Good day, ladies and gentlemen, welcome to the Hydro One Limited First Quarter 2018 Analyst Teleconference. At this time, all participants are in 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 zero on your touch-tone telephone. As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Omar Javed, Vice President, Investor Relations. Please go ahead.
Good morning, everyone, thank you for joining us. I'm here in Toronto with Hydro One's President and CEO, Mayo Schmidt, as well as our Chief Financial Officer, Paul Dobson, Greg Kiraly, our Chief Operating Officer, Ferio Pugliese, our Executive Vice President in Customer Care and Corporate Affairs, James Scarlett, our Chief Legal Officer, Patrick Meneley, our Executive Vice President and Chief Development Officer, and Judy McKellar, our Executive Vice President and Chief Human Resources Officer. We'll provide some brief comments on our first quarter results and then spend the majority of the call answering as many of your questions as time permits. We will be having our annual general meeting later after this call, we will be a little bit short on time today. 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 in to the teleconference, you can find them on Hydro One's website in the investor relations sections under events and presentation. 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 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 Mayo Schmidt.
Thank you, Omar, thank you to everyone that's joining me today on this call to talk about our first-quarter highlights and the progress toward becoming a leading North American utility. With the IPO well behind the organization, Hydro One moved forward as an investor-backed corporation that is agile and responsive to market drivers while creating a culture of service excellence that continually adapts to changing customer needs and expectations. The first quarter was a demonstration of Hydro One's potential, realized from strong execution and management's leadership. I'm pleased to report that Hydro One and Avista have achieved numerous key milestones in the regulatory approval process for our proposed merger, including all-party, all-issue settlements and agreements in Washington this past March, followed by Alaska and Idaho in April. Recently, a settlement in principle with all parties in the Oregon proceeding has been reached.
We expect to file the Oregon settlement agreement later in May. The companies also received approval from the Federal Energy Regulatory Commission in January, an antitrust clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in March. Hydro One and Avista received the Federal Communications Commission's consent on May 4th. Hydro One and Avista continue to anticipate closing the transaction in the second half of 2018. We see this merger as an important step in our strategic plan to grow and diversify our business for our organization and for our shareholders. The company has ramped up its focus on delivering business innovation and driving productivity enhancements across its lines of business. We continue to benefit from material savings through fundamental process improvements and streamlining at key cost centers.
Led by strong direction from our executive team, we've seen a significant portion of the savings realized by implementing competitive procurement processes, utilizing industry best practices by sourcing materials and services in advance of planned work. We are now driving productivity improvements in every line of our business. For the first quarter alone, we have generated approximately CAD 16 million in productivity savings, which is ahead of where we were last year at this time. For example, we have implemented new technologies and practices in our forestry maintenance program that will result in both reduced outages and cost savings that flow back to our customers and shareholders. On the labor front, we are pleased to announce a tentative settlement of a two-year collective agreement with the Power Workers' Union covering approximately 4,000 employees in critical frontline roles.
Our respective negotiation team worked diligently over the course of the last several months to arrive at an agreement which recognizes the significant contribution our employees make in maintaining the supply of power across the province while delivering value to our customers and shareholders. This quarter also further demonstrated an established trend of rising customer service satisfaction metrics to achieve market leadership and service. In the most recent survey, for example, distribution customer satisfaction rose six percentage points year-over-year. The catalyst was the March completion of the transition of 400 customer contact center employees contracted over the last 10 years, now brought in-house, participating as key members of the business teams driving customer satisfaction across Ontario. When compared with the end of 2017, first quarter results for overall customer satisfaction with calls rose four points to 94%.
Customer issues resolved on the first call jumped four points to 89%. Billing accuracy reached a record of 99.7%. Our reputation is being noticed internationally. In January, the company received the Emergency Assistance Award from the Edison Electric Institute for support efforts following Hurricane Irma in Florida last September. In March, the company mobilized nearly 175 employees to help efforts to restore power following a storm in Boston and Baltimore that left approximately 1 million people without power. Our management team and employees are highly supportive of the opportunity to help these types of cross-border events as they are aligned with efforts to capitalize on business growth opportunities and build our brand. Locally, too, perception of Hydro One's brand saw a boost from our world-class storm response efforts that Ontarians have come to expect from Hydro One's emergency services.
