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Operator
Good morning, ladies and gentlemen, and welcome to the Hydro One Limited's second quarter 2021 analyst teleconference. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. As a reminder, the call is being recorded. I would now like to introduce your host for today's conference, Mr. Omar Javid, Vice President, Investor Relations at Hydro One. Please go ahead.
Omar Javid
Good morning, everyone, and thank you for joining us in Hydro One's earnings call. Joining us today are our President and CEO, Mark Poeska, our Chief Financial Officer, Chris Lopez, and our Chief Regulatory Officer, Frank D'Andrea. In the call today, we will go over our recently filed joint rate application, our sustainability goals, and the quarterly results. We will then spend the majority of the call answering as many of your questions as time permits. There are also several slides that illustrate some of the points we'll address in a moment. They should be up on the webcast now, or if you're dialed into the call, you can find them on Hydro One's website in the investor relations section under events and presentations. Today's discussions will likely touch on estimates and other forward-looking information. You should review the cautionary language in today's earnings release and our MD&A, which we filed this morning regarding the various factors, assumptions, and risks associated that could cause our actual results to differ as they all apply to this call. With that, I'll turn the call over to our president and CEO, Mark Poeska. Thank you, Omar.
Mark Poeska
Before we begin, I'm sorry to share that in mid-June, one of our employees lost his life after being struck by a motor vehicle while working in the Cappas casing region. Our thoughts and prayers are with his family, friends, and coworkers. Along with all our employees, executives and directors, I'm devastated that we have experienced this tragic loss. Safety remains our top priority and we must eliminate serious injuries in our company. The investigation on what led to this incident is ongoing and together with the authorities, we're looking to understand the details and the cause of the accident. We're yet again reminded of the hazards our employees face and the extremely tough conditions in which they work to deliver reliable electricity and fulfill our customers' needs. To operate a safe and resilient grid, our assets need investment, and our customers are supportive of reinvesting in an electricity system that will provide them with reliable power. On August 5th, we filed our comprehensive five-year investment plan for both the transmission and distribution segments of our business with the Ontario Energy Board. Informed by extensive customer engagement, this is our first ever joint rate application. It is a strategic plan to significantly improve reliability for our distribution customers, manage risks, prepare for the impacts of climate change, support communities, and contribute to economic development. It balances the needs of customers with the impact on bills through our hard work, innovation, and continuous improvement. In 2019 and 2020, Hydro One conducted customer engagement surveys to reflect customer needs and preferences for the transmission and distribution system investment plan. The engagement was the most comprehensive in Hydro One's history. with nearly 50,000 customers participating. For the first time, investment planning and customer engagement processes were integrated over two phases and customer feedback was provided as an input into the overall plan. In addition to hardening the system to withstand the impacts of climate change and to make it more reliable for future generations, We learned just how important it is not only to Hydro One, but also to our customers that we one, proactively replace aging infrastructure to avoid more costly repair, maintenance, and emergency work. Two, make investments to improve reliability. And three, make the system more resilient. We also conducted a systemic review of our asset investment needs, driven by asset condition and system requirements. What we found was a significant portion of transmission, distribution and common assets have deteriorated to the point where they pose a risk to achieving business and customer objectives around safety, reliability and the environment. This needs to be fixed. and we are confident that our five-year plan is the right plan for all Ontarians. We have a critical need to modernize our grid, to prepare for future integrated distributed energy resources, to prepare the system for severe weather and the impacts of climate change, to prepare for the greater electrification of the economy and enhanced cybersecurity, to ultimately develop a modern, flexible grid of the future. We have seen that Ontario has continued to prosper and there is continued economic growth that requires access to safe and reliable power. Whether it's the agriculture sector in Southwest Ontario or mining in the North, electricity is the backbone of the economy and we're committed to connecting new customers and facilitating economic prosperity. As a result of our robust asset management approach, in this significant customer outreach. We are proposing capital expenditures of approximately $12.5 billion over the 2023 to 2027 period. Of this amount, approximately 67% is geared towards system renewal. The remainder represents a combination of one, non-discretionary spend driven by our obligation to connect, And two, investments ensure that we are meeting operational objectives and addressing future customer requirements. Some examples of the work that is contemplated under the extensive investment plan are as follows. For the transmission segment, we will invest approximately $3.5 billion to address station assets, including those which link major generation resources to major load centers, and those that serve local distribution companies and large industrial facilities. We've allocated approximately $1.9 billion to address lines assets which serve smaller towns, First Nations communities and businesses, pipeline compressor stations, and large load facilities