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spk07: Good morning, ladies and gentlemen, and welcome to Hydro One Limited's second quarter 2022 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 1-1. 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.
spk13: Good morning, everyone, and thank you for joining in one second quarter earnings call. Joining us today are Interim President and CEO Bill Sheffield and our Chief Financial Officer, Chris Lopez. In the call today, we will go over our second quarter results and then spend most 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. This should be up on the webcast now, or if you're dialed into the call, You can also find them on Hydro One's website in the investor relations section under events and presentations. Today's discussions will likely touch on estimates and other forward-looking information. We should review the cautionary language in today's earnings release and our MD&A, which we filed this morning regarding the various factors, assumptions, and risks that could cause our actual results to differ as they all apply to this call. With that, I turn the call over to our Interim President and CEO, Bill Sheffield.
spk01: Thanks very much, Omar. Good morning and thank you for joining us for our second quarter earnings call. I'll briefly discuss some of our notable achievements in the quarter and then pass it over to Chris to discuss the financial results in greater detail. As you'll see in this morning's release, our teams continue to operate in a very disciplined manner to serve our customers and the communities in which we operate. On June 21st, Mark Pauesca stepped down as the CEO to pursue a leadership opportunity with another utility closer to his family in Western Canada. I have to admit I had mixed emotions about his departure, but I can understand and empathize with his desire to be closer to his family. Mark leaves a great legacy at Hydro One. During his tenure, Hydro One built an executive team that successfully launched a new strategy and focused the organization on delivering results. There were renewed focus on safety, advocating for customers, being a trusted partner while emphasizing our efforts on the environment, social and governance matters, building the grid for the future, and innovating and growing the business. All of which led to a restoration of shareholder value. I'm confident that Hydro One's relentless focus on energizing life for all Ontarians is not only the right track, but also one that has been deeply ingrained in our corporate structure and culture. I would like to thank Mark for staying in an advisory role to help me transition into my role as the steward for this company and for its important assets. It's my objective to ensure there is a continuity and stability at the board as it executes and searches for a permanent CEO. We are committed to executing our current strategy without losing any momentum, and given the depth and breadth of the teams, I'm confident we will be able to continue delivering results for all our stakeholders. As a board member, I always knew we had excellent teams, but I have now seen firsthand that our employees are some of the most dedicated people in the business. An example was the way the crews mobilized on Saturday, May 21st, to respond to the devastating storm that impacted the province. With hurricane-level winds, the storm knocked out power to nearly 760,000 customers and left 2,500 broken poles and damaged approximately 500 transformers. More than 3,000 crew members got to work immediately and worked around the clock to restore power in difficult conditions. The scale of the devastation necessitated help from beyond Ontario's borders. The call for help was answered from our many partners in Manitoba, Quebec, New York, Michigan, and New Brunswick. I applaud everyone's cooperation. I personally witnessed the affected areas for both Hydro One and Hydro Ottawa, and I'm very proud that together, we were able to get our customers' lights on quickly and without any serious injuries. It's no wonder that Hydro One has been repeatedly recognized for its long history of safety and safely restoring power during emergencies. Recently, Edison Electric Institute presented Hydro One with its 12th Emergency Response Award for restoring power to its customers despite challenging conditions following a severe storm and windstorm during the Easter long weekend. Ultimately, it's our customers who are impacted by these extreme weather conditions, and I want to thank them for their patience while we restore power and for the outpouring of support and acknowledgement for our crews. These storms remind us that we must remain committed to investing in our system as well as adapting and mitigating climate change in a complex business and regulatory environment. Last year, Hydro One took significant steps to