In April, we had back-to-back storms that caused power outages to hundreds of thousands of customers. The largest weather event involved a severe rain, ice, and winds over 120 km per hour that hit Ontario in mid-April. The company restored power to nearly 500,000 customers in four days, a new record for Hydro One, as it surpassed the six-day restoration effort from the last large-scale ice storm that struck in March of 2016. Hydro One's new record recovery is made possible by implementing management's new methodology and approach for storm preparation that armed our response teams with the tools and information needed to better deploy power line and forestry crews and align the necessary resources in advance.
I'm proud to see how our teams have rallied as an organization against these large storm cells with our operations and field teams working to restore power to our customers very quickly despite the treacherous conditions. Critically, all this work was done without a single safety incident. The company further strengthened its leadership team by adding proven experience and highly regarded business leaders to our team. The company welcomed Paul Dobson as Chief Financial Officer March 1st. A Canadian that's come home after 15 years in the utility industry as a global leader. Paul has assumed responsibility for finance, treasury, controller, audit, technology, and our regulatory group. Pat Meneely joined Hydro One as Executive Vice President and Chief Development Officer on March 1st. Pat is a highly regarded Canadian executive with significant expertise leading strategy, innovation, mergers, and acquisitions.
I'd like to ask Paul to provide additional details on the quarter's financial results, and of course, the executive team and myself will stand by for your questions following Paul's review, and then our departure to go to the annual general meeting. Thank you.
Thank you, Mayo. Good morning, everyone. We saw a significant increase in both earnings per share and adjusted earnings per share compared to the first quarter of last year. These positive results were driven by the timing of the transmission rate decision, colder weather, and higher ROE in the transmission business. It should be noted that this is the first quarter in which the basic EPS was higher than the adjusted EPS due to a fair value unrealized gain recorded on the deal contingent foreign exchange forward contract to convert CAD 1.4 billion to USD. As you may recall, this contract was entered into to mitigate the foreign currency risk related to a portion of the Avista acquisition purchase price that was financed by the issuance of the convertible debentures.
Before I go over the details of our results for the quarter, I would like to discuss the Avista deal, particularly the effects of the recent developments on the accretion. As you recall, we had originally anticipated accretion in the mid-single digits. Last quarter, we disclosed on the call that the U.S. tax reform would have a negative impact on accretion of approximately CAD 0.02-CAD 0.03. This results from a combination of a reduction in the tax shield and from a disallowance of the hybrid structure. In addition to this, the financial and non-financial commitments as a result of the rate settlement agreements, we have a further impact of CAD 0.02 from the initial joint application. We are still highly confident in this deal and highly value the growth and diversification benefits. We intend to find opportunities with Avista's high-performance and efficient team to enhance productivity for both organizations.
In addition, we aim to leverage the Ontario regulatory model and explore opportunities with the various regulators to bring innovative solutions to manage the outcome for the benefit of our customers in both Ontario and the U.S. Moving on to our first quarter results. Revenue net of purchase power was higher by 7.3% year-over-year, mostly driven by the transmission business. Transmission revenues reflect the decision on our 2017-2018 transmission rate filing, including the rates implemented in the third quarter of last year. Transmission revenues were also positively affected by colder weather, resulting in higher peak demand and higher allowed ROE. OM&A costs were down slightly quarter-over-quarter. However, distribution OM&A includes one-time costs related to the restoration efforts during the storms in Baltimore, Boston, and Nova Scotia, which were fully recoverable with the offset recorded in revenue.