such as mines and paper mills. For the distribution business, we will modernize infrastructure. to detect, repair, and restore power more quickly, thereby improving resiliency and reducing the impact of power outages on our customers by up to 25% over the application period. We will install approximately 1,200 remote operable switches and reclosers, approximately 5,000 fault indicators. We will replace 51,000 wood poles in poor condition and refurbish another 14,000 poles. We will also add 120 distribution station transformers and facilitate new load connections. And these are just some examples of the extensive work required. Combined, these transmission and distribution capital investments will result in a rate-based growth of approximately 6% per annum for the five-year period 23 to 27. This is an increase of approximately 1% from our previous rate-based growth guidance till 2022, reflecting the needs of the system and our customers. We will do this work while becoming even more efficient and more productive. The savings as a result of our combined hard work, our efficiency, and our productivity to date are already flowing to our customers. Since the IPO to the end of 2020, we generated over $738 million in productivity savings. These and future improvements allow us to reduce the rate impact for our customers. And I'm pleased to say that based on these numbers, in the first year of the new investment period, customer bills will decrease for the distribution segment by 1.8%, and decrease for transmission segment by 0.3%. Over the five-year period of the application, distribution and transmission customers will see an average increase that is less than expected inflation. Distribution and transmission bills will have an average annual increase of 0.8% and 0.3% respectively over five years. To put that into context, our typical residential customer's bill will increase by an average of $1.68 each year for the five-year period. Again, our work to drive efficiencies and continually improve productivity has helped us to keep our costs as low as possible for our customers. And as we consider the needs of the grid, we're also taking the initiative to be mindful of the environment in which we operate. I am proud to report that we have received a number of accolades on the sustainability front. We received the Environmental Excellence Award from the Electricity Distributors Association for our pollinator program. We're recognized again by corporate night as the best 50 corporate citizen in Canada. and we were designated a sustainable electricity company yet again by the CEA. So today, we are also excited to share our annual sustainability report. It highlights the important progress we have taken over the last year and sets out our new sustainability priorities centered on people, planet, and community. We have further increased our transparency by aligning with GRI and SASB standards and are on our way to alignment with the TCFD standard. For PLANET, we're including climate change considerations into decisions and plans to ensure grid resiliency through our adaptation strategies. We're also making commitments to do our part in mitigating climate change and establishing new targets. While we only account for 0.2% of Ontario's emissions, we plan to achieve a 30% reduction of greenhouse gas emissions by 2030. Furthermore, Hydro One is committed to achieving net zero GHG emissions by 2050. This means that along with many other initiatives, we're planning on converting 100% of our fleet of sedans and SUVs to electric vehicles or hybrids by 2030. For people, we are setting targets and working to identify, eliminate and prevent systemic barriers in the workplace. As signatories to the Catalyst Accord, we're committed to achieving in our workplace at least 30% of female executives while our board is already at 50%. We also signed the Black North Initiative Pledge under which we are committed to having 3.5% black executives and board of directors as well as hiring 5% Black students in our workforce by 2025. These steps will renew our promise to identify, eliminate, and prevent systemic barriers in the workplace, and build a diverse, equitable, and inclusive workforce at Hydro One. And finally, for communities. We realize that Hydro One has a critical role to play in helping Ontario emerge stronger from the COVID-19 pandemic. We are continuing to support the Ontario economy by investing in our communities, hiring locally, paying taxes and buying goods and services from local suppliers, including Indigenous suppliers. In 2020, we purchased $1.4 billion of goods and services from Ontario suppliers. Our shared success depends on our ability to build trust as a reliable partner and good neighbor for communities and the people of Ontario. We also recognize that we serve approximately 100 First Nations communities across Ontario, and we are committed to building long-term relationships with these communities. While we spent $42 million with Indigenous communities in 2020, we're excited to announce that we will increase spending to 5% of the company's purchases of materials and services on Indigenous procurement by 2026. In addition, as part of our community investment program, we will ensure that 20% of our corporate donations and sponsorships support Indigenous communities. As I've referenced in previous calls, I'm pleased to say our unions share our overall partnership mind. Recently, the members of the Society of United Professionals voted in favor of renewing the collective agreement. This collective agreement covers approximately 1,800 employees in frontline supervisory, engineering, and professional roles across the company's operations. The agreement reflects our shared commitment to working together. Notably, for the first time, wage increases included an equity component. The agreement also allows for increased productivity, enhanced flexibility, and a renewed emphasis on diverse and inclusive practices. We are now in a period of labour stability with this agreement in place for the next couple of years. And with that, I'll turn it over to Chris to discuss our positive financial results for this quarter. Over to you, Chris.
