Good morning, ladies and gentlemen, and welcome to the Hydro One Limited's second quarter 2020 analyst teleconference. I would now like to introduce your host for today's conference, Mr. Omar Javed, Vice President Investor Relations at Hydro One. Please go ahead.
Good morning, everyone, and thank you for joining us in Hydro One's second virtual earnings call. Joining us today are our President and CEO, Mark Poweska, and our Chief Financial Officer, Chris Lopez. In the call today, we will go over our second quarter results and 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 will address in a moment. They 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. We also released our 2019 sustainability report this morning, which should be up on the website as well. 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 have 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 President and CEO, Mark Poweska.
Thank you, Omar. Good morning, everyone, and thank you for joining us today to review our second-quarter results. I hope you are healthy and staying safe during this time. Today's update will focus on our sustainability achievements and path forward to building a more diverse and inclusive company, the second stage of our operations as we continue to navigate the COVID-19 pandemic, and our Q2 financial results. The world continues to grapple with the impacts of COVID-19 pandemic, we've also seen social movements around the world. We all share a responsibility in confronting racism. Our organization is on a collective journey to better understand the experiences of Black and Indigenous employees with systemic racism and bias in order to create an inclusive environment. Recently, I joined other Canadian CEOs in signing a pledge to the BlackNorth Initiative.
For us, this means committing to seven goals to move Canada toward ending Anti-Black Racism and creating opportunities for underrepresented groups. As Ontario's largest electricity transmission and distribution company, we recognize the impact we have in developing meaningful, long-term change in our society. The events of this year have also put a spotlight on the collective responsibility that governments, companies, and individuals share in building a more sustainable world. Corporations will be evaluated on how they adapt and actions they take today. As part of our corporate strategy, I prioritize the focus on Environmental, Social, and Governance issues. Why? Because our long-term performance depends on incorporating sustainability into all aspects of our business. Our stakeholders told us they expect an unwavering commitment to exceptional customer service, safety, efficiency, and sustainability. They want us to look out for future generations.
By becoming a more sustainable company, we can help create a better and brighter future for all. We are pleased that our efforts are being recognized as we recently secured a spot in Corporate Knights 2020 list of Canada's 50 Best Corporate Citizens and ranked fourth amongst a global list of 143 utilities. This morning, we released our 2019 sustainability report, solidifying our leadership in environmental, social, and governance issues. Some highlights include, on the environmental front, our commitment to reduce our carbon footprint by converting 50% of our fleet of sedans and SUVs to electrical vehicles or hybrids by 2025. In addition, our significant savings as a result of our recycling program. On social, 2019 saw our highest-ever Indigenous spend. Our recent achievements of Catalyst Accord commitments on gender diversity, including 50/50 gender diversity on our board, and our commitment to develop diversity hiring goals.
On governance, our use of the Sustainability Accounting Standards Board framework and the Global Reporting Initiative Core Sustainability Reporting standards. We are also aiming to adhere to the Task Force on Climate-related Financial Disclosures in the near future to secure transparent disclosures and drive the consistency of our sustainability performance data. The social elements of sustainability are vital right now in determining how we all emerge from this uncertain period. To me, the social element means ensuring the health and safety of employees and the public. It means affordability for our customers, removing racism, and building an inclusive culture. All while adapting our business model and helping to restart the economy. As an essential business, we have played a critical role in energizing life in the province during the COVID-19 pandemic, and we will continue to play a critical role in rebuilding the economy.
We continue to do everything we can to protect our employees and stand up for customers and communities. We weathered a number of storms, including one in June, where we safely restored power to 200,000 customers. Our hardworking crews demonstrated that we are still able to restore power just as quickly and just as safely as they were prior to the pandemic. Project work and capital deployment has ramped back up. As of the beginning of June, our fieldwork is back to normal levels. We now anticipate we will complete most of our work programs by the end of the year or in the beginning of 2021. We still have more than 3,000 office staff that are working from home. Our cautious, measured, and safe approach to returning staff back into the office setting is working. Throughout the pandemic, we have not had any workplace transmissions of COVID-19.
Consistent with our staged approach, the first stage is a return of up to 10% of our office staff into an office, concentrating on employees requiring access to special equipment to perform their job effectively. In the long term, we're engaging with our employees on our work-from-home strategy. We continue to monitor our network and system very closely during this pandemic. This has been a very hot summer, and we've experienced higher usage peaks and much higher than last year. Our electricity system is prepared for this, and we continue to monitor our grid to provide safe and reliable power to our customers. We believe we have a great responsibility to support our customers through the pandemic, especially those who are struggling with affordability.