understand, balance, and make commitments to sustainably adapt our infrastructure, operations, and business to future climate changes and needs, while at the same time mitigating carbon emissions. As demonstrated in the sustainability report released this morning, we've made good progress in advancing our performance against environmental, social, and governance goals. Recall last year we made several commitments and targets that we will report against in the ESG performance scorecard, and I'm pleased to provide a transparent account of our progress. Under PLANET, We reduced GHG emissions by 9% compared to the 2018 baseline and are on track to achieve our planned goals. While supply chain disruptions affected our pace as envisioned, we converted approximately 14% of our fleet of sedans and SUVs to electric and hybrid vehicles. For community, we surpassed our Indigenous procurement target for 2021, spending $58.3 million, or 3.4% of our total sourceable spend, with Indigenous businesses, our highest to date. We also allocated 25% of our community investment donations and sponsorships to support Indigenous communities beyond our original impact goal of 20%. For people, at 9%, we exceeded our target of having 5% Black student hires. However, we know we have a lot more work to do here as we still do not have any Black executives or board members. With respect to our Catalyst Accord commitments, our 2021 annual average of executives and board members identifying as female is 31% of executives and 50% of independent board directors, both exceeding their respective targets. We're deeply committed on this path and will continue to report transparently on our progress. To further demonstrate our strong commitment to our ESG goals, we amended our syndicated lines of credit to include a pricing adjustment which can increase or decrease our cost of funding based on our performance in these three priority areas. Apart from our ESG performance scorecard that I just discussed, the sustainability report also contains several notable achievements in advancing all our areas of people, planet, and community. These include building a stronger safety culture, fundraising for charities, advancing Indigenous relations, embracing the United Nations Declaration on the Rights of Indigenous Peoples, UNDRIP, integrating United Nations Sustainability Development Goals, UN SDGs, as it's called, into our reporting strategy and standing up for communities. I am pleased we were recognized for this progress as we won an Electricity Canada Centre of Excellence Award for our climate mitigation strategy, in addition to winning an award from the Electricity Distributors Association for our pollinator program. Finally, we were once again recognized by Corporate Knights as a best 50 corporate citizen in Canada with significant improvements on our year over year ratings. Now, one more reward to tell you about. I'm happy we are making great strides with respect to the way we interact and serve with our customers. Chartwell, a utility industry leader in research, recently granted us a gold best practices award for improving customer service and customer satisfaction. Amongst other factors, this was a recognition of the increase in our customer satisfaction scores, improvement in call handle time, and upskilling of staff to better serve our customers. We play a critical role in meeting the needs of our customers, building a grid for the future, and supporting economic growth. Guided by our purpose of energizing life in Ontario, we are living up to our responsibilities to put people, planet, and communities first. Before I pass it on to Chris, I want to share a couple of housekeeping updates. Lala Garzuzzi, our chief safety officer, has decided to pursue another opportunity. She was terrific and we wish her the very best in her new endeavor. The health, safety and environment teams will now report to Megan Telford, our chief human resources officer, who will continue on with the excellent work already underway. Finally, with respect to the results of the annual meeting of shareholders that was held on June 8, 2022, I'm happy to report that shareholders voted in favor of all items of business put forth And as mentioned in last quarter's call, Mark Budlaski was nominated for election and was subsequently elected to the Board of Directors. Mark brings a wealth of experience and skill to the Board. He is the Director of Economic Policy and Initiatives at the First Nations Major Projects Coalition, where he leads policy development at a First Nations collective seeking ownership in major projects such as pipelines, mines, and electric infrastructure, as well as improvements in project environmental practices. we will all benefit from his deep knowledge and strong track record. With that, I'll turn it over to Chris to discuss our financial results this quarter. Over to you, Chris.