Chris
Thank you, Mark. Good morning, everyone, and thank you for joining us today. I hope you and your families are safe and doing well. I'll take this moment to express my sincerest condolences to the family, friends, and coworkers affected by this tragic motor vehicle accident. My thoughts and prayers are with you all. With respect to the business, We are excited about the recent filing of the joint rate application that includes the investment plan for both our transmission and distribution businesses for 2023 through to 2027. Equally, I am energized by the recent release of our sustainability targets and happy to share our sustainability report, which outlines the progress we have made and the impact we have had on people, the planet, and the communities we serve. In terms of our financial results for the quarter, we saw a decline in earnings per share to 40 cents from $1.84. Although this seems dramatic, the decline was primarily due to the Deferred Tax Asset, or DTA, decision by the Ontario Divisional Court that was rendered in Q2 of 2020, which led to an $867 million income tax recovery last year. On an adjusted basis this quarter, we saw an increase in earnings per share to 40 cents compared to 39 cents in the same period last year. The main drivers of higher adjusted earnings this quarter were Ontario Energy Board or OEB approved rates for the transmission and distribution segments, higher demand and lower COVID-19 related expenses. These are partially offset by one-time revenues for the transmission segment in the second quarter of 2020. Higher operation and maintenance administration costs and higher depreciation and asset removal costs. Our second quarter revenue net of purchase power was higher year over year by 2.6%. This was comprised of OEB approved rates for 2021, as well as stronger demand in both the transmission and distribution segments. Transmission revenues were lower by 2.4%, while distribution revenues net of purchase power were higher by 8.1%. For the transmission segment, the revenue reflects OEB approved rates resulting from the transmission rate filing received in the second quarter of last year, as well as strong peak demand this quarter. However, the year-over-year revenue increase was offset by the one-time impacts of the OAB decision last year, which included the catch-up revenue for the first quarter of 2020 and the recognition of conservation and demand management revenues, both of which drove last year's revenues higher. Year-over-year peak demand for the quarter was higher by 1.8%, driven by strong demand in April and June, partially offset by lower demand in May. For the distribution segment, in addition to the OEB approved rates, electricity distributed to Hydro One customers was higher by 8.6%. That said, nearly 48% of the increase was attributed to the inclusion of demand from the acquired electric local distribution companies, or LDCs, Peterborough and Aurelia, which had closed in the third quarter of 2020. And as such, were not included last year. While these two LDCs contributed towards higher distribution revenues, the impact in net income was not material. On the cost front, operating maintenance and administration expenses were higher by 7% year over year. The year over year comparability is challenging as last year we incurred higher COVID-19 related costs due to the temporary stand down of our workforce in the face of the pandemic. At the time, these COVID-19 costs were largely offset by lower work program costs as programs were deferred. This year, the relationship of COVID-19 costs and work program costs has reversed. We incurred minimal COVID-19 costs, but higher work program costs. The higher work program costs are driven by timing of vegetation management work, our emergency restoration efforts, and customer programs in the distribution segment. As referenced earlier, OM&A was also higher due to the acquisition of Peterborough and Aurelia. Consistent with previous quarters, the financial impact of the measures taken by Hydro One to support our customers, including the Pandemic Relief Fund, financial assistance and increased payment flexibility, extending the Winter Relief Program, and the Small Business Pandemic Relief Program launched in January 2021 were not material. Depreciation expense was higher year over year due to the increase in capital assets, which is consistent with our stated capital investment program, as well as higher asset removal costs and environmental spend. On financing, we saw a decrease in interest expense in the quarter due primarily to the recognition of carrying charges associated with the recovery of the DTA amounts previously shared with ratepayers. The carrying charges will be minimal going forward. Financing costs also declined due to higher capitalized interest as compared to last year due to a higher average balance of assets under construction in the second quarter of this year. Income tax expense was $26 million for the quarter compared to an income tax recovery of $849 million in the same quarter last year. The increase in income tax expense was primarily due to $867 million income tax recovery recognised last year following the Ontario Divisional Court decision on the deferred tax asset. When adjusted for this one-time item, the adjusted income tax expense for the second quarter last year was $18 million. The $8 million increase in adjusted income taxes was due to lower net deductible timing differences and higher pre-tax earnings. The effective rate this quarter was 9.8% versus 6.9% last year and consistent with our previous guidance of 6% to 13% for periods prior to the implementation of the deferred tax asset decision. With the implementation of the DTA decision on July 1st, 2021, And as communicated last quarter, the effective tax rate guidance will now change to 14 to 22% over the next five years with the most significant impact over the 21 to 2023 DTA recovery period. As a reminder, the change in effective tax rate will be net income neutral. On June 17th, 2021, the OEB issued their final guidance on the rules and operation of the deferral account established for utilities to track the impacts arising from COVID-19. The OEP determined that eligibility for recovery of most balances will be subject to a means test based on the utility's achieved regulatory ROE. Given this guidance, we have not recognised any amounts related to COVID-19 costs as regulatory assets. As a reminder, we had reversed the recognition of regulatory assets associated with bad debts the fourth quarter of 2020, and had recognized the expense in the same period. As a result, there was no net income impact from this guidance. Moving to investing activities, capital investments for the second quarter was $553 million, which is a 28.9% increase from the second quarter of 2020. The increase was mainly due to a higher volume of refurbishments and replacements for stations, lines, and wood poles, along with higher investments in multi-year development projects for the transmission business, higher volume of work on customer connections in both the transmission and distribution businesses, and the construction of a new Ontario grid control centre in Aurelia. We placed $300 million of assets in service in the second quarter, an 81.8% increase compared to the prior year. This was largely a result of the lumpy nature of placing assets into service. The year-over-year increase related primarily to transmission segments, which had substantial completions and higher spend on lines and component replacements in 2021. In the distribution segment, we saw a year-over-year increase of 40.2%, due mainly to a higher volume of work on customer connections and assets placed into service for system capability reinforcement projects. On guidance, we continue to be committed to and affirm our target of 4% to 7% earnings per share growth through 2022. We expect to provide guidance post-2022 after the approval of the joint rate application. As promised, we have updated the future capital investment tables for the period 2021 through to 2027 for all segments. We have also provided the annual expected rate-based numbers and corresponding revenue requirements for the amounts included in the joint rate application. Between the filing of the joint rate application and reaffirmation of our guidance, Hydro One has and continues to demonstrate a resilient business strategy and stable fundamentals. Together, they allow us to support our customers and communities while delivering positive financial results. I'll stop there and we'd be pleased to take your questions.
