primarily related to two items affecting comparability. The first, the timing of regulatory catch-up revenues from the transmission rate decision in the third quarter of last year. That means last year's third quarter results included three quarters of catch-up revenue, which amounted to approximately CAD 55 million.
The second, being the difference in the company's effective tax rate for the quarter, which was 17.1% compared to 9.3% last year. I will touch on the changes in income tax expense later in the call. Excepting the two items just discussed, positive financial results during the quarter were driven by favorable weather, coupled with continued efficiencies in operations, maintenance, and administrative costs. Revenue net of purchase power was higher by 3.1% year-over-year, driven by both the transmission and distribution businesses. Transmission revenues were primarily affected by favorable weather, which generated higher average monthly Ontario 60-minute peak demand. Distribution revenues were similarly favorable, affected by weather, which resulted in higher energy consumption. Continuing focus on cost control resulted in a 2.2% reduction in O&A costs year-over-year.
The primary driver of the reduced cost was lower consulting and contract costs related to the Avista merger that were partially offset by higher vegetation management and labor costs. Overall, we are pleased with our O&A performance in the quarter. Below the operating cost line, our financing charges increased by 30.7%. The primary reason for the increase is an unrealized loss due to the revaluation of the deal contingent foreign exchange forward contract entered into in October of last year related to the Avista merger. The unrealized loss was due to the strengthening of the Canadian dollar versus the US dollar during the quarter, reversing $24 million of unrealized gains recorded earlier in the year. For the first nine months of the year, unrealized gains stand at $25 million. Income tax for the quarter was 78.3% higher than a year ago.
The increase in income tax expense for the three and nine months ended September 30, 2018, was primarily due to a combination of an increase in the estimated annual effective tax rate for 2018, arising from higher forecasted earnings, coupled with a corresponding decrease in the estimated annual effective tax rate for 2017, arising from lower forecast earnings. The company's effective tax rate for the quarter was 17.1% versus 9.3% in the prior year. We continue to maintain our guidance of approximately 16% effective tax rate. Moving over to investing activities, assets placed in service are low in the third quarter compared to the prior year. This reflects some large in-service additions in the same quarter in 2017, as well as timing of planned in-service additions in 2018.
Skewing the comparison is the in-service portions of several large transmission station projects in 2017, including our Richview, Lakehead, and Kirkland Lake facilities and the Outage Response Management system on the distribution side. In terms of our regulatory updates, as Paul mentioned earlier, the Ontario Energy Board announced it would be sending the motion back to the panel for review and decision on the deferred tax asset. The OEB issued a procedural order on November 6th, outlining the next steps throughout November and December. We 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.
Following our submission to the OEB for a one-year inflationary adjustment to the transmission rates , we have updated our capital expenditure forecast for 2019 to reflect a lower CapEx spend, which has been reduced by CAD 158 million. For now, we will be keeping the remaining years unchanged. Our forecast for 2020 to 2022 will be part of a thorough review of our transmission investment plans and will be reflected in the next rate filing. For our 2018 to 2022 distribution rates application, the company filed its reply argument with the OEB at the end of August. This concludes the evidentiary process, except for certain items such as pole attachment charges and items related to Bill 2 and executive compensation. The OEB issued a procedural order on September 26th, outlining the next steps in the process throughout October and November.
Our expectation is that we will receive approvals in December with retroactive adjustments for 2018. In terms of the balance sheet, on September 13th, S&P lowered its issuer credit ratings on the company from A- to A. It also lowered the issuer level rating for Hydro One Inc. from A- to A. Hydro One Inc.'s commercial paper program was also downgraded to A-1(low) from A-1(mid). All ratings remain on credit watch negative, pending the completion of the Avista transaction. The one-notch downgrade reflects S&P's reassessment of Hydro One's management and governance structure. For the Lake Superior Link project, a seven-day oral hearing was completed on October 12, we submitted our argument in chief 10 days later. Intervenor submissions were due October 31. NextBridge and Hydro One had until November 7 to file their final arguments.
We expect a decision to be made by the end of the year on what is an exciting opportunity. I will stop there and we'd be pleased to take your questions.