Net of these costs, distribution OM&A was down 4.1%, reflecting lower corporate support costs. Included in OM&A was an increase of CAD 1.6 million of Avista-related costs, which are excluded in the calculation of adjusted net income. Total OM&A, net of these two items, is lower by over 3%. Savings and operating costs, including the corporate support costs already mentioned, were partially offset by some one-time write-offs. Overall, we are pleased with our OM&A performance in Q1. Below the operating cost line, our financing charges decreased by 14.6%. As I mentioned earlier, we recorded an unrealized gain due to the revaluation of the deal-contingent foreign exchange forward contract entered into in October of last year related to the Avista merger. These were partially offset by the interest expense on the convertible debentures issued in August to satisfy the equity component of the Avista transaction.
Moving over to investing activities, assets placed in service are lower in the first quarter compared to the prior year. This reflects some large in-service additions in the same quarter in the prior year, as well as the timing of planned in-service additions in 2018. Skewing the comparison is the in-service amount of portions of several large transmission station projects in 2017 and the Bolton operations center on the distribution side. In addition, the in-service amount for the quarter was lower as we continue to work on some large projects scheduled to be in service later in 2018, including our Clarington transmission station that is required to ensure an adequate, safe, and reliable supply of power to support the growing communities in the eastern part of the Greater Toronto area.
In terms of our regulatory updates, as we mentioned last quarter, the OEB granted a hearing of the merits of the motion to vary portions of the transmission rate decision, including objections that a portion of the tax savings resulting from the government of Ontario's decision to sell its ownership interest in Hydro One Limited and its subsequent IPO should be applied to reduce the revenue requirement. The hearing took place on February 12th of this year. We are waiting on a decision and continue to record revenue using a revenue requirement that is inclusive of 100% of the tax saving resulting from the government of Ontario's decision to sell its ownership interest in Hydro One.
On the transmission front, we received some direction from the OEB regarding our previously planned filing of the transmission revenue requirement application under the Custom Incentive Rate-setting framework for a five-year test period from 2019 to 2023. On March 16th, the OEB issued a letter directing us to file the application on a four-year test period from 2019 to 2022. In addition, the OEB conveyed its direction to file a single application for distribution rates and transmission revenue requirement for the period 2023 to 2027, including Hydro One Remotes. Although the matter will be heard as a single application, the OEB's final determination will result in separate revenue requirements for the distribution businesses and the transmission business.
As a result of this direction, we are happy to comply and are working towards a transmission rate application for the four-year period, 2019 to 2022, which has delayed the anticipated filing date to mid-2018. We believe these steps will help streamline the regulatory process. On the distribution side, as noted last quarter, the OEB set interim rates based on the current OEB-approved rates with no adjustments. On December 21st, we filed an update to the 2018-2022 rate application that described the impact to the proposed revenue requirement of various developments, including the updated cost of capital parameters and inflation factor for 2018 issued by the OEB, and reduction in the 2018 OM&A forecast and the 2018 to 2022 capital forecast of CAD 106 million.
In terms of the application process, a technical conference was held on March 1st to March 5th, and oral hearings are scheduled in the month of June. At this time, our expectations are that a decision would be anticipated towards the end of the year with retroactive rate adjustment. On April 12th, the OEB issued its decision denying Hydro One's application to acquire the shares of Orillia Power, citing that it is not satisfied that a no-harm test has been met with respect to the financial impact of the transaction to customers. It is Hydro One's view that the OEB erred in its decision, and therefore we filed a notice to review and vary the decision on May 2nd. This decision does not change in any way our long-term strategy to roll up Ontario local distribution companies, which we view as highly accretive and have executed successfully.
For the Avista transaction, as Mayo mentioned, we have reached settlement agreements with three state utility commissions and an in-principle settlement agreement with Oregon. All of the settlement agreements remain subject to approval by the respective commissions. We've received approval from the Avista shareholders and received antitrust clearance for the proposed merger. We recently received the Federal Communications Commission's consent to close the transaction. Approval was received by the Federal Energy Regulatory Commission earlier in the first quarter and was mentioned on the last earnings call. We are awaiting settlement agreements in Montana and approval from the Committee on Foreign Investment in the United States. I'll stop there. We'd be pleased to take your questions.