Omar Javid
Thank you, Mark and Chris. We asked the operator to explain how they'd like to organize the Q&A polling process. In case we aren't able to address your questions today, my team and I are always available to respond to follow-up questions. Please go ahead.
Operator
Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Mark Jarvie with CIBC Capital Markets. Your line is open.
Mark Jarvie
Thanks. Good morning, everyone. The first one, just if I look at the updated CapEx, putting aside the joint rate application, looks like the 2021 and 2022 spend has gone a little higher. Can you just talk a little bit about drivers? And I think also in the joint rate application, it aligns how you're allowed to be above a little bit the forecast for rate-based. Just maybe you can give us some context in terms of where you think you'll end up at the end of 2022 in terms of how much you're allowed to be off of the original forecast in terms of rate-based growth.
Mark Poeska
Yeah, Chris, do you mind taking that? Sure.
Chris
Thanks, Mark. Thanks for the question, Mark Jarvie. Yeah, so we did increase 21. I think it went up by $140 million approximately. And really what's driving that, Mark, is increased demand work, so customer connections and growth in the distribution business. But on the transmission side, as you know, our long-term projects are lumpy in nature. So what we're doing there is just moving – capex between years. It doesn't have a material impact on rate base.
Mark Jarvie
And then on the distribution side, does it have a sort of a small favorable impact in terms of where you'll trend to in rate base for the next couple of years?
Chris
It will do. As I said, it was $40 million of additional spend on distribution. And the nature of distribution is changing a little bit. It now is a combination of it's still mostly sort of in-year. When you spend the capex, it's in service within 12 months. But there are some longer-term projects now helping connect upstations and so on that don't fall on the transmission side of the business. So it has a little bit of lumpiness to it, but the majority of that $40 million will translate into increased rate base. And as a reminder, we can be within that dead band of plus or minus 2%.
Mark Jarvie
Got it. And then when you go through some of your materials or some talk of, like, on the general application impacts of climate change on physical infrastructure, Are you guys seeing anything in terms of increased aging or, you know, a bit more wear and tear in terms of strain on reliability? And, you know, how does that sort of play into, like, sort of the incremental investments you see needed over the next sort of five-year window?
Mark Poeska
Yeah, it's Mark here. We did build in the impacts of climate change into our investment plan, particularly into, one, dealing with our poor condition poles. but also our vegetation management, and in a big way, investing in technology to help us with reliability in our assets. So I talked about reclosers and fault finders and things like that. So we have built in fairly significant investments to reduce or improve our reliability by about 25% on the distribution side, and a lot of those are reflected in adapting to climate change.
Mark Jarvie
And just to follow up on that, Mark, in that technology improvement, is that sort of a little bit of an OpEx to CapEx switch where you can put that, you know, what you normally do on maintenance spending more into some capital investments? And that helps, I guess, just keep those fairly stable here. Is that part of the thesis you're on?
Mark Poeska
Yeah. Yeah, that's a great point. We're investing in technology, which will reduce things like truck rolls and things like that in the event of outages because we'll be able to restore the system using our central control center in a more efficient way. Okay, great.
Mark Jarvie
I'll leave it there. Thanks, guys.
Operator
Thank you. Our next question comes from Maurice Choi with RBC Capital Markets. Your line is open.
Maurice Choi
Thanks, Anne. Good morning. My first question I wanted to just pick up on, might be a little bit too early to ask, but you filed the application on Friday. Have you received any early feedback from your stakeholders, including those in government as well as other political parties? As well, you mentioned obviously you've done a few rounds of feedback with other stakeholders in preparation for this application. How significantly different is this application from those rounds of feedback?
Mark Poeska
I would say our approach to consulting with stakeholders in this round is wide and significant. We also did a technical briefing for media so the media understands what we're asking for in our application. The feedback we've received is very similar to what we received from our customers. People understand our need to invest in the system. They understand what the drivers are. And the approach we're taking is to be open and transparent right up front on what we're asking for and why. And that's why we did a proactive technical briefing with media the day after we filed the application. Our customer engagement really showed a robust support from our customers, which helps with stakeholders such as government and others that we did that work so that we can demonstrate that our customers are supportive of what this investment plan is.
Maurice Choi
And just to follow up on that, have you had any engagement with them since Friday? With customers or? No. Specifically those with the government as well as other political parties?