Thank you, Paul and Chris. I will request Christie to please explain how she'd like to organize the Q&A polling process. Please go ahead, Christie.
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 Robert Hope with Scotiabank. Your line is open.
Good morning, everyone. Congrats on a good quarter. Maybe if we can start on the 2019 transmission filing. Can we just maybe get some additional clarity on why you chose a one-year inflation-adjusted filing as well as your expectation on your ability to earn a return, given there's no capital tracker?
Sure. I'll start, Robert, Maybe ask Chris to add some color as well. Yes, we did file a one-year 2019 inflationary increase. As the new board has come on, they wanted to get up to speed with more understanding of details of our capital expenditures over the long term and understand the details of that. 2019, the inflationary increase, the sort of process with that is a much more simple application with a shorter time to process. We wanted to make sure that we were able to invest in 2019 for safety and reliability reasons and fully intend to bring forward a multi-year IRM in the early part of 2019 for 2020 to 2022.
We need to make sure that what we bring forward balances the need for safety and reliability across the system, which is absolutely paramount, with consideration for the impact on customer rates and cost to consumers, which is also extremely important. That's our thinking with regards to the 2019 filing.
Just in regard to the CapEx reduction in 2019 of CAD 158 million, is this efficiencies being gained, or will you have to make this up in the back half of the forecast? Could we see other revisions in your CapEx plan?
I would say it's more a combination of there are some efficiencies in there, but as we look to sequence and prioritize those investments, we will see some of that come through in the 2020 to 2022 filing. I think net overall, it's slightly lower because of efficiency and reprioritization, but not materially so.
All right. Thank you. I'll hop back in the queue.
Thanks, Robert.
Thank you. Our next question is from Linda Ezergailis with TD Securities. Your line is open.
Thank you. I appreciate the update on the Avista dilution outlook for the company. I just want to get a better understanding of what specifically has changed since Q1 of this year. Was it just the increased financing costs, or were there other changes as well that led from it being essentially neutral to accretion to dilutive?
Hi, Linda. It's Chris. I think if you followed our disclosure earlier in the year, I think we did announce, as we're going through the negotiations with regulators, I think we announced the impact of the rate credits earlier this year. The financing costs have affected us sort of from mid-year on. We've seen some changes in the debt markets, including our one-notch downgrade at S&P here in Q3. I think they're the two consistent ones this year. The others were known last year and announced last year.
Thank you.
Sure.
Just from a strategic perspective, when will the new board articulate any sort of evolved strategy or reiterate the company's prior strategy? I'm wondering specifically if there's some sort of an annual review that is coming up or how you can comment on that process.
Sure. Yeah, sure, Linda. I'll comment on that. Yeah, the new board is getting up to speed with what the existing strategy is, and hopefully you can see in the results the execution of that strategy and the good results coming through. The board is also, as we mentioned, is searching for a new CEO and coming up with a new strategy is work that the new CEO and the board will do together and expect that will be extremely high priority when that person is on board. My own sense is that there are elements of the existing strategy, many elements of the existing strategy, will continue. Are still the right for our space. There could be other elements that will be more emphasized, certainly around the good success we've seen around productivity and efficiency and around capital allocation as well.
We expect, I would call the strategy, while it is the purview of the new board and the new CEO primarily, I would expect a lot of the elements of what you've seen in our existing strategy to continue.
That's helpful context. Thank you. Has the board indicated to the management team what the status of the CEO search is and what the expected timing to resolve that process or complete that process is?
Yeah. They are making very good progress on that. They've retained a search firm. There's been a subcommittee of the board struck to do the CEO search. They are well underway and making very good progress on that.
Thank you. I'll jump back in the queue.
Thank you. Our next question is from David Quezada with Raymond James. Your line is open.
Hey, thanks. Morning, everyone. My first question here, just on the backdrop in Ontario and the broader theme of the government's desire to reduce rates. I'm wondering if you've heard anything on plans with some of the IPPs to potentially blend and extend power contracts there, and if you think that could help reduce client bills outside of your business, obviously.