Thank you, Mayo and Paul. Before we ask the operator to explain how she'd like to organize the Q&A polling process, we're a bit tight on time this quarter as our annual shareholder meeting begins at 9:30 A.M. We're requesting participants wishing to ask questions this morning to please keep them to a single topic so that as many people as possible have an opportunity to participate. We will be ending the call at 8:45 A.M. as a result of our need to go to the annual shareholder meeting. Please go ahead, Candice.
Thank you. Ladies and gentlemen on the phone lines, if you would like to ask a question at this time, you may press star and then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Linda Ezergailis of TD Securities. Your line is now open.
Thank you. It was very helpful to get an update on your Avista acquisition accretion estimates. I'm wondering if you could also maybe help us understand the net cash flow impacts of both U.S. tax reform as well as your settlements. How has this informed any sort of recent discussions by the debt rating agencies? Are they looking for you to make any sort of adjustments to your financing plans or anything as a result?
There has been an impact to our cash flow in line with the accretion metrics that we talked about earlier. We are meeting with the debt rating agencies later in the month, and we will take them through the impact and expect to have a favorable rating from them on the back of that.
That's helpful context. Just as a quick follow-up. As the close of Avista nears, how are you thinking about your U.S. acquisitions strategy given U.S. tax reform, the current regulatory environment, the capital market conditions, and any sort of actual acquisition opportunities that might be floating out there?
Hi, Linda. It's Mayo. Thanks for your good question. One is we're really entirely focused on closing Avista. We're working with their team, building up the integration modeling. We've got some very robust thoughts about what'll be practical applications of some of the good work that we've done in our business, and they've done in their business, and applying those cross-border. The entire focus is on that. We're not actively pursuing other opportunities in that particular geography. We really focus entirely on getting Avista closed. It's sort of our no-harm test is that that's our focus, and we won't pursue other opportunities that in fact may impair that.
Secondly, as we look at our own local market, as Paul had mentioned, we see the local distribution company market, which there's still 54 local distribution companies in, is highly attractive and quite frankly, beyond compelling in terms of the financial metrics. One of the, it's a small example, Orillia, which we've been working on for some period of time, unfortunately has just taken a longer period of time than one would anticipate in the regulatory environment. The city is just thrilled to have Hydro One come in and assist them in their infrastructure. It's an accretive transaction for us. It's a nice tuck-in. There's lots of opportunities here in Ontario. KPMG's analysis some years ago demonstrated that a full consolidation of the entire market, that there's generally about CAD 1.5 billion in synergies in this Ontario market.
That's some years in the future, I'm sure, that'll take to see that all occur. From a position that we're in today, we're the natural acquirer of these businesses. We work very well with the communities, and quite frankly, we surround every community in Ontario. We've been very good neighbors.
Thank you.
Thank you. Our next question comes from Robert Catellier of CIBC. Your line is now open.
Hi, good morning. I'll start with Avista. I'm wondering how the politics in Ontario are influencing the regulatory approval process there. Specifically, can you comment on the CFIUS clearance process?
Sure. Let me start, then I'll ask Jamie to join in, as Jamie's been charged with the work around clearing the regulatory hurdles. Just fortunately, myself and the chairman of the board have had recent meetings with the Avista Group. Certainly, they're very interested in knowing the activities here in Ontario in terms of the election. Their confidence is very high in our organization and the value creation between the two organizations. Certainly, it'd be their greatest hope and our expectation that politics won't find their way into ultimately affecting any of the operations here at Hydro One or ultimately at Avista. We're monitoring. We're running our business as investors would expect us to. It will not change anything that we're doing in terms of the planning for integration and opportunities that we think in terms of cost benefits in the particular business.
We are certainly at this time are not anticipating any unintended material effects to either business, and that's the conversation we've had with their board, and they're satisfied with the conversation. Jamie, do you want to talk about CFIUS?
Sure. CFIUS is really a national security review. We don't have any visibility into where that is right now, other than it's just moving forward in the ordinary course. They haven't asked any follow-up questions. I'd be very surprised if Ontario politics was factoring into that review at all. We expect that to be successfully prosecuted in the next little while.