Mark Poeska
No, not since Friday we haven't. We did do the media technical briefing on Friday, like I talked about. We did brief stakeholders, some of them the night before, like government, and they're supportive of our investment and understand why we need to do it.
Maurice Choi
Great. And just to finish off my second question specifically, The company has always had this simple and easy-to-understand 555 strategy in this regulatory period. As you look at the JRAP, is there anything in there that would cause you to believe that your EPS and dividend growth wouldn't also march in line with your rate-based CAGR?
Mark Poeska
Well, so we've given guidance out to the end of 22, and we will update that guidance after the approval of JRAP. I think it's too premature for us to speculate on that. We need to go through the process with the OEB and finalize our rate order, and then we will update that guidance going forward.
Maurice Choi
At least on a funding plan, I suppose that you would be reconfirming that no equity issuance would be required?
Mark Poeska
That's correct. With the plan that we put forward, we will not need equity to support the investment plan. Perfect. Thank you very much.
Operator
Thank you. Our next question comes from Rob Hope with Scotiabank. Your line is open.
Rob Hope
Good morning, everyone. Two kind of longer-term conceptual questions. The JRAP's got a placeholder ROE of 8.34%. How are you thinking about kind of you know, that ROE relative to your cost of capital as well as, you know, could you, you know, would you be open to the OEB, you know, revising how it's looking at cost of capital and would you try to spur that?
Mark Poeska
Yeah, so Rob, I'll start. Maybe I'll ask Chris or Frank to weigh in because we do have Frank, our chief regulatory officer online. But the 8.34 is what the ROE would be based on the interest rate if we were to set it today. We will be updating that in Q4 2022 based on the actual formulaic approach for our ROE based on the interest rates at that time. So as I said, the 8.34% is essentially a placeholder for today, and that will get updated to reflect the differences. Frank, do you have anything you want to weigh in on that?
Rob
No, you've got that correct, Mark. It is a placeholder for now, and we will look at it when we file our final draft rate order from the OEP. So that will be determined in the fourth quarter of 2022.
Rob Hope
Okay.
Chris
Robert's Chris here. Just remember, that is a formulaic process, so it's based on the movement in the Canadian long bonds. The number you see there at 8.34 was the number that was set by the OEP. in Q4 of last year. So just as a matter of process, we use the rate that they've got out there in the public. They'll update that again this year and they'll update it. The one that will apply to this application will be in Q4 of 2022. So it'll depend on your view of interest rates at that point in time. If you were to update it today, it would be 8.7% or approximately around that number. But if you look forward to what you think it might be in 2022, that's what would get factored into the ROE.
Rob Hope
Okay. And just to confirm, you're happy with the formulaic ROE calculation? You wouldn't look to kind of spur a revision of the cost of capital parameters?
Chris
No. At this time, Rob, we're very happy with the – we think it balances risk and opportunity together. Now, again, if you were set at a certain point in time, say – the economy was in a very unusual place, like right at the beginning of COVID, that might be something we'd look at to say, look, how do we rebalance or adjust that given it's a five-year application? But we think there's sufficient time for that to play through by the end of 2022. All right.
Rob Hope
Thank you. And then kind of another longer-term question, you know, just going through the load forecast and the JRAP, you know, looking for kind of, you know, just a little bit of load here, but As we're seeing the potential electrification of the economy, how does that weigh into your thinking about potential upside to the demand forecast? I guess then the offset would be increased embedded generation. How are you thinking about the puts and takes on and benefits of additional demand?
Mark Poeska
Yeah, our load forecast is based on historical load and then the forward-looking consensus forecasts on things like economic drivers of electricity consumption, which includes GDP, housing starts, population, and those types of things. It also includes views on EV take-up and as far as overall electrification, we are seeing already a transition to electrification, which is built into our historic loads, which will carry through to the forecast. So an example would be the agriculture sector has already been transitioning over to electricity, and as far as that trend continues, it is built into our forecast. Thank you.
Operator
Our next question comes from Andrew McCuskey with Credit Suisse. Your line is open.
Andrew McCuskey
Thanks. Good morning. I guess this question is for Mark, and it's a bit of a philosophical question on how you thought about the JRAP from a positioning standpoint, and what effectively are you trying to solve for? Is it a capital deployed amount that generates a certain amount of rates growth, or is it from a benchmarking standpoint on where you really want to stand from transmission reliability distribution reliability with avoiding rate shock in between those two concepts.
Mark Poeska
Yeah, it really is balancing the need for investment in our assets based on condition of our assets with rates and impact on customers. And that's really why we did such an extensive outreach with customers. And we did assess with them different investment levels and what it would mean to their bills and ask them what they would support. We did it both for the transmission customers and the distribution customers and overall we had support from our customers on our level of investment with about half of them actually saying that we should be investing more and half saying we should be at where we are or lower. We think it's good support for our investment plan because it does balance the customer's needs and views with bill impacts. And in that, one of the big areas that customers were concerned about is reliability, particularly our rural customers. And this investment plan does improve reliability for them by about 25%. So I think we've found that balance there. Andrew, in this investment plan, and that's what we'll be putting forward as our evidence to the OAB.