Sure. I think all ideas are on the table in our discussions with other industry participants and with the Ministry of Energy. There is a lot of information being gathered, a lot of ideas being put forward, and a lot of options being considered. We have certainly been participating in that. My own opinion is it's not going to be one thing, it's going to be many different things that the government and the Ministry of Energy, the OEB, will need to consider to impact bills going forward. We do think it is something that the whole industry should be thinking about, working to their strategy, and participating in. As you know, Hydro One is really only a small part.
If you look at all of the costs across the whole industry in Ontario, we are a small part of that, but still, we will be putting forward our ideas about things that we can do and the industry can do to impact rates. We also, as I mentioned earlier, though, have to certainly consider, as others do as well, how we balance the need for investment in reliability and safety, which is absolutely paramount, with impacting rates going forward as well. We're hopeful that if we all work together, the industry will come up with the best long-term solutions and outcomes for the people of Ontario.
That's helpful. Thank you. Then just my only other question here, just regarding the Avista transaction and the dilution for year one. Appreciate it might be early days at this point, but any context you can provide on how you expect the accretion to trend after that first year?
Chris, do you want to take that?
Yeah. I think when we first announced the deal, we said we were excited about some of the benefits that we could get from combining the two businesses and extracting lower costs over time that potentially could come up to the bottom line. The customers would get it after rate cases were completed. In the meantime, the shareholders would benefit. We still expect that to occur, so that hasn't changed. I think our starting point now is, as we said previously, we indicated mid-single digit accretive. That was starting from a slightly lower point, but the trajectory would be the same. We would expect that over time, we would end up back where we were, and I think we've talked about good long-term value. Instead of being those mid-single digits in the second or third year, now it might be a little bit further out.
The only thing I'd add to that too is I think as the management teams of Avista and Hydro One have come together and come together frequently, actually, to talk about different opportunities and fleshing out what those might look like, which we'll be happy to share with you in due course. I firmly believe, and the leadership team here believes, that those synergies will come through. We need time to properly flesh them out and make sure that they're embedded into our plans and into our thinking.
Okay, great. I appreciate that. Thank you. I'll get back in the queue.
Thank you. Our next question is from Robert Catellier with CIBC Capital Markets. Your line is open.
Hey, good morning. I think you've answered most of my questions, but I just need a couple of clarifications here. Maybe for you, Chris, I just wanted to make sure I understood the actual change here from the last guidance on the Avista accretion, which is no dilution. Is this change entirely due to financing costs, or have there been increasing merger commitments made?
There have been no increasing merger commitments on the financial side. Any of the concerns down in the U.S. have been more on the governance side. No additional financial commitments. This is purely related to the increasing cost of financing. As I said, the two areas that you point to is the flattening yield curve, the widening of spreads in the last quarter here, and then finally, our S&P downgrade in Q3.
Okay, that's what I thought you said. I just wanted to clarify that. Just on the whole idea of getting the Ontario bill down, just hearing your comments, it makes me wonder if you're suggesting that there might be a lower capital plan from Hydro One as you seek to balance the safety reliability with rates. Is that what you're suggesting in your comments?
No, not entirely. I wouldn't quite characterize it that way. I think the amounts that we put forward and ask for to invest in the system are the right amounts to keep safety and reliability balanced with cost. We're not asking for more than we think we need. We do have an aging infrastructure. We want to make sure that safety is always top of mind for not only our employees, but for our customers as well. We think we put forward a very good balance of that and quite dependable balance. Certainly committed to hitting those numbers and making those investments and getting those outcomes. There could be some impact to that as we go through how and the government figures out how they want to achieve the 12%. Not saying that that's not a possible risk.
We think our investment plan is certainly very dependable in balancing everything I just talked about.
Okay.
I'll just add to Paul's comment there that a large driver of the capital program is that the fleet is aging and that we need to renew that fleet. That's the main driver. If we become more productive, we can potentially reduce that a little bit, that capital envelope. The main driver behind it is end-of-life assets that need to be addressed.
Yeah, that's an undeniable reality. Okay, 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. I also had a clarification on just the OEB appeal and the review of the deferred tax asset ruling. Did you say that you expect to receive a decision by year-end?