We continue to offer financial assistance to residential customers through our pandemic relief program. We've returned CAD 5 million in security deposits to over 4,000 eligible business customers. We've also extended our ban on disconnections for residential customers during this time. Our community investment strategy has been focused on the most pressing needs facing our communities. We partnered with GlobalMedic and the Métis Nation of Ontario to provide food and supplies to our Indigenous customers and communities. We also provided funding to Feed Ontario, which provides supplies to food banks across the province. By being more in tune with the needs of our customers, we've been successful in advocating for more measures to provide customer relief. The government introduced COVID-19 recovery rates, which put a pause on peak pricing and introduced flexible electricity pricing until October 31st, 2020, and introduced the COVID-19 Energy Assistance Program.
As we continue to navigate the pandemic, our strong foundations have resulted in a proven ability to adapt. Now, we will look at how the electricity sector can support economic recovery in the province. A safe, reliable transmission system is fundamental to supporting economic growth and jobs. This quarter, we moved forward on two large transmission projects. First, we continued our engagement process to build a new transmission line from Chatham to Lakeshore to support the greenhouse industry, otherwise known as the Leamington line. We were pleased with the record attendance of 4,000 people during our virtual community information session, which illustrates the impactful nature of the project. Second, we launched community engagement for the Waasigan transmission line, which is the first step in the environmental assessment process.
This transmission line will increase the amount of electricity that can flow through the system in northwestern Ontario, providing local businesses and communities with the electricity they need to grow. These two projects are examples of how we continue to add value and support economic growth in Ontario. We are also doing our part to drive costs out of the system for the benefit of our customers and shareholders. We've realized CAD 86 million in productivity savings this quarter as the pandemic provided an opportunity for us to accelerate work that used technology more effectively and was safer to execute in a socially distant manner. Chris will speak more to this later. In April, we received a decision from the Ontario Energy Board on the company's 2020-2022 transmission rate application, demonstrating Ontario's constructive regulatory environment.
In this decision, the OEB approved approximately CAD 3.4 billion of capital expenditures, which will allow us to make the necessary investments required for a safe and reliable electricity system. In order to advocate for more flexibility and relief for our customers, we asked the OEB to defer implementation of the approved rates, which they have supported. By doing this, we are able to eliminate any increases to the transmission portion of the bill in 2020, at a time when relief is needed more than ever. We are pleased with their decision to allow rate deferral so we can minimize any further adverse customer impacts. The OEB will determine the collection period for our foregone revenue in a future decision. Last month, we received a decision on our appeal to the Ontario Divisional Court regarding the OEB's decision on the deferred tax asset.
The Ontario Divisional Court set aside the decision of the OEB and ordered that the matter be returned to the OEB to correct the errors identified and make the appropriate tax savings allocations. We are awaiting next steps from the Ontario Energy Board, but are pleased that the OEB did not appeal the decision at the Ontario Divisional Court. Chris will go into further depth about the impact of this ruling on our financials. We are further pleased with the path the government is taking on the implementation of the OEB's new governance structure. The recent leadership announcements strengthen the OEB, and we welcome the new appointees and the returning members. We look forward to working on behalf of customers and all Ontarians in a period of constructive rate regulation under their leadership.
In other updates, on August 1st, we successfully completed the acquisition of the distribution and business assets of Peterborough Distribution, and we look forward to completing the acquisition of Orillia Power shortly. We are pleased to have the privilege of serving both cities and their unique needs as they continue to see significant growth. I'm happy to announce that we have reached a tentative three-year deal on two collective agreements with the Power Workers' Union, which represents 3,800 regular employees and approximately 1,400 casual employees in critical frontline roles across the company operations in Ontario. Union members will now vote on these tentative agreements, with the outcomes anticipated in September and October. Our Chief Human Resources Officer, Saila Millers-Lee, will be retiring this fall.
Saila has been a trusted member of my executive leadership team, a visible advocate for our employees, and has been instrumental in leading our human resources transformation journey. I would like to welcome Stacey Mowbray to the Hydro One Board of Directors. We all will benefit from her strong track record in leading successful, publicly traded consumer brands, and I look forward to working with her. With her appointment, our non-executive board maintains the ratio of 50% women and 50% men, which is a testament to our values. In closing, the last few quarters have been positive for Hydro One. We are successfully executing the strategy that was released last year in November, and these efforts are bearing fruit. Our relationships with our partners and stakeholders have strengthened. We've received multiple favorable rulings from the legal and regulatory bodies.
We've reached tentative agreements with our unions. Our customer satisfaction is higher than before. Hydro One is on a stable and secure path towards long-term success. Over to you, Chris.