I might just, to your question, Robert, follow up with the final point you ask about in terms of the regulators. They're certainly observing and watching the Ontario election and taking a view on it. To date, the team and Jamie's work has methodically and mechanically and in good order, processed through the regulatory authorities' discussions/negotiations. We're very positive about the constructive nature of our relationships. Quite frankly, I would just say that this was really laying the groundwork early on when myself and other leaders went out to visit with the governor and the commissioners in very early days to not only pay our necessary respect but also to demonstrate our interest and capabilities in their market. Hydro One bringing our balance sheet and expertise to their market and sharing best practices is highly attractive to leadership in all of those states.
Okay, that's pretty good color. Thank you. I just wanted to move on to the LDC consolidation. You struck a bullish note there in your comments about what's possible in Ontario and the accretion. As you mentioned, there's been some delays with Orillia. I'm wondering how the Orillia decision impacts your view on either strategy as to how you approach these acquisitions or ultimately the potential accretion. Could you just address the LDC consolidation, please?
Sure, Robert, I'd be happy to. I think it's a matter for us of we're poised to be available to communities that would like to consolidate and have Hydro One take care of their infrastructure. For us, it doesn't go to price. It just simply goes to the process around the regulatory. We're going through some change in the regulatory environment where we're going from cost of service to performance-based, which we think is quite attractive and multi-year programs, which, for us lay out the financial opportunities well into the future. I think it's just a case of the market settling into its pace and finding its footing. We're working directly hand-in-hand with the regulators to find that balance, and they've offered some new alternatives to what we've experienced in the past.
In this particular case of Orillia, they've got rate certainty for 10 years, and the regulators ask for years 11 and 12. We feel comfortable that we can give them, in fact, our view of 11 and 12. At the end of the day, they stand to regulate us in 11 and 12 regardless. I think it's just a matter of with these changes we're going through that both the company and the regulator maturing together to get to a more succinct conversation and closing process to find our way to see more of these opportunities. We remain quite positive in our attitude and our offering with the communities, and we're just being patient at the moment.
Okay. Thank you.
Thanks, Robert.
Thank you. Our next question comes from Andrew Kuske of Credit Suisse. Your line is now open.
Thank you. Good morning. I think the question's probably for Mayo to start, maybe also for Jamie. Just on maybe some clarity on the governance agreement that Hydro One has with the province versus some of the election noise that's out there right now.
Sure, Andrew. I would just comment at the highest level we can, of course, get in any kind of detail you'd like or even offline, but simply put is we're just going through the ordinary process. We have a governance agreement with the provinces. I think you're aware that they are a shareholder, not a manager of the business. They're, of course, politics around hydro. Hydro as a commodity has been very high. Really, unfortunately, the focus has come on to Hydro One a good bit. The reality is that the key theme here is really the Global Adjustment, which is a 10-12 years historical legacy that's causing certain strains on people's budgets. Of course, Hydro One has done our work and quite frankly, very successfully lowered the cost of hydro for our customers by 31% on average for the next three years.
We're quite frankly, looking forward to getting through the election. We don't have a view or a bias in that election. The fact is that I think in our view would be once we clear it and the Hydro or electricity becomes less of, let's say, a lightning rod, that things will smooth out, but we're not losing our focus as an organization in the meantime. I don't know if you have any other questions around that, Andrew, but that'd be our view at this time.
That's helpful. Then just maybe one extension on it, what kind of runway do you think you have on cost reductions looking out into the future to effectively help reduce the bills? Because obviously the power cost is one issue, and that's not you. You're really on just the T&D side of it, but how much controllable cost do you think you can strip out of the organization and pass on to ratepayers?