Andrew McCuskey
That's helpful. And then just to go back to the two-thirds of the capital is really system renewal oriented, but clearly renewing a system that has facility age that can be 40, 50 years plus in some cases, you get a lot of productivity benefits of the new capital deployment. I think you gave some
Mark Poeska
so that you expect but is there ways to quantify that from a financial standpoint whether it's what many declines um future maintenance capital is there something you can give us on that front well maybe i'll talk about the condition and chris can weigh in on on the economics the impacts on that so so we've often talked about a third of our assets are end of life we don't replace Assets just because of age we plate replacement because of condition so and the end-of-life assessment gives us a general assessment, but then we've done Condition asset assessments and what we've found is is about 10% of our transmission assets are in poor condition today and And that means about 27% of our transformers 11% of our breakers 14% of our conductors and in this investment plan We're not even dealing with all of those that are in poor condition. We're dealing with a lot of them, but we don't even deal with all of those. So I believe that there is good evidence as to why we need to invest in those, and that's 67% of our overall investment plan. Chris, do you want to take the second part of Andrew's question?
Chris
So, Andrew, I think it's the same program we had from 2015 to 2020. Through that period, in Mark's comments this morning, he talked about achieving approximately $738 million of productivity savings over those five years. And that's really the benefit or the target of offsetting inflation every year. So that's translated into about $50 million per year. That will continue, and it gets roughly split over the longer term between our capital and operating programs. So up to this point, capital has been more like 65%, 70% of our program, and optics has been the remainder. So I would see that continuing over the longer term. I'll just remind you, Andrew, that's been a big benefit to ratepayers. And where they see that is they see it when we, if we over-earn, we share 50% of that benefit with ratepayers. And part of that first year rebasing that the ratepayers are seeing is that 1.8% reduction in bills or $3.20 per bill across the year, a chunk of that is due to the benefits of productivity. So that's us being rebased at the end of this rate period to those productivity benefits. So I see that continuing. Andrew, it will be roughly the same as what you saw in the past.
Andrew McCuskey
Very helpful. Thank you.
Operator
Thank you. Our next question comes from Ben Pham with BMO. Your line is open.
Ben Pham
Hi, thanks. Good morning. I wanted to go back on the financing funding outlook for the JREC program. You mentioned no need for equity. I'm wondering, I mean, it's a pretty big step up in CapEx per year. Your comments on no equity need, is that just taking your cash flow from operations plus the dividends and then you're financing opco debt at 60%? Is that Is that what's driving that conclusion? Chris, do you want to respond?
Chris
Sure. Thanks for the question, Ben. There's two things. At this point in time, we have some balance sheet flexibility that will take us up to our 60-40 debt equity, maybe slightly higher than that over this period. But we also have the large deferred tax assets on our balance sheet, which you might consider. And that sits around $2 billion. So we're monetising that as well. So as we do that, we don't need any additional borrowing to do that. And through the deferred tax asset decision, you saw the return of over $250 million of that amount in the next two to three years. And then after that, it's about $50 million per year. So that's part of it. And then the uplift in earnings, we hold that payout ratio constant, so we retain part of that to fund our growth. So we don't see a need for equity when we move from 5% to 6% through to 2027.
Ben Pham
Okay. And would you say that, given your source of capital, this new CapEx program, does it Does it restrict you to some extent on smaller LDC acquisitions? I know it's small, but does this need a point where you're a bit more restricted in what you can do outside of your base plan?
Chris
No, Ben. From our point of view, we understood the asset condition for longer than just this rate application. So we had been seeing this need for a while. It's now absolutely supported through customer consultation and so on. But that disallowed us to plan. I know some of the questions from analysts in the past have been, with the decision of the DTA, would you look at returning capital to investors? We said we would if we didn't see a need for it. But this is where the need comes. So we do not see it impacting, one, our ability to finance the application you have in front of you, or LBCs. And in the past, what I've said is, LDC consolidation should continue at approximately $1 to $200 billion per year. Now, if we did something large then, beyond that, then yes, we would look at how we would finance that. But $1 to $200 billion per year through this rate period, we would see no need for additional equity.
Ben Pham
Okay, great. And to truly wrap, any sense of timing on this session you've You had quite a lengthy time before the 2022 and we anticipate it's similar in the past and all the conversations you had so far, you had a couple months beyond just because of a joint application. I got any thoughts, initial thoughts on a decision?
Mark Poeska
Yeah, we expect a decision in the fourth quarter of 2022. The OEB process for an application of this size, bigger than $500 million, is 355 days from the date of notice of application, which we expect will be around August 9th, next year, if you go on that 355 days. But we really are expecting by Q4 of 2022.
Ben Pham
Okay, that's great. Thank you.
Operator
Thank you. Our next question comes from Linda Ezergalis with TD Securities. Your line is open. Thank you.
Linda Ezergalis
I'm wondering if I can get a sense of some of the aspects of your union agreement that was just reached. Are those already reflected in your JRAP? And also, how might we think of the expiry of your IT Capgemini agreement at the end of 2024? Is it reasonable to assume a renewal similar to what's in place currently? Any sort of context on those two agreements would be helpful.