spk12: Good morning, everyone, and thank you for joining us today. I'd like to start by acknowledging Mark's departure and welcoming Bill. The entire organization is very pleased with the continuity that Bill brings from his time as a board member. I can attest that the transition has been exceptionally smooth, which is a credit to the efforts of both Mark and Bill I wish Mark the very best in his new endeavor. In terms of our financial results for the second quarter, basic earnings per share was 43 cents compared to 40 cents in 2021. The key drivers for the change in earnings this quarter were the annual adjustment to OEB approved rates to the transmission and distribution segments, higher peak demand driven by favorable weather and reopening of the economy, and lower OM&A driven by capitalization of storm costs. These are partially offset by an increased allowance for doubtful accounts, and higher depreciation, amortization, and asset removal costs, primarily resulting from storm-related asset replacement. Our second quarter revenue net of purchase power was higher year over year by 11.8%. Like previous quarters, this was made up of the recovery of deferred tax asset, or DTA, amounts, as well as the cessation of DTA amount sharing going forward following the DTA implementation decision. As a reminder, the impacts on the DTA implementation decision are cash flow positive but net income neutral due to a corresponding offset in taxes. In addition, revenues for the transmission and distribution segments reflected the annual adjustment of OED approved rates. Favorable weather and reopening of the economy drove up peak demand in April and May with a marginal decline in June. The average monthly peak demand for the quarter was up 3.7% while the energy distributed to Hydro One customers was flat. On the cost front, operating maintenance and administration expenses declined year-over-year by approximately 1%. The decrease in OM&A was primarily the result of capitalization of storm costs. A portion of our corporate support costs are recovered from capital expenditures. Higher storm-related distribution capital expenditures have resulted in a favorable impact to OM&A in this period. In addition, The storm also impacted our vegetation management efforts as resources were redirected to restore power to the affected areas. While these efforts to respond to the outage were capitalized, resulting in lower OM&A, the outstanding work still needs to be completed. We expect the deferred work programs will be completed during the balance of this year. Similar to last quarter, we booked a higher allowance for doubtful accounts or bad debt expense. We continue to see impacts of the current economic environment on the ability of our customers to pay their bills. Our early collection efforts have resulted in lower payments than initially expected. And the portion of customers enrolling in payment arrangements is increasing at a rate higher than before the pandemic. Hydro-1 will continue to help our customers access support and provide various financial assistance and flexible payment options. Depreciation expense was higher year over year by 14.7% due to the increase in capital assets. which is consistent with our stated capital investment program, as well as higher asset removal costs resulting from storm-related asset replacements. On financing, we saw a year-over-year increase in our financing charges of $15 million. The main contributor of this increase was a recognition of the carrying charges in 2021 associated with the recovery of the DTA amounts previously shared with ratepayers. In addition, we had higher weighted average interest rates on short-term notes. We continue to be pleased with stability of our balance sheet and robust investment grade credit rating. Income tax expense was $68 million for the quarter compared to $26 million in the same quarter last year. The increase in income tax expense was due to the tax expense on account of the DTA implementation decision, which as discussed earlier, is net income neutral. In addition to the DTA recovery amounts, we also had higher taxes on account of higher pre-tax earnings, which are partially offset by timing differences. The effective tax rate this quarter was 20.9% versus the effective tax rate last year of 9.8%. This is consistent with the annual guidance we provided earlier this year of 14 to 22% over the next five years. As a reminder, the most significant impacts will be over the 2021 to 2023 DTA recovery period. Moving to investing activities, in the second quarter, we placed $547 million of assets in service, which is an 82.3% increase compared to the prior year. Both the transmission and distribution segments contributed to the increase. Within the transmission segment, the new Lakeshore transmission station was placed in service, which will service southwestern Ontario, where we are seeing a tremendous amount of growth, as well as higher transmission line refurbishments and replacements. For the distribution segment, we inserviced approximately 118 million of assets on account of the storm in May. This was partially offset by timing of system capability reinforcement projects and lower volume of wooden pole replacements. Capital investments for the second quarter were 612 million, which is a 10.7% increase from the second quarter in 2021. The increase came primarily from the distribution segment due to the higher storm-related asset replacement discussed earlier. and higher spend on system capability reinforcement. The year-over-year increase in spend was partially offset by capital investments incurred last year on the new grid control centre, the Lakeshore transmission station that we inserviced this quarter, and lower volume of work both in the transmission and distribution segments. There are a couple of notable items with respect to capital this quarter. You'll notice that we've updated our major transmission project table as well as the future capital investments table. In the spirit of maintaining a high level of transparency, we have further outlined the Leamington Area Transmission Reinforcement Project into its core components and provided, where available, line-by-line estimations on each of the new lines in southwestern Ontario. As some of the lines are still in the development phase, the estimations there represent the cost for the development phase only. We will continue to update the table as we get more information. For future capital investment tables, we have made two updates. We have updated the estimate for the Chatham by Lakeshore line for which we have filed a lead to construct application or section 92 with the OEB. This line is expected to go in service in 2025 and as a result increases the capital investment as well as the projected rate base. Secondly, we also updated the capital table for the regional and system growth outlook which includes the storm related asset replacements discussed earlier. To minimize the impact on our customers, we aim to offset the higher capital expenditure on storms incurred in 2022 over the JRAP period. As a reminder, the capital investment and rate-based numbers for the future years remain subject to OEB approval. On the regulatory front, the joint rate application remains well on track. As commuted in the last call, we recently attended a technical conference in which the intervenors and the OEB had the opportunity to ask us about the specifics of the rate application and inflationary update. We are scheduled to attend a settlement conference in mid-August, followed by a potential oral hearing in September and October. With the exception of a full settlement, our expectation for a decision in the first quarter of 2023 remains unchanged. Following whatever sense of the Building Broadband Faster Act that we discussed in our last call on July 7, the OEB established a deferral account for distributors to record incremental costs associated with activities supporting broadband projects. We are pleased with the opportunity to help enable better access and connectivity for all Ontarians, as well as the OEB's approach to ensure these efforts do not impact the necessary work that is required to maintain and strengthen the grid. We will continue to assess the impact of broadband initiatives and we will provide more information as it becomes available. In other updates, we were very pleased with the ratification of the collective agreement with the Canadian Union of Skilled Workers, or CUSW. The new agreement, which affects about 1,000 skilled workers, was ratified by the CUSW membership in May and will be in place through April 2026. Finally, on guidance, we continue to be committed to and affirm our target of 4% to 7% earnings per share growth through 2020. As a reminder, we expect to provide updated guidance for the post-2022 period following the approval of the joint rate application. I'll stop there, and we'd be pleased to take your questions.