Thank you, Mark. Good morning, everyone, and thank you for joining us today during what continues to be an extraordinary time. I hope you and your families are, and will continue to be, safe and well. Ontario recently entered stage 3 of the province's 3-stage reopening plan, in which most businesses and public spaces have reopened with requirements to follow public health advice and workplace safety guidelines. We continue to remain optimistic that together, we will find a solution that will allow everyone to move forward with a new normal way of life in the not-too-distant future. In terms of our financial results for the quarter, we saw an increase in basic earnings per share to CAD 1.84, compared to CAD 0.26 last year.
Adjusting for the Ontario Divisional Court decision regarding the deferred tax asset, on which I will elaborate later in the call, the adjusted earnings per share was CAD 0.39 compared to CAD 0.26 last year. In addition to hotter weather positively affecting peak demand, there were a number of favorable events this quarter that have contributed to the higher adjusted earnings. In April, we received the 2020 - 2022 transmission rate decision, which included one-time items such as the recognition of revenues related to prior year conservation and demand management, as well as transmission revenues related to the first quarter. Despite the marginally higher reported OM&A number, we saw a positive contribution from OM&A to earnings this quarter. Excluding the other post-employment benefits, which are recovered in revenue and therefore net income neutral, OM&A costs were lower despite additional COVID-19 related expenses.
I am pleased with these results, which is a testament to the resiliency of our employees, our continued commitment to reducing costs for our customers, and the fundamentals of the underlying business. Our second quarter revenue net of purchased power was higher year-over-year by 13.4%. As mentioned, the primary driver of the increase was the hotter weather this quarter, resulting in higher average monthly Ontario 60-minute peak demand. While COVID-19 and milder weather had negatively impacted peak demand in April, we saw substantially hotter weather in May and June, with year-over-year peak demand up 23% in May and 5% in June. This favorable weather pattern resulted in a year-over-year quarterly increase in peak demand of approximately 5%. We continue to see the hotter weather translate into higher peak demand in July, as the year-over-year peak demand increased by approximately 12%.
In addition, the transmission decision included revenues related to changes in approved rates, the recognition of other post-employment benefits that were previously capitalized, and one-time items such as catch-up revenue for the first quarter, which is recognized this quarter, and the disposition of balances from the regulatory deferral and variance accounts not previously recognized. Distribution revenues net of purchased power were also higher by 4.5%, driven by approved rates as well as higher energy consumption in the quarter. Turning to operating expenditures, reported OM&A was higher by 1.1% year-over-year. As I mentioned earlier, included in the transmission decision was the requirement to recognize other post-employment benefits as both a cost and a revenue item, and therefore net income neutral, rather than capitalizing and amortizing it. Adjusting for this, we saw a marginal decrease in OM&A year-over-year despite the additional COVID-19-related costs.
In response to the pandemic, we prioritized essential and high-priority work and deferred other work in April and May. We expect to complete the deferred work programs within the year as our teams return to full complement at the beginning of June. On an ongoing basis, I am pleased with our continued efforts to reduce costs for our customers and highlight the lower corporate support costs this quarter. Consistent with the first quarter call, the 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 temporary suspension of late fees, are not expected to be material.
We continue to incur higher operating expenses in the quarter of approximately CAD 23 million related to COVID-19. This includes the temporary stand-down of casual workforce and the purchase of additional facility and cleaning-related supplies.
The cost of COVID-19 on a year-to-date basis, excluding any impact from load, now total approximately CAD 46 million, which includes a CAD 14 million allowance for bad debts, which has been deferred. We continue to track the impact of COVID-19 as directed by the OEB. The OEB has recently initiated a consultation process on the deferral accounts relating to the impacts arising from COVID-19. The consultation will assist the OEB in the development of appropriate accounting guidance as it assesses the policy direction with respect to the amounts tracked and establishes the timing and process for disposition. The consultation process will likely conclude in late 2020 or early 2021. As such, we expect to receive definitive guidance on the COVID-19 tracking and deferral accounts in late 2020 or early 2021.
On financing, we saw a slight increase in interest expense due to a higher weighted average long-term debt balance as a result of the CAD 1.1 billion debt issuance in the first quarter of 2020. As a reminder, this issuance was completed at some of the most competitive rates achieved by a Canadian issuer. We remain very pleased with our strong balance sheet and robust investment-grade credit ratings. The income tax recovery was CAD 849 million for the second quarter, compared to CAD 6 million last year. The increase in income tax recovery was primarily attributable to the Ontario Divisional Court decision issued on July 16, which set aside the OEB ruling on the deferred tax asset.
As a reminder, the deferred tax asset had resulted from Hydro One's initial public offering and its transition from the payment in lieu of tax regime under the Electricity Act to tax payments under the federal and provincial tax regimes. While the Ontario Divisional Court decision concluded that it did not have the authority to substitute its own decision for that of the OEB, the court's order returned the matter to the OEB with clear directions. Though the decision was received in July, it was a subsequent event that required adjustment in the financial statements. As such, we have reversed the one-time charges taken at the end of 2018 and recognized an income tax recovery that has a one-time net income impact of CAD 867 million.