Mark Poeska
Sure, Linda. Maybe I'll take the society agreement first, which is one that we recently signed. And it will take us out to 2023. So it was a successful bargaining with the society, and it resulted in a number of enhancements aligned to our strategic goals. And mainly, it's created a path to ensuring labor costs are better aligned to the market for society represented roles. And the agreement also helps us move towards our corporate D&I sustainability goals. As well as, as I said in my opening comments, a portion of the increases in the society agreement are equity-based, which ties more of our employees to the performance of the company, which we think is a positive outcome. It also maintains our existing contracting out flexibility. So as we see our capital plan growing, that gives us some flexibility there as well to contract out some of that work. So we think it was a good agreement for both our employees and for the company overall. And then the IT Cap Gemini, which is the second part of that, We have in-sourced a lot of the energy to Hydro One, a bunch of the IT. And then we have the outsourced agreement with Capgemini for the remainder of those services that used to be provided by energy. We do see that that is giving us an overall cost benefit by that new arrangement with Capgemini directly. I can't speculate on whether we will extend that contract at this point, but we are seeing that we are getting benefits out of that in the new arrangements directly with Capgemini instead of through energy and by insourcing the critical things that we wanted to have within the company.
Linda Ezergalis
Okay, thank you. And as a follow-up, just better trying to understand what's embedded in your JREP, How can we think of the inflation assumptions in your capital expenditures? And you have a capital factor as well, just trying to get an understanding of whether any sort of productivity factor is embedded in your capital factor in your formula as well.
Mark Poeska
Yeah, maybe I'll ask Frank to speak to how we've embedded the productivity into the capital factor. So Frank, can you maybe explain that to Linda?
Rob
Sure. Thank you, Mark. Linda, the last time we did our application for transmission and distribution, we had put a bottom line reduction into our application, and that seemed to cause confusion at the hearings. So what we've done now is we've built it into the formula, and it's just the standard formula from the OEB. So there is, of course, your stretch factor, but in the capital factor, there's the assumed additional stretch there as well. And so that productivity factor is now captured through the formula. In terms of the inflation, it is the standard inflation assumptions that follow the Ontario CPI, so in or around 2%. Thank you.
Operator
Thank you. Our next question comes from David Quezada with Raymond James. Your line is open.
David Quezada
Thanks. Good morning, everyone. My first question, just in light of the contemplated increase in CapEx, which is pretty meaningful in the JRAP, I'm curious how you'll go about or what your requirements will be in terms of adding staff and, I guess... how you think about the availability of third-party contractors as you look to increase the pace of CapEx.
Mark Poeska
Yeah, David, it's Mark here. So as I talked about in the society agreement, we do have the ability to contract out, and society covers a lot of our engineering project management, that type of support. We also do have the ability on contracts new stations in Greenfield to contract that out into a transmission to outside contractors and construction companies. So we have been building a plan within our execution group to ramp up our ability to deliver on this increased capital without actually increasing a lot of headcount increases within Hydro One. So we have been negotiating to our agreement that flexibility, knowing that we are looking at ramping up our capital, and I think we're in good shape to do that.
David Quezada
Okay, great. Thank you for that. And then maybe there's one more for me. Among the parts of your business that are not covered by the JRAP, I appreciate that you will be putting out an updated capital plan next year, but are you able to comment on just the pace of CapEx and rate-based growth that you expect for those other parts of the business? Do you think it's going to be roughly consistent with what's outlined in the JRAP?
Mark Poeska
Yeah, a large part of our spend is within the JRAP. There are some projects which are outside of JRAP, and they are in other filings that we will be having. So as part of JRAP, we're proposing two regulatory accounts with the OEB to allow us to execute on new externally driven work without materially impacting the JRAP capex. And so some examples of that are the development work for Wasik and Chatham to Lakeshore and Lampton. We do expect these new transmission projects to be in licensed partnerships like we did for B2M and NRLP. and they'll be subject to their own rate applications outside of J-ROD. So some of our new lines are outside of this investment plan, which we're showing you today.
David Quezada
Okay, great. Thanks for that. I'll get back in the queue.
Operator
Thank you. As a reminder, to ask a question at this time, please press star, then 1, or your touchtone telephone. Our next question comes from Darius Lazani with Bank of America. Your line is open. Thank you.
Chris
Hi, good morning. Thank you for taking my questions. I just wanted to come back to the proposed spending in the JRAP, specifically the division between distribution and transmission. It looks like the step up in distribution is a little bit more of a step change than in transmission. And you've touched on it a little bit, but can you just talk about what drove that particular step up? Is it more just a factor of the distribution rates being a little bit more out of date than transmission comparably, or just a greater need to refurbish aging equipment or any other factors?