spk13: Thank you, Bill 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 calls or your questions today, my team and I are always available to respond to follow-up questions. We ask that you limit your questions to one question and then one follow-up question. If you have any additional questions, we request you to rejoin the queue. Please go ahead, operator.
spk07: Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Ben Pham with BMO Capital Markets. Your line is now open.
spk09: Hi. Thanks. Good morning. I wanted to ask, in terms of employee retention, perhaps maybe discussions at the board level, could you comment on maybe items or factors that you're exploring or things you're exploring when you Think about employer retention, especially as you look for a new CEO the next couple of months. Can I appreciate personal drivers moving executives around, but CEOs do tend to move around with families and stay for an extended period of time.
spk01: Yeah. So thanks for the questions, Bill. A couple of things. First of all, let me start with what seems like sort of a simplistic view of This is a sector that's growing, and it's a place where you'd think people would want to be. And thinking about the grand set of miners in electric engineering, I'm very happy about that because it's going to grow. With respect to where are we at, we have actually a very low turnover rate. If you take the total employee base, it's just a little over 1%. Have we been affected by the fact that we have good people and other people might be interested in them? Yes, we have. Will that have a big impact on us recruiting a CEO? I don't really believe so. I was on the board. I came to the board in 2018. It was on the search committee when we went and found Mark Bueska. And I think you're pretty happy or I'm certainly pretty happy as a shareholder with the results that came from that recruitment. And so the board will do what it's good at. It's done this before. They're mature. The search process, of course, has started. We'll look at internal and external candidates and we'll make sure we do a very good job. And I have no reason to believe we won't have as good a result as we did the last time. In terms of overall retention, one of the nicest things for me switching from the board side of the table to the management side of the table is to discover the rest of the bench, so to speak. We've got a lot of really great people here, and a lot of them have been here for a long time. So I'm hopeful. Do we face the same problems everybody else does when you have good employees and so on? Yes, we do. Are we successfully keeping really great people? Yes, I'd say we are.
spk09: Okay, great. And thanks, Fred. And maybe fall on that. What are your thoughts in terms of timing? Is this a six-month process, three months, longer, shorter?
spk01: Yeah, so I'm sorry, I'm not going to really answer that. The first question I usually get asked is who's the next CEO? And then the second question is, if you won't tell me that, how long will it be? and so on, and it's just really not appropriate. It'll happen when it's done and we've got the right choice. I'm sorry, that's all I can really say. Okay, great. Okay, thank you.
spk07: Thank you. Our next question comes from the line of Andrew Kuski with Credit Suisse. Your line is open.
spk05: Thanks. Good morning. Maybe a big, broad question, and just with the legislative session starting yesterday in Ontario, albeit a truncated version, How do you think about energy policy and electricity policy on a go forward basis under the current environment? Because there's obviously a lot of moving parts and really exciting developments happening as we transition in not just Ontario, but more broadly.