Although a one-time item, it will result in an average annual increase in FFO in the range of CAD 50 million-CAD 60 million per year once the OEB has determined the path forward. Due to the reasons discussed earlier, the effective tax rate this quarter was - 326.5% versus - 3.9% last year. Adjusting for the income tax recovery, our effective tax rate would have been 6.9%, which is consistent with our previous guidance of 6%-13%. In the near term, our effective tax rate guidance is not expected to change. We will update you further once the OEB has determined the path forward. Moving over to investing activities.
The company placed CAD 165 million of assets in service in the second quarter, a 40.2% decrease to the prior year. This was largely a result of higher in-servicing of station sustainment investments at several transmission stations last year, and lower volume of overhead lines and component replacements in the second quarter of this year. We also in-serviced a substantial portion of the development project at Bridgman Transmission Station in the second quarter of 2019. Capital investment for the second quarter was CAD 429 million, which is a 15.9% increase from the second quarter in 2019. The increase was mainly due to higher investments in multi-year development projects for the transmission business, the construction of a new Ontario grid control center in Orillia, investments in distribution system connections and modernization initiatives, and a higher volume of new customer connections and storm-related asset replacements.
Our crews have been able to do an outstanding job on execution of the capital program and in-servicing of projects, despite the challenges posed by the pandemic. We continue to recover from the impact COVID-19 has had on our ability to in-service projects in the quarter, and will make best efforts for a full recovery in the latter part of 2020. As promised, in our first quarter call, we have updated the future capital investment forecast to reflect the changes arising from the transmission decision, as well as the Peterborough acquisition. The table will be updated next quarter with the expected closing of the Orillia acquisition. The changes do not materially impact our long-term capital investment growth rate or our long-term rate base growth. Productivity savings of CAD 86 million in the second quarter represented a 61.7% increase year-over-year.
Productivity improvements were a result of ongoing work in labor force efficiency and the previous rollout of technology solutions in the forestry, corporate, and customer service areas. While we deferred some work programs with larger work crews to later in the year, the pandemic provided a unique opportunity to accelerate work that used technology more effectively and was safer to execute in a socially distant manner. This resulted in higher productivity being realized in the quarter. For the remainder of the year, we do not expect the same run rate as experienced this quarter, as we revert back to the cadence of our regular work program. Subsequent to the end of the quarter, on July 16, we received the final rate order from the OEB on our 2020 to 2022 transmission rate decision. The OEB accepted Hydro One's proposed reductions to in-service additions included in the draft rate order.
As a reminder, since the capital reductions were predominantly in the sustainment category, we expect the deferred portion of capital to be deployed in our next rate application. As Mark mentioned, we were pleased that the OEB agreed to defer the implementation of approved rates in support of our customers. While there is no impact to net income, collection of our 2020 forgone revenue will be determined in a future decision from the OEB. On the acquisition front, I am pleased that we successfully completed the purchase of the business and distribution assets of Peterborough Distribution from the City of Peterborough on August 1st. We also continue to make good progress and expect to close the acquisition of Orillia Power Distribution Corporation from the City of Orillia in the third quarter of this year.
Finally, at this time, we do not see a change to the guidance we issued at our Investor Day and reaffirmed in last quarter's call. While due to COVID-19, we have prioritized near-term capital delivery to work that is essential, we are confident that we will complete the capital program as committed over the rate period. Considering the impacts of COVID-19 and the recent decision on the 2020 to 2022 transmission rate application, the approval of the Orillia and Peterborough acquisitions, we continue to be committed to and affirm our guidance of 4%-7% earnings per share growth through 2022. I'll stop there, and we'd be pleased to take your questions. Thank you, Mark and Chris. We asked Shannon to explain how she'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, Shannon.
Thank you. As a reminder, to ask a question, you will need to press star one 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 Ben Pham with BMO. Your line is open.
Okay. Thanks. Good morning. I know you mentioned the EPS guidance here. You're reaffirming that you have the CapEx numbers also moving a bit lower here because of this decision. I was wondering if you can update us on the, to an extent, the new rate base CAGR that you're expecting over the next five years and with the lower CapEx. What are you guys seeing in terms of offsets there to keep you within that guidance range?
Yeah. Chris, do you want to take that question?
Sure. I think the last comment I had in my opening remarks was that we've reaffirmed our 4%-7% EPS growth over that time. We're still very comfortable that the rate base CAGR is in the upper fours. Yes, we did reduce it, but it was very marginal, the reduction that you just saw that was put through. It was the net impact of the transition rate case, which was roughly a 10% reduction in capital expenditure, but still approval of 90% being more than CAD 3.4 billion of CapEx over the next three years. Secondly, we updated for the acquisition of Peterborough. In short, we're very confident in the upper fours just on rate base growth.