Mark Poeska
I would say that the biggest difference between TX and DX, why there's more of a step up is because in TX, our reliability of TX is first quartile, whereas our reliability on the DX side is is third or fourth quartile. And in order to improve the reliability, which is one of the things the customers commented on as our customer outreach, we need to step up the spending there. And part of that is on things like poor condition poles, but it's also the technology investments I talked about before, which is the reclosers and fault finders and things like that on the system to help us improve the reliability. So the drivers are different with transmission and with distribution, and we do see that we need to improve the reliability on the distribution side more so than on transmission.
Chris
Okay, excellent. Thank you. One more if I can. In terms of your 4% to 7% EPS guidance range through 2022, now that we're presumably there's some visibility into 2022, Have you given any consideration to potentially narrowing that range?
Chris
Hi, Darius, it's Chris. I can take this one. We will leave that guidance in place. And I think I said in the past that we have more confidence of being at the upper end of that range that was provided previously. So it will stay consistent. When the joint rate application is approved, we will update our guidance beyond 2022.
Chris
Okay, thank you. I'll leave it there.
Operator
Thank you. Our next question comes from Patrick Kinney with National Bank Financial. Your line is open.
Patrick Kinney
Yeah, good morning, guys. Just back to your sustainability targets. I know your carbon footprint is already quite modest relative to other utilities in North America, but just curious on your target to reduce GHG emissions by 30% by 2030. Curious if you have any opportunities to move that reduction target more in line with the federal government's new target of 40 to 45%. And if you did accelerate that goal, what that might mean for the five-year capital plan.
Mark Poeska
Yeah, we just released our goal of 30 by 30, and we think it's the right goal for us, irrespective of the fact that the government has accelerated it. And to your point earlier, Our carbon footprint is relatively small, and we think our role actually is to help decarbonize the economy through connecting the 96% decarbonized electricity in Ontario to customers. The other thing is our target includes Scope 1 and Scope 2. So the Scope 2 is tied to how green the grid is in Ontario, which we don't directly control. And so we wanted to make sure that we set a target which was achievable by the actions we can take. And we will also work with the suppliers and the ISO and the OAB on looking at the mix of carbon versus non-carbon generating electricity in Ontario. So we're comfortable with that. And our JRAP includes investments to get there, and they're not incremental to what we were looking for. And so the primary areas around converting our fleet, building automation into our buildings to reduce our carbon footprint of our buildings, reducing the diesels in our remote communities. That's probably our biggest single footprint is our remote communities and some of those will be coming off of diesel as they're connected to the grid and we'll look at renewable opportunities for others. So we're comfortable with the targets we've set and that they're achievable.
Patrick Kinney
Thanks for that, Mark. And as a follow-on, maybe for Chris too, but just perhaps you can confirm what amounts, if any, within the capital plan, um, are earmarked for innovation and some of your green tech JVs. Um, I know you've, you're basically accelerating, um, some of the charging station initiatives, um, quite rapidly. So just curious if there's, um, any upside to the capital plan related to some of those joint ventures.
Chris
Thanks, Pat. Uh, yeah, so, so there will be, um, at this point in time, what you're referring to there is, um, our joint venture, Ivy, the charging network. It's in its very early stages, so that has not sort of – there is upside to capital investment in there that's not included in this plan. So what we've really updated for today is really the joint rate application. So to the extent that EV penetration happens quicker or even more broader, that would be reflected in the next update. And we do those updates, Pat, normally around our business plan, so sort of the end of the year going into the new year. So there's definitely upside there. And the EV charging stations would be outside the joint rate application in any case. It's not regulated. But we do see upside there, and we will update that normally once a year as part of our business planning process.
Patrick Kinney
Okay, that's perfect. I'll leave it there. Thanks, guys.
Operator
Thank you. And our last question comes from Matthew Weeks with Industrial Alliance. Your line is open. Thank you.
Chris
Good morning. Thank you for taking my question. I was just noticing that when you look at the CapEx and the way that it's trending, it seems like a greater amount is generally directed towards sustaining CapEx over the years. Is it too early to tell, or would you say that this trend would continue or level off? if it does level off, you know, over the long term, would you see it leveling off at around maybe 75% or something like that, you know, sustaining CapEx as a percentage of total CapEx?
Mark Poeska
Yeah, it's Mark here. So, so it is based on condition. The sustaining investments are primarily based on, on condition. And as I said before, we do condition assessments of our assets and, and yeah, Even at the investment that you're seeing today, we don't deal with all our poor condition assets by the end of the 27th period. If you assume, which we need to, that the existing assets will continue to age, You know, we're not dealing with all the poor condition assets in this investment plan. Others will get into that poor condition zone by the end of the investment period that will continually update and look at those conditions going forward as we develop our application beyond 27. So short answer is that there is a long-term kind of need to invest in our agent assets in Ontario.
Chris
Okay, thank you. That's it for me. I'll get back to the queue.
Operator
Thank you, and that does conclude our Q&A session for today. I'd like to turn the call back over to Omar Javid for any further remarks.
Omar Javid
Thank you, Jen. The management team and Hydro One thanks everyone for their time with us this morning during what is a busy period. 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 and continue to be safe.
Operator
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.
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