spk01: Well, let's start from we're excited by what the government has in mind with the growth that's there. And obviously, we're already participating in that. We're trying to make sure that we can handle whatever comes our way and actually think about it ahead of time and see where the next place is that will probably be needed because the infrastructure doesn't appear instantly if it's not already there. So we're pretty upbeat about this. Even the broadband conversation, which we've now become a bit of a catalyst to make sure that things can happen, that's interesting. It's hard not to be excited. The forecasts, I'm not going to give you a personal forecast, but the forecasts are pretty Impressive. And even if only some of that happens, I think it'll be great for this company in this sector. Chris, you want to add anything to that?
spk12: I think you covered it, Bill. Andrew, we've had this conversation in the past. If you look at decarbonization or the energy transition is probably the new word for it. For that to occur by 2050, there's got to be a doubling or tripling of the investment in the energy sector. And Ontario is well set up for that. We've got access to minerals in the northwest. In the south, it's growing quite quickly. So bringing all those things together in a coherent manner is what we're focused on. And we're focused on how do we bring transmission lines. We'd like to know them in advance so we can get them ready. It's not always the case, but how do we do it quicker, faster, better? That's really what we're trying to do is be able to respond to those needs.
spk05: I appreciate that context and the color and commentary and maybe just a follow-up. Do you see a path in the future to have consolidation of some of the LDCs, which you've been doing, but maybe an accelerated version of consolidation of the LDCs that helps strip out costs overall of the system to help pay for some of the investments that are needed into the future?
spk01: Phil, I would say we're always interested and we're always talking to people and Even if the consolidation doesn't happen, we work with all of them. You can see that in the storm. I was in Ottawa and I saw what happened with Hydro Ottawa and Hydro One together. It was pretty good. And so I'd say we're always open to the conversation. It's unlikely an awful lot's going to happen when municipal elections are in October, to be honest. That's not the time that city councils get organized to do those sorts of things. So we'll bide our time. We'll keep in touch with those. And the ones that are the most beneficial for Ontarians are the ones, of course, we'd be most interested in. And I'm not going to tell you what I think they are.
spk12: I would just add, actually, that the pace of change is getting quicker, not just with the energy transition, but cyber, other sort of elements. So as that pace increases, you know, leadership and partnership within the sector, consolidations included in that, is more and more required or more and more sought out.
spk05: Very much appreciated. Thank you.
spk07: Thank you. Our next question comes from the line of Mark Jarvie with CIBC. Your line is now open.
spk08: Hi. Good morning, everyone. Bill, another question here on the CEO search. Just curious if when you're thinking about March replacement, is it key to have continuity in terms of continuation of the defined strategy or are you guys open as you look at candidates to bring in sort of let them come with a sort of a potential opportunity to, to bring in a bit of a different vision as well.
spk01: Well, I think you kind of know the answer to that. Uh, the strategy that came in when Mark came almost doubled the stock price. So why would we do anything other than that? Uh, it's really a simple question. If we had any other thoughts, it would be, wouldn't be soon. And it would have to be because it's a lot better than what we're doing. And, and, uh, I find that hard to see. So my job is to make sure that we stay focused. We don't lose a beat in getting the strategy executed and hope you guys are happy with the results.
spk08: Okay. Good to hear. And then Chris, just a comment on guidance, the four to seven, is that to say that you couldn't exceed 7% depending on weather and load through the back half of this year, or just when you see what you have to do to play catch up on deferral on OMNA that 7% would be sort of the capital where you could get to on the EPS growth.
spk12: Yeah, I think, Mike, you hit the nail on the head, which is based on what we know today and the work program for the balance of the year, we are reaffirming guidance at 165. The unknown that could change that is weather and load. So if that ends up being very strong, it could well increase beyond that. But right now, we base our forecasts on weather normalized. On that basis, we are still reaffirming guidance $7.65. Okay.
spk08: Thanks, Chris. Thanks, Bill.
spk07: Thank you. Our next question comes from the line of Linda Ezegelez with TD Securities. Your line is open.
spk00: Thank you. Can you maybe help us understand as we look in the back half of the year, what you've seen in weather so far this Q3 and how you see the cadence of your spending unfolding in Q3 so we can help shape the balance of the year from an earnings perspective.