Frankly, that's the area I'm most excited about, frankly. When we think about to date, we're CAD 114 million in cost savings, CAD 89 million in 2017 alone. We've already, as mentioned in our notes, have had really, really good progress early in the year. I would say our organization's just hitting its stride in terms of finding efficiencies and productivity, and we're going to continue to be able to harvest those opportunities over the coming years, and not months in any sake, but years. I think this has a long trajectory of opportunity for the company, and I think it'll be accentuated by the combination of ourselves and Avista.
I think the combination is going to provide some powerful outcomes in both cost savings, productivity, and quite frankly, I'm really excited about the innovation side of the business where they've had a great progress in their businesses, whether it was Itron or Smart City. They've got some real good programs underway. We've got our telematics, we've got our Move the Mobile, which we've harvested lots and lots of value. In fact, last year, our operations team reduced by over 1,000 vehicles simply just due to our analytic program on use of equipment. We've got a good highway ahead of us. It's an area we're quite excited about.
Frankly, having the performance incentive rates over the course of a four or five-year allows us to not only keep but also to share after a certain point those with customers, which we think is appropriate and highly attractive to us. It will be, I think you'll see the theme for the organization for years to come.
That's great. Thank you.
Thank you very much, Andrew.
Thank you. Our next question comes from Mona Nazir of Laurentian Bank. Your line is now open.
Good morning. Thank you for taking my question. My first question just has to do, and it's a clarification on the Avista accretion. Depending on where you're starting for that mid-single-digit accretion and then netting out the U.S. tax and higher settlements, is it true that you could still have some accretion, albeit very minimal, which I believe you stated on the past call? I'm just wondering if that still holds true.
Just to reiterate, we did say mid-single digits. The tax impact about CAD 0.03.
Yep.
The settlement's about, as we mentioned here, about CAD 0.02. We are right around CAD 0.00-CAD 0.01 at the moment.
Okay.
That's for 2019. That's looking out into the future, in years beyond, we still see the deal as being attractive.
This question's more for Paul Dobson, but I'm just wondering if you could speak about your first few months at Hydro One and how that transition has gone, and just looking at the company or speaking about the opportunities that you see.
Sure. Yeah. Thanks for the question, Mona. Yeah, it has been quite a whirlwind, I must confess. Coming from what I thought was a very progressive company, coming back home here to a utility that I'm very familiar with. I've been really pleasantly surprised by the amount of innovation, the quality of the people, and just the sheer amount of really great ideas that are here about how we can create value and continue to service customers. Just within our home country here of Ontario, there's plenty of opportunities from the roll-ups to the other productivity measures. When we look beyond Ontario, I think there are other opportunities there as well. Like I said, it's been a whirlwind. It's been a lot, to be honest with you, but really excited about the opportunity.
Okay. Thank you.
Thank you. Our next question comes from Robert Kwan of RBC Capital Markets. Your line is now open.
Morning. Whether it's additional U.S. acquisitions down the road or the roll-off opportunities, I'm just wondering, when you look at your credit metrics, how much balance sheet capacity do you think you've got or what you feel comfortable with to add leverage to pursue any of these new initiatives?
Well, depending on the size of what we're talking about in terms of other initiatives, certainly the roll-ups, the smaller roll-ups in Ontario, I think we could comfortably accommodate. If we're looking at something larger, we would likely have to go into the capital markets and issue equity at that time.
I guess, Paul, can you quantify what larger might mean to you?
Well, not at this time. It depends on what the opportunity is. It depends on what the jurisdiction it's in, many factors.
Sorry, go ahead, Paul.
No, that's it.
Okay.
That's how I characterize it.
I guess, maybe if I can just turn that around and you think about capital allocation, have you thought about adding leverage to the balance sheet just with the capacity you've got to buy back stock or put differently, effectively acquiring your business at what right now is a kind of a mid-teens P/E multiple, which I would think would seem pretty attractive versus what else you'd have to pay to buy things?
Well, at the moment, we're focused on closing the Avista transaction and raising the debt required to close that transaction, that will get us to the structure that we're comfortable with.
When you say comfortable with, would that be where you'd be long-term structure, i.e., you would finance kind of new larger initiatives in line with where the credit metrics would be, i.e., you wouldn't see material double leverage?