I'll clarify. They've sent out a procedural order which just outlines what the expectations are of the various participants. That order takes us to December 18. That's when filings will be made on the request that they have in front of us. In terms of a decision, that would mean they would need to render a decision sometime between December 18 and December 31. We would love that, I'm not sure that is realistic.
Okay, helpful. I'm just wanting to touch on the CEO search, and I know you said that there are no definitive timelines. I'm just wondering if you could further clarify on the executive compensation structure and the details of such. Do you expect that to narrow the pool of candidates, or has that been a barrier at all?
Well, I'll start it and maybe ask Judy McKellar, our head of HR, to add a few colored comments as well. Yeah, the CEO search is making very good progress. I believe they've interviewed a number of candidates, both internally and externally. With respect to compensation, looking at this as a commercial business, as a private company, you would look at who the relevant peers are that, in line with the strategy that we are seeking to execute. Look at the benchmarking and look at where we would come out to target the right individual. I do not think it is going to negatively impact the quality of the candidates, nor do I think it's going to impact further down in the organization in a negative way. I'll ask Judy if she's got any other comments to add.
Sure. Thank you, Paul. As Paul has already said, the board's top priority right now is the selection of the CEO. With that in mind, they're looking at the best slate of candidates that have been put through by a very seasoned executive search firm. They also have established a CEO selection committee. It's a top priority. They know very well that they've got to hire a high-caliber CEO in order to deliver on our corporate mandate, and they're also looking at market-competitive compensation. We are expecting an excellent result.
Okay. That's very helpful. Since we do have Judy on the line, I just thought I would ask about the culture and the tone of the employee base. I know there's been, at least following the C-suite, a number of management departures and changes in the last two years. I'm not sure if you had the current turnover levels on hand, but I'm just wondering, has there been an increase, or is it a mix of employees exiting or some downsizing, or it's in line with peers? Thank you.
Thank you for the question. No, we have not seen an increase in staff turnover. Our staff remain, I would say, highly engaged. They're committed to the important work we do at Hydro One every day for our customers and our ratepayers. They're hopeful that, as I said, we'll find an excellent CEO. With that in mind, we continue to engage our workforce, and we haven't seen any change in terms of an engaged workforce at this point.
Yeah, the only thing I'd add to that, too, is that as I make my way around the company and meet with people, I'm always very impressed with the resiliency, their dedication, as you saw certainly on full display with our storm recovery response. The amount of talent and experience in the company, and how deep the bench is as well. We haven't seen the turnover, and where some might expect we would. We have not seen that turnover, and I think that just speaks volumes about the dedication and the quality of the people we have here.
Thank you so much. That's it from me.
Thanks, Mona.
Thank you. Our next question is from Ben Pham with BMO Capital Markets. Your line is open.
Okay. Thanks. Good morning. I just want to go back to the Avista conversation, the dilution that you highlighted. I wanted to check in. Usually, when you see diluted transactions, it's usually a post-facto discovery. It's more factors changing as the deals close and the numbers don't drive out or the other situation is dilutive deal near-term, but in five years, it's dramatically accretive. It sounds like you guys are thinking about the latter in this situation. As you look to other transactions in the future, I know that's not near-term, but is the thought process that's what you would be willing to do? Not take accretion in the first year and just time it over time?
Well, I'll start and ask maybe Chris to add some comments as well. I think, in the M&A space and certainly transactions as large as this, the strategic benefits and the reasons for doing the transaction in the first place are still there. In transactions of this size and when you think about our company, we think long-term. We don't just think about the first year. Certainly, it is unfortunate that some of these things have happened and we're in a dilutive position in the first year. We fully expect that over the mid to long term, that we will create value from this transaction and are dedicated to doing that. We always think for all stakeholders, thinking longer term, but the best outcome for all stakeholders, including customers, including shareholders, is the way to look at transactions of this size.
We would certainly hope for accretion in the first year, but if it doesn't come through, it doesn't invalidate the whole theory.
Okay. Then on the flex and the accretion expectation, it looks like most of it's rising interest rates. That's beyond your control. It looks like you're baking in almost a 50 basis point increase, it seems, based on my quick math. Are you looking at just the recent historical move in the last six months? Are you guys thinking about the forward curve and building some cushion in this new dilutive number that you're putting out?