spk12: Linda, you always ask me the question on weather and weather forecasting. July was up a couple of points, so it was slightly strong, but that's July on its own. There's still five months left. The times that are important for us is the shoulder season, so the transition between heating and cooling. So it's difficult to give you a number today, but July was slightly higher, not enough to call up the year on volume yet. In terms of the guidance I gave before, I would still stick with $1.65. So if your forecasts are higher, it's a good indication that our OM&A is expected to be higher in the back half of the year. And I said that in my opening comments around the storm did affect our ability to execute work programs in Q2, and we are committed to completing those work programs in the back half of the year.
spk00: Thank you. And maybe just as a follow-up, some of the items that are most discussed during JRAP? Can you provide some feedback where you expect kind of the sticking points to be, where you've made a lot of progress in aligning interests, et cetera?
spk12: Yeah, so I'll just reiterate first the process. So we just completed the technical conference in May, June. That technical conference is really focused on the recasting of evidence. So mainly on the inflation and the CDM update, conservation demand management. So that's now complete and we're moving into settlements. So all the questions to this point are on the record. Really what they're focused on is there are increased investments in transmission at the pace, but also distribution. So are those necessary? As a reminder, we had our largest customer outreach in this last round, over 50,000 outreaches. So when we went through that process, we were very comfortable that the plan we put forward and the plan we updated, really for inflation, that was it, was to continue to meet those commitments. So there are no change in themes. The next step of the process is a settlement conference, which is going to start mid-August. And then if that is not a full settlement, we'll have the oral hearing in September and October. And as I said in my opening comments today, we expect a decision in the first quarter of next year. There's nothing new to report this quarter. We're still on track. We feel very confident that the application is strong and will be approved.
spk07: Thank you. Thank you. Our next question comes from the line of Maurice Choi with RBC Capital Markets. Your line is now open.
spk11: Thank you and good morning. I just wanted to follow up on a question about CEO. Bill, you mentioned that you were on a search committee that found Mark a few years back. Clearly, Ontario and Hydro One continue to change, not least because of the energy transition and the years ahead in terms of the work and expectation. How does your search parameters reflect this change? And if it helps, is there such thing as a kind of CEO that the board is not looking for?
spk01: Well, you're asking for the work of the search committee and our matrix, skills matrix, et cetera. I don't think that's appropriate for me to share. But what I will tell you is that there's a lot of history in this company, and the heart and soul of it is actually spread across the country, across the province. And so somebody who can identify with all the players, both on Bay Street and in Thunder Bay and in The remote communities would be a real plus, and I think you could count on somebody like that showing up. I don't think I want to make any other comment on the other kinds of attributes that are must-haves or nice-to-haves, but there are a lot. But it's a great job, I can tell you.
spk11: Understood. And maybe it's quite full up to that. Obviously, there's a legislation that somewhat limits the compensation of the CEO and of the company. How do you approach something like that when you have the legislation in front of you, there is a sunset clause to it? Any thoughts as you go about the search?
spk01: First comment is that compensation is the only thing that attracts people to this kind of company. A lot of really great people are here and they could make more money somewhere else. I'm not as concerned about that. I think we'll work our way through it and figure out how to deal with it. One thing I will tell you is the last time we were looking, all of you weren't as happy with the company and our relationships were that great. And it was tough to sell at that time. This time, it's much easier. This is a really great place to come with a great future. So I think you could stay tuned and assume there'll be a great result.
spk11: Perfect. And if I could just finish up on just broadly about the work on transmission lines. You spoke to how there has been a refinement in terms of estimates that made up the Calumetree-Lakeshore line. Can you speak about what causes these types of estimate changes, the scope changes, inflation or global supply pressures, and are there any emerging trends that would be a look through for other transmission work that you have in the years ahead?
spk12: Hi, Maurice. It's Chris. Yeah, no, that particular update for Chatham is just part of our regulatory process. So we estimate the project at certain points in time, and they have wide variations on estimation. When we do a Section 92, that's the equivalent of us getting approval for that capital expenditure. So the estimates just get much tighter. So it's just part of a normal process. Chatham to Lakeshore reached its Section 92 in Q2, and we were updating the disclosure for that application.
spk11: And nothing from that update would be applicable as a look through to other work that you have planned?
spk12: No, except that we would follow the same process for the other work. So the remaining four lines in that group, so you've got five lines, but the remaining four will go through the same process. They will get to a point where we do inspection 92, we end up in front of the OEB, and we lay out the cost of construction, and then it gets approved, then we move forward on executions.