Yeah, I think that's a fair way to characterize it. Yes.
Okay. That's great. Thank you.
Thank you. Our next question comes from Jeremy Rosenfield of Industrial Alliance. Your line is now open.
Yeah, thanks. You mentioned off the top there was a really great response to some of the April ice storms. I was just wondering if you have any ideas, in terms of costs associated with the storm recovery and whether that would be above the threshold for which you intend to file for cost recovery or if it's still not above that threshold.
Yeah, this is Greg Kiraly, Chief Operating Officer. Through the first quarter, we had some storm activity, but we were actually slightly below what our storm budget was, both in capital and O&M for the year. I can tell you with April and May, that situation has changed, and we'll obviously inform you as those costs come in. We did have three large storms between April and early May that affected literally 1.3 million customers just in those three storms. We definitely will be over our storm-specific budget for the second quarter at that point. That's all part of our redirection process, right? We know we're going to incur these storms, and we know we have flexibility within our work plan, and we're going to have to look to other areas where we can redirect funds in order to fund those storms.
We're comfortable with it. Yes, we were hit hard with the storms, and that'll be reflected in the second quarter. We believe we've got our O&M costs
A discipline around execution such that now we can redirect and recover from any over budget condition that we might have.
Okay. Maybe just a separate question, more strategic. Mayo, obviously, acquisitions of municipal electric utilities in Ontario, right within the fairway for the business. Have you ever thought about branching out to municipal water utilities and whether that might be something that could be interesting on the basis that there may be some strategic benefits or some O&M cost savings that could be transported or harmonized between existing business? Any thoughts on that?
Sure. Right now, the multiples, I think for the immediate future, the multiples on the water businesses are pretty steamy. They're very high. It's an area we're aware of, but not an area that we're actively pursuing. We're really focused on our core competencies. Quite frankly, we're very excited about the fact that we not only have the complementary T&D business, like as an example, again, with Avista, we've added also a run-of-the-river generation, which is fully regulated. We also get some exposure to wind in that business, we're also entering into the renewable area. The fact that it's all fully regulated and one of our opportunities we see is that in those particular markets, those are 1-year applications on regulation, and we see the potential to demonstrate an ability to go to multi-year performance-based incentives. There's an opportunity there.
I guess it gets back to Jeremy, that there's so many, such an opportunity-rich environment for our organization right now. As even going back to Robert's question, our focus really has to be on integration. Pat Meneley's team is, and supported by Paul's group on the finance side, has a very sophisticated, well-developed integration program, fully staffed and ready to roll. We're focused on job one, and that would be that particular activity. We've integrated over 90 local distribution companies over the course of many years and about five of them in the last couple of years, including Great Lakes Power. We've got and are developing the muscle in that area, which we're quite happy about. I think right now, although some years down the road, there may be opportunities to diversify further and no doubt about billing and integrating a water utility.
Those things are all practical applications. The first thing is right in the center of our core competency, we're going to focus on T&D and regulated and adding these complementary generation opportunities.
Great. That's a very comprehensive response. Thank you, Mayo. That's it for me.
Thanks, Jeremy. Thank you.
Thank you. Due to time constraints, we now have time for one last question, and our final question comes from the line of Frederic Bastien of Raymond James. Your line is now open.
Lucky me. Guys, just wanted to build on some of the earlier questions around strategy. Are you in a position to now engage in discussions with potential targets to
Frederic, we think we lost you here. Engage in potential, and then you dropped off. Operator?
Frederic, if your line is on mute, please unmute. Once again, Frederic, your line is now open.
Maybe we could go to our last question, Omar, and then we wrap up.
Okay.
I think we'll touch base with you, Frederic after the call. We'll proceed ahead to close the call. Thank you, Candice. The management team at Hydro One thanks everyone for their time with us this morning during what definitely is a busy period. We appreciate your interest and your ownership. If you have any further questions that weren't addressed on the call, please feel free to reach out and we'll get them answered. Thank you again, and enjoy the rest of the day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.