Yeah, Ben, I think if you look at the straight math, it was, I think, it's about three quarters of 1%, if you look at the curves. I think what's occurred here is there was a flattening of the yield curve, there was some optionality previously in terms of bringing some short term versus long term. Given the flatness of the curve, I think you're correct now that by having some more long-term debt, you can reduce our risk. We are looking at that, overall, it really has been changes in the market that have resulted in this, and largely since end of Q2, where we've seen that change. Like I said, the only other part I'd point to is that S&P acted and provided a one-notch downgrade, not due to the company's financial position, but more due to external factors such as governance.
That's what they pointed to. They were things that you didn't see there, and we will manage that, and we will find a way to offset that the best way we can.
Okay. Thanks for that. One quick last one. The weather impact you highlighted during the quarter, certainly much better than year-over-year. Are you able to quantify the magnitude, the weather impact, this quarter versus the third year average that's baked in the rates?
Can you just repeat that, Ben? I just want to understand what question you're asking there.
On the favorable weather conditions that benefited this quarter.
Yeah
versus last year. I know last year was quite mild.
Yes.
Is this quarter a normal weather year relative to that 30 year average you're using, or there was actually some upside beyond that average rate, rather than just looking at year-over-year?
Yeah, correct. Yeah, you picked up on it exactly. Last year was an event where it was a very low third quarter due to weather, this year is an event where it's a high third quarter due to weather. This isn't like, the gap is quite wide year-over-year. It's not the 30 year average. It is up quite a bit.
Okay. All right. Thank you.
Thank you. Our next question is from Robert Kwan with RBC Capital Markets. Your line is open.
Morning. Recognizing that Avista is still to close, kind of coming back to just how you might approach larger scale M&A and what's happened here with the Avista transaction. If you're looking at future sizable M&A, does this change, though, how much accretion you'd seek to target, especially when using double leverage? As well, would you try to focus on faster growing businesses or one with materially better costs of capital so that at least you could grow your way out of any changes?
Yeah. First of all, I'd say we're not looking at any large M&A. We've got our plate quite full with Avista and want to make sure that that transaction is successful, as well as our other priorities throughout the rest of the company. There is no large scale M&A on the horizon. Certainly in the mid to longer term, if that does come back into our thinking, we absolutely would look at making sure that the transaction worked for customers, for shareholders, for all stakeholders right out of the gate, and make sure that we had enough contingency or cushion in there to ensure that that outcome happens. We think of certainly big M&A, all M&A really, as long-term value creation, and that's how we approach it.
I would echo Paul's comments that the short to medium term, we're absolutely focused on ensuring that the value that we were chasing in Avista is captured and that our customers in both territories, in the U.S. and Ontario, are well served, and that we earn the right to do any further M&A. Other than that, small tuck-in type transactions here in Ontario that we've been doing would be still on the table. Like I say, it would be very opportunistic.
Yes. Just to reiterate that, even the smaller ones that we would look at and certainly do support in the likes of Orillia Peterborough going forward, we'd want to make sure that all of those transactions work for all stakeholders.
Got it. Just to be clear, coming back to Avista and the path to trying to get this to being accretive, is it pretty much solely getting at synergies or are there other factors that you're seeing that can get this deal back to accretion?
Well, synergies are part of it. Absolutely. When we think about synergies, we think about synergies across the group. In Ontario, what things can we do, learning from what Avista has done and apply to Ontario and create more value in Ontario? We would also look at the sort of regulatory structure in the U.S. and see if there's other ways that we can have longer-term rate filings, incentive-type rate mechanisms like we have here in Ontario. Certainly see if that is a possibility, if that works, certainly for the customers in the Avista territories, for the regulators in the Avista territories and works for us. All of those are opportunities and possibilities that we will pursue.
Understood. If I can just finish on rating agency actions with S&P now at A- and potentially going to BBB+ post Avista. Certainly, I doubt that's the rating you wanted, I'm just wondering, are you comfortable pro forma at BBB+ or would you be looking at taking steps to preserve A-?
Which entity are you referring to?
Sorry. The Hydro One.