spk06: Great. Thank you very much.
spk07: Thank you. Our next question comes from the line of Robert Hope with Scotiabank. Your line is now open.
spk02: Morning, everyone. Just a follow-up question on the JRAP. Since the kind of inflation update provided a couple months ago, how have your thoughts on inflation changed? You know, we have seen greater clarity on labor and commodity pricing has been volatile, to say the least.
spk12: Hi Robert, it's Chris. It felt like a lonely place when we updated our evidence a few months back. We were foretelling inflation impacts and we were probably one of the lone voices at that point in the energy space, electricity space. As history's played out now in the last few months, it's shown that we've been fairly much in line with that. So the relationship with the OEB, the interveners, going through the technical conference on inflation, there's been a shared understanding. I like the quote from Janet Yellen, former treasurer down in the US, when she said that they didn't see the magnitude or the scale of inflation. So our approach to that was, let's update our evidence, let's agree on a true up before we enter JRAP, and that's because we didn't know exactly what it would be, but it's actually turned out to be very fortuitous and accurate. The other thing I would add, sorry, the other thing I'd add, Robert, is that the OEB is potentially considering an industry consultation on inflation. So we were the first one out the gate, but certainly other LDCs are expressing concerns around inflation as well. We are in a fortunate position that we are going to be rebased with an inflation adjustment here. So that's a good outcome for all consumers, but it's a good outcome also for Hydro One.
spk02: Okay, thanks for that. And then just as we enter the settlement conference here in a couple weeks, how far forward are the goals? Is the expectation, just given the moving parts, that an oral hearing is more likely, or is there a road forward to a settlement?
spk12: I think I got most of that, Robert. I think the gist of the question was, you know, views on a potential settlement versus the oral hearing. We have seen settlements more recently. OPG is a good example of that. So certainly the OEB part of their modernization process is to look for ways to accelerate the process and have negotiated settlements. So I think the probability is higher, but there are changes in our application, right? We're asking for a step change in investments. You've got the inflation component. So we're hopeful that we can reach a settlement on significant portions of the application. It'd be great if we could do it on the whole thing. We'll do the best we can. I suspect that there'll be elements, at least, of the application that could end up in an oral hearing. The good news is we have certainty that if it does do that, partial or otherwise, we know we'll have a decision by the end of Q1 next year. Thank you.
spk07: Thank you. Our next question comes from the line of David with Raymond James. Your line is open.
spk10: Hey, thanks. Morning, everyone. I think just one left for me, and it relates to reliability. I'm just curious, and I realize you're not obviously directly involved in generation in Ontario, but curious what your thoughts are on adequacy of supply heading out to 2025, what you see as the moving parts there, and how that could affect reliability for your customers.
spk01: Wow. Everybody understands that pickering is coming to the end of life, so that's going to have an impact on everybody. I'm not going to try and forecast what the generators need to do, the IESO's job. Do we think it has an impact on reliability? I don't think it's going to impact transportation distribution. If there's some disruption in supply, I suppose that might impact us, but I think the plans will be in place in advance and make sure we're okay. Do you want to add anything to that, Chris?
spk12: Yeah, my understanding, David, is that the generation supply looks, although it will change, we've just spoken about pickering, although it will change, it is adequate through 2030. And we know that there are studies going on about what's the right mix of generation post-2030. So I think you can look at that far and be fairly comfortable. The cost of that generation might change. Nuclear might be slightly less than, say, gas, depending on the commodity price. but there is adequate capacity to supply the Ontario market.
spk10: Okay, fair enough. Thanks for that.
spk07: Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your touchtone telephone. Our next question comes from Julian Dumoulin-Smith with Bank of America. Your line is now open.
spk06: Hey, good morning. This is Darius.
spk04: Thanks for taking my question. Just was wondering if, as you're looking at the data points out there regarding the formulaic ROE in Ontario, how you're trending versus some of the more recent decisions in previous years?
spk12: Hi, Darius. It's Chris. I always love this question. It comes every time. Our current ROEs, 8.52 for transmission and 9 for distribution, they were set at different times. If we were to look at that calculation today, so using July's numbers, you're somewhere in between 9.25 and 9.5. The distribution, they were set at different times. If we were to look at that calculation today, so using July's numbers, you're somewhere in between 9.25 and 9.5. So it is higher, and that's reflective of the higher bond rates that we've seen and rising interest rates.