You add on any of the other growth that we get out of our potentially over-earning and our unregulated business, which is a smaller part.
All right. That's great. Thanks for that update . I'm not sure how much more detail you can provide on some of the trends you're seeing in volumes. The data is the data. You see July up also quite a bit. It is quite interesting to see volumes move up quite a bit during COVID-19. Is there any way to normalize some of the demand for weather conditions you're seeing? Is there anything, maybe just high-level, you're seeing in terms of your customer mix and what's been occurring within each of the customer classes on demand?
Ben. It's Mark here. I'll maybe start with that, and Chris, if you want to add in, you can go ahead. There was a recent call with the IESO, a stakeholder engagement meeting, when they really talked about what they're seeing across the province for loads between the different customer classes. On the residential side, we're actually seeing about a 10%-15% increase in daily peak volumes during these heat waves relative to pre-COVID demand. On the residential, the heat has really had an impact on the loads. For small commercial, daily peak and energy reductions of about 4% compared to pre-COVID period. Then for the large commercial and industrial, we're seeing recent increases in consumption since stage 2 reopening. However, the demand for this segment is still slightly below the pre-COVID levels.
To summarize, really, residential loads are increasing, obviously, a lot driven by the fact that people are working from home, a lot of people, and the heat. Small commercial, slight decrease in consumption there, which as the economy reopens, we expect that to start to recover. The same thing with the large commercial and industrial, but have seen a demand increase in that quicker as stage 2 is reopening.
All right.
Yeah, Mark, I'll just add a couple of comments. I think you're correct. We did see in July another increase. This is all publicly available information from the IESO. Peak load was up 12%-13% for the month of July. We've seen a very strong start to August. It is a trend that's continued. No doubt the warmer weather has added to that, but I think the underlying shift from where we consume our power hasn't been as I think some of the assumptions early on that we saw from other countries was that load will drop 10%. We simply haven't seen that. DX load for the last quarter or Q2 was up 2.4%, so that's energy consumption. Then TX peak, which drives our transmission business, was up 5%.
I think I gave guidance on last quarter's call that said if it's based on other countries' experiences, we would have seen a 10% reduction. It's quite an increase. Part of it's no doubt due to weather, but the other part is I don't think we're being affected in the same way other countries were with COVID-19. The IESO also commented on as we're coming into stage 3 with more businesses opening, we should see any of those potential impacts of COVID-19 start to be relieved. The combination of a strong weather pattern and COVID-19 sort of starting to normalize, we should see that continue. In fact, we have in July and August.
All right. That's great. Thanks very much.
Thank you. Our next question comes from Julien Dumoulin-Smith with Bank of America. Your line is open.
Hey, good morning, team. Thanks for the time. Hope you all are well and safe as well. I wanted to follow up a little bit on cash flow. Obviously, there is some gyrations as you already alluded to here. Can you speak to how the DTA might start to flow in and how you think about the future use of these cash benefits just broadly?
Yeah. Chris, do you want to talk to that?
Absolutely. Yeah. Thanks, Julien. Thanks for the question, and good to hear from you again. Overall, what we've done so far is we've received a decision that says, it's a Divisional Court that says, look, the money will be returned to shareholders based on that decision. That's CAD 867 million. The next phase of this is the court will issue an order. The time has expired for an appeal, and the court will now issue an order that is very specific to the OEB. The OEB will go through a process to confirm that they've corrected, and then there'll be a process by which we work out when it gets put in rates. There are a number of options there.
They could ask for an update to a rate order that's in place today, or possibly the more likely scenario would be to ask us to consider the return of the DTA at the next rates order. That could be as late as 2022. That's the end of 2022, going into 2023. That could be the next period for this. It's uncertain, Julien, is exactly when we would start to see the cash flow benefits of that. I would say it would be no later than 2023 on, which is the next rate case. It could be sooner, but that would depend on the OEB process. As for what we would do with that, the benefits would be CAD 50 million-CAD 60 million near term. When we say near term, that's the average run rate of the DTA going forward.
Recall that we've already been sharing.
The benefits with existing rate payers today. By the end of 2022, that could be as high as CAD 300 million. As it stands today, it is approximately CAD 150 million. If you add that on, that could increase the DTA cash flow benefit for a period of time up towards the CAD 100 million mark. The long-term projection is around CAD 50 million-CAD 60 million per year. As for what we would do with that-
All right, excellent.