Okay. Yeah, we're comfortable there, and we want to ensure we stay there. The one notch that came as governance was unexpected, clearly. We would have much preferred if that did not occur. We are comfortable at BBB+. We can't react to those kind of factors where we have no control over. Overall, the answer is yes, we are comfortable at BBB+, and we will ensure that we do everything necessary to maintain a strong balance sheet.
Great. Thank you very much.
Thank you. As a reminder, if you wish to ask a question at this time, please press star one. Our next question is from Jeremy Rosenfield with Industrial Alliance. Your line is open.
Thanks. I just wanted to go back to the discussion on the Avista and the dilution. I'm just curious, in terms of post-closing financing plans, previously, I think if I remember correctly, there was a strategy or you wanted to look at additional debt financing. Also, to what degree are you taking into account sort of equity injections into Avista post the transaction closing? How is that factoring into the dilution commentary that you've made this morning?
Thanks, Jeremy. I think you're referring to on yesterday's call Avista indicated there was a requirement for equity. That is fully baked into our estimates. That's included here. In terms of the financing, the plan remains as we had disclosed at the start of the transaction. We will look at any and all opportunities at the time we execute the debt financing, which is likely to be either very late this year or early next year. Whatever opportunities avail themselves then in terms of term and the type of instrument we would look at that point. We're staying open to that. This takes into account any capital injection that Avista may require.
Okay, great. Then the only other question that I had, maybe if there's just some general comments that you have on the Lake Superior Link project or the filing and the hearing that occurred in early October and sort of what your outlook is for that process.
Sure. Happy to. You're right. The hearing was completed October 12th. The arguments in chief were submitted October 22nd. Final arguments are this week, I think by Friday, if I'm not mistaken. The Board panel expects to issue their decision, they've told us, by the end of the year. Our proposal, we feel very strongly about. With less costs, not only up front but ongoing as well. Also, our proposal is less intrusive on the environment and we think is a much better outcome for all customers and people in Ontario. We're very hopeful the panel will take that under consideration when they come to their decision. Again, we hope to see the result of that by the end of the year.
Great. That's it for me. Thank you.
Thank you.
Thank you. Our next question is from Patrick Kenny with National Bank. Your line is open.
Yeah, good morning, guys. Just on Avista, I wanted to confirm the regulatory process in Idaho. The hearing date had been reset to the end of the month here due to the leadership changes. Just wondering if we should expect this timeline to continue to be pushed back until the CEO search is complete.
Yeah. Well, with respect to Idaho specifically, the hearing is scheduled for November 26th. We have requested a decision in line with the Washington timeframe, Idaho is under no commitment. There is no statutory commitment to abide by that, they certainly understand. We've been having interactions with Idaho staff and interveners as well, those discussions are continuing ahead of the hearing on November 26th. We're very hopeful of a positive outcome there. I know, Chris, is there anything you would add to that?
No, I think you've touched the main points. They're under no obligation. However, they've indicated and agreed to a best efforts to meet the timeline that Washington has. All three commissions are aware
That we would like to, as a combined stakeholder group, conclude the transaction in December.
Okay, great. Thanks for that. Just to circle back on the modest reduction in capital for 2019. Wondering if you could share any update on your discussions with the board to potentially accelerate your LDC consolidation activity in Ontario, not only to backfill the organic growth budget, but also to help crystallize the mandate of reducing distribution rates across the province.
Yeah. We have had discussions with the board, not only in the context of Peterborough and Orillia and just walking through those transactions, but on the broader strategy as well. We believe that consolidating LDCs in Ontario can make both economic and operational sense and provide a great outcome for customers. We think that's still a goal of the province and should be looking at that as a way to get to rate reductions for everybody. We will continue, and the board will still continue to look at opportunities as they come along. As I stated earlier, we have got to make sure that all of those opportunities work for customers, work for shareholders as well, and all stakeholders, and work for the OEB. Those things all have to line up for us to move forward with them.
That's great. Thank you.
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, Christie. The management team in Hydro One thanks everyone for their time with us this morning during what is a busy period for everyone. 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 does conclude today's program. You may all disconnect. Everyone, have a great day.