spk04: Great. Thank you for that. And maybe just one more if I can. Great. Thank you for that. And maybe just one more if I can. Could you please just give an update on the different collective bargaining process. I believe there's one agreement reached with the union earlier in the year, and I think there's one more ongoing. And whether that process, once that reaches a conclusion, would that necessitate any updates to the JRAP filing, or is that contemplated in your, the existing filing?
spk12: Yeah, I can take that, Darius. So we just, I think the one you're referring to, we just completed the Canadian Union of I think Bill spoke today in his opening comments. So that was ratified here on May 23rd, and it will run through 23, 24, 25. So we're comfortable that that's complete. The ones that will come up next year is society and PWU. We've made assumptions that are presented in our joint rate application. They will not affect the rate application. The rate application will proceed as is, and we will work to meet those assumptions and business conditions along with GIRAP.
spk04: Great. Thanks very much for that response.
spk07: Thank you. Our next question comes from the line of Matthew Weeks with Industrial Alliance. Your line is now open.
spk03: Good morning. Thanks for taking my question. Thinking about sort of the performance of Hydro One through the IR rate-making framework and you know, being able to capture a decent amount of cost efficiencies. As you go into rebasing and thinking about capturing additional, you know, efficiencies going forward, I'm just wondering what sort of levers, you know, from your perspective Hydro One has to pull.
spk01: Let me start first just by saying, making comment that during the opening comments, we talked about storms impacting other work. So was the fact that we have a lot more new connections than we've had for a while. So that's a sign of health for the province for sure. And it's something we have to respond to and we are. So I would say that that's pretty healthy going forward. Chris, you want to add?
spk12: Yeah, I think the question is more around our performance on productivity over the past five years. It's been very strong. As you get rebased, this is the benefit of incentive rate making. is that we share those benefits with ratepayers. So as we went along, if we went above a certain amount, they were shared in real time. And now when we get rebased, they get the full benefit of those benefits that we built up over the last five years. We're still confident. When we started that program five years ago, we didn't have a clear path to how all of those savings will be achieved, but we have a program that gets that, we used to say, offsetting inflation. And with inflation where it is today, that's much more challenging. But something in the order of 2% is what we've targeted over time, and we've been very successful at that. And that really comes from improvements in tools, processes, and even in the way that our people engage those tools and processes. So we'll continue to do that. It can come from technology. It can come from better ways to achieve reliability. That's increased investment or better investments on the line so we don't have to go out so that we can find those faults much faster. So those kind of things I think we continue and we'll continue to aim for those offsets. The other one that Bill spoke to, which is real, is when we keep getting demand pressures, which means new connections, it's a good sign that load is growing. When load grows, that's another opportunity to outperform, especially in the rate period. So yes, we've got to take on additional work, but we also get the benefit of additional revenue if that load eventuates. So we look to both areas, load and productivity. And I think that will continue. We're still very confident that we'll achieve that through the next rate period. Okay, thank you.
spk03: And lastly for me, thinking about interest rates and the rising cost of borrowing, I'm just wondering if you can provide sort of a breakdown at all on, you know, what Hydro One's balance sheet looks like in terms of fixed versus variable debt and how protected you are at this point from rising rates in the short term.
spk12: Yeah, so we're pretty much on fixed in all of our long-term borrowings. So really the exposure is any new borrowings that we take on in any particular year. So it's normally made up of our new capital investment, about $600 million a year of debt we would take on in that part, and then also any debt that's coming due and we refinance. So that's where our exposure comes in. So it's mainly on that. So it's about $1 to $1.5 million a year. throughout the joint rate application period. Now, the good news is that our ROE also gets reset, and it's reflective of those higher rates also. So the balance sheet's in very good condition. I said I'm very pleased with where the balance sheet's at today and the investment horizon ahead. So I have no concerns there of any particular exposure for Hydro One.
spk03: Okay, thank you. I appreciate the commentary. I'll turn the call back. Thanks.
spk07: 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.
spk13: Thanks, Shannon. The management team at 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.
spk07: Ladies and gentlemen, thank you for participating in today's webinar. 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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