Julien, as for what we do with that, it's probably too soon to call. It would depend on when we get it and when it starts coming through. Clearly we'd look at our position on FFO, and that would put us in a much stronger position and give us more ability with our balance sheet. We'll have a look at that and determine that at that point.
Got it. Excellent. Can you comment a little bit more on the municipal backdrop and potential for further roll-ups? I could see both COVID being an impasse while municipal budgets and some of the pressures there could also lend themselves to further credibility of such moves. Just if you can speak beyond the formally disclosed processes you've already alluded to looking ahead to 2021 and 2022 as the road forward.
Yeah, it's Mark here, Julian, welcome. I'll start the response to that question. Really, I think communities right now are focused on COVID-19 and how they're going to reopen and restart their economies as well. We are working with those communities. Many of them are our customers, so we're working to support them through COVID-19 and do what we can do to help support that. What they might do with their local utilities in the future as a result of the impacts of COVID is still yet to be known. We obviously, if one is willing to divest of their municipal assets, we would be interested in looking at those, but at this point, we're really just looking at supporting those communities throughout COVID and we'll work with them in the future.
Thank you, team, very much.
Thank you. Our next question comes from Linda Ezergailis with TD Securities. Your line is open.
Thank you. Just a follow-up question with respect to shifting load. As you see residential load having increased and not affected as much as initially contemplated, potentially, how might this shape your capital expenditures? Are there any projects maybe that might be accelerated? Are there some that might be deferred or less of a priority? Do you think it's still too early to tell how structurally loads might be shifting over the longer term?
I think that in the short term, there isn't a lot of change. We have our approved rate filings from now till 2022, and those are based on our capital investments, and that hasn't changed, and we don't expect that to change. In the short term, don't see an impact. I think the longer-term impacts of COVID on demand and load and requirements for new infrastructure is still yet to be seen. I think there is an opportunity for investment in the electrical system as part of economic recovery for the province, and we will be working with the others in the sector, the IESO and governments on putting our ideas forward on where some prudent investments in the system could help with recovery from COVID.
In short, we have approved rates for both DX and TX based on our capital investments from now till 2022, and I don't see that changing.
Thank you. Maybe you can just help give us an understanding of the recent Power Workers' Union settlement that was announced. How might this change your cost and cost trends? Does the tentative settlement provide for any additional flexibility as it relates to use of technology or potentially outsourcing? Can you comment on attributes beyond just the cost?
We do have a tentative agreement with the PWU for both the customer service operations and the main PWU agreement, which represents a large portion of our employees. It is premature for me to speak about the details of that because those agreements haven't been ratified. We're expecting the customer service to be ratified in early September and the main agreement to be ratified in October, at which time we'll be more free to speak about the elements of those agreements.
Okay. Thank you. I'll jump back in the queue.
Thanks.
Thank you. Our next question comes from David Quezada with Raymond James. Your line is open.
Thanks. Morning, everyone. My first question here, just on the topic of productivity savings. Obviously, you had another really strong quarter there, and there were some technology additions that drove that. Could you just maybe talk about how you're tracking versus your targets and what you see as the runway for additional savings going forward?
As we've talked about in the past, really what we are trying to do with our productivity savings is essentially offset inflation. That means about CAD 50 million a year in productivity savings increases. We saw a fairly good increase in our productivity savings in Q2. A lot of that driven by our ability to deploy technology, which I think COVID-19 helped to accelerate, and our move to mobile with a lot of our forestry teams to iPads in their hands and dispatching crew resources using electronic means has really helped us. The other areas that we saw improvements in Q2 is incremental customer service savings, which came as a result of our call center insourcing, and settlements of settlements, which is another element of our call center, which we brought back into the company, and we're seeing savings as a result of that.
On the capital front, we saw incremental fleet rationalization. We accelerated our overtime reduction in transmission stations, and we saw increased wrench time in the move to mobile. Right across, we saw quite a bit of productivity improvement in Q2. The other area was we increased our procurement during Q2 as we stockpiled some resources, some materials like poles and transformers, which, as a result of COVID, we wanted to make sure we had enough stockpile. We got the incremental productivity savings as a result of improved volume buys.
That's great color. Thank you. Then just maybe one other one. Appreciate it's not a huge part of your business, but the unregulated side. I'm just wondering if you can update us where you are with the charging network and maybe any news on the fiber optic side of the business.
Yeah. Chris leads our growth portfolio, so I'll ask Chris to speak to those.
Yeah. I'll take telecom first, which is the fiber optic question. Overall, we've seen our telecom revenues quite strong. Part of our plan is to grow that business. Growing that business with new products has been a little more challenging in this period. When you think about the longer term, it has been impacted slightly here in Q2 and Q3, but we think we can recover that. The positive side is we've seen a higher demand for our services in regards to short-term telecommunications needs by corporates. That has actually underpinned our profitability in that business quite well for this year. We've seen that. We're back on track there. In regards to the EV charging network, we continue to expand our partnership there with Ontario Power Generation, OPG, and it's going very well.
We had started with fast-charging units. Now we're looking at some of the slower-charging units that would be used in residential and non-commercial uses. That business continues to grow at a very good rate for us. The only thing I'd remind you of overall is that it's not a big component of our business. Remember, 99% of our earnings comes from regulated sources, and that will continue to be the case for some time to come. On the unregulated side, some of those things are presenting themselves quite well.
Great. Thanks for that. I'll get back in the queue.
Thank you. Our next question comes from Robert Hope with Scotiabank. Your line is open.
Yep. Morning, everyone. First question, just on Mark's comments about the potential of infrastructure spending as a measure of stimulus during COVID-19. How would that occur under your incentive framework, or would there have to be an overlay there?
Yeah. Hey, Robert. Good question. It's Mark here. I think it's early on to figure out how that would work with the OEB. If the IESO directed us to build additional infrastructure as a result of economic stimulus, we would have to work with the IESO and the OEB on whether it would be incremental above our approved capital program or offset some of it within. I think it's pretty early on to determine what that might look like. We're really just putting forward opportunities for where we see there is load growth and the need for additional infrastructure, particularly in the southwest. We're building one new line in infrastructure to feed the greenhouse industry down in the southwest of Ontario, we haven't even built that and it's fully subscribed by customers already, and there's opportunity for more growth there.
In the mining sector that we see that there's opportunity in the northwest for mining and additional infrastructure to support that. Early days, we're putting things forward that we think might be helpful. How that might be rolled into rates and into our capital program would have to fall out of that.
All right. Appreciate that. Secondly, how are you thinking about your COVID costs that you're tracking, including bad debts? Have those actually started to pick up? As you go into the consultations with the OEB, how do you discuss the fact that you're actually seeing, I'll nominate large savings versus the increasing COVID costs as well as the strong results so far?
I think part of what's happening right now with the cost recovery or the cost collection account is we're working with the others in the sector, and we will work with the OEB on how do you separate the impacts of COVID from the day-to-day impacts of weather and things like that. That's not clear to us yet, even on the revenue side of how do you separate those things. Part of the consultation process will be to get some clarity on how each of the utilities in the province will capture and dissect those costs. At that point, the consultation will turn to what might be appropriate for recovery in the future from the utilities. Again, pretty early on, we are in consultation. We aren't expecting really to get clarity on what it might look like until late 2020 and early 2021.
We'll continue to work with the others in the sector and the OEB through that and update you guys as we go along.
Hi, Robert. It's Chris. Just a clarifying follow-up there. I think you started the question with costs starting to accelerate. Just in regards to bad debts, we have not seen that. Bad debts have remained very flat. In fact, they're slightly down on last year. We made a provision in Q1 for CAD 14 million, and we kept that. We did not change it. There still are ways to go here in terms of COVID, so we've kept that for now, but we've not seen an increase in bad debts from that period. In regards to cost, you did see an increase in this quarter of CAD 23 million. That was primarily at the front end of Q2. At the back end, it's really slowed down here, so we do not expect that run rate to continue.
Again, if you end up with a second or third wave, that could change. For now, we believe that those costs may increase incrementally from here, but not at that rate. Then we're going to do everything we can to try and offset the cost as much as we can.
Thank you. Appreciate that.
Thank you. Our next question comes from Mark Jarvi with CIBC Capital. Your line is open.
Good morning, everyone. Chris, I thought I heard you say that inside the distribution utility that some of the lower OM&A came from standing down crews and a little bit of the reduced activity. Maybe you can help parse apart how much that contributed in the quarter and maybe what would be a more normalized OM&A for the distribution segment this quarter.
Thanks, Mark. I think if you think about the questions on productivity, we were able to accelerate some productivity from later in the year. I don't expect that same level of productivity that we achieved this quarter to continue at that rate for the balance of the year. In the first half of the year, if you add up the statements from Q1 and Q2, we've had quite an impact on productivity. That's been a large source of the OM&A savings here in Q2. I would still expect us what you should see is COVID-19 costs sort of drop away now and then some of our work programs pick up, but I would expect our run rate to stay roughly similar.
That's probably the best way to look at it, Mark, is that, and I was hinting to that a second ago when we talked about our COVID-19 costs being heavily weighted to April and May.
Okay. Are you able to provide any sort of color around when you think about when trends are favorable, whether it's lower storms or weather, and you can try to get ahead on OM&A, whether or not that's transmission or distribution, but how much flex do you guys have in a given year, in terms of how much you can manage OM&A costs?
Yeah. It's Mark here. As we've talked about in the past, really, we try to manage and achieve CAD 50 million in productivity savings. We do have expectations by the OEB that we complete our work programs during the rate period, which in this case, for both TX and DX, goes until 2022. We do have flexibility within that rate period to advance and/or move work in and out of a particular year, provided we achieve our overall objectives by the end of the rate period. We do look at the flexibility, based on what's happening within year, to move work from period to period with the objective of completing all our required work and achieving the outcomes that we've committed to the OEB by the end of the rate period. Chris, do you have anything you want to add to that?
Yeah. I think the only thing I'd add there is that we have some demand programs, like customer connections, storms, and so on. We will be conscious of that also. We will flex our work program to absorb those additional costs. When those costs are not there, we can accelerate some of the work program that we had for future years. We do have that flexibility. We assess that quarterly, depending on what happened in the quarter and what we see happening for the balance of the year. We have quite a bit of flexibility there to do that work.
With net revenues much higher on transmission given favorable conditions, is that what we saw in Q2? Did you try to get ahead a little bit on OM&A spend in the quarter?
What you saw with transmission was more just a case of when we looked at the work that we could do safely, and in an isolated manner, we focused on those kinds of activities that could be done safely for all our staff. We accelerated some work from later in the year that allowed us to do that safely. That's what you saw in the quarter, not necessarily a focused effort on bringing costs forward from a future year.
Okay. Thanks. It's helpful.
Thank you. Our next question comes from Robert Kwan with RBC Capital Markets. Your line is open.
Good morning. Just wondering if you could talk about your interactions with the government, both operational as well as from a rate perspective generally, but a couple of things I'd be interested in your thoughts specifically. First, whether it's operational or just spending, your thoughts on Bill 171 and whether, or if you can quantify what you think the cost or the rate base impact to that would be. As it relates to rates, have your discussions ever moved or incorporated your thoughts on the generation mix and the cost of generation? Notwithstanding you don't have any, but that maybe positions you as a little bit more of an independent expert as it relates to just optimizing the mix within the customer rate basket.
Yeah, Robert, it's Mark Poweska here. Maybe I'll talk in general about interactions with government focuses that I'm seeing from government right now. Probably no surprise to you that government's really focused on the impacts of the pandemic and how they can support the electricity customers across the province. They've taken several actions as a result of that, including a holiday from time-of-use rates, fixing that, eliminating or freezing the Industrial Conservation Initiative, which is really targeted at not penalizing large industrials for using energy at peaks because of the fact that we are energy long and capacity long right now and they don't want them to ramp back and slow down the economy by doing that. They're trying to incent the use of energy to get the economy going.
There's a lot of things the government is looking at right now, and we've seen the actions they've taken, which is really around supporting customers and restarting the economy. There hasn't been a lot of chatter lately around what they're doing with rates long-term and what they want to do with the global adjustment. I suspect at some point they will turn to that. The bill provides a mechanism by which utility companies may be required to move utility infrastructure if necessary for the transit. We are working with the transit authorities to make sure that we're doing our part in order to not hold up the investments in the transit infrastructure, particularly in Downtown Toronto. The risk to utilities is that if utilities delay projects, some of the costs can be passed on to the utilities.
We're working very closely with Metrolinx on the ones that we're associated with to make sure that we're in lockstep with them so that we don't have a risk of some of those costs being passed on to us.
Got it. Have you see any major movement of facilities that would be larger kind of tickets as part of Bill 171?
Yeah. Far, the largest that we're seeing is the new subway line. There is some infrastructure that needs to be moved as a result of that. It's not large in the perspective of it's going to change our rate base growth. It is within the portfolio of our capital program.
Got it. Let me just finish with some of the COVID costs. You've highlighted your costs to date and largely being able to offset that by what seems like more timing on the OM&A. As you kind of push that back into the second half, can you talk about, I think the number is CAD 46 million incurred to date. How much of that do you think you will not be able to offset? As you get into the consultation process, being the largest LDC, what's your position on looking to recover the straight out COVID costs versus whether it's any cost to offset or bringing things that have benefited, like weather and residential use into this, just to kind of minimize it on a net basis?
Yeah, I'll start it, and then I'll ask Chris to talk about the OM&A costs. As I said earlier, we will work with the OEB and the others in the sector on the three cost recovery counts that they've set up. Just a reminder, one is looking at the cost for us to make the billing changes, the other is looking at revenue, and the third is looking at miscellaneous costs such as bad debts. We will continue to work with the OEB on that and as we get more clarity on how that will be calculated and what parts of that might be recoverable in the future, we will share that with you.
Robert, I'll just clarify some things there. The CAD 46 million that you're quoting, that's the subtotal of what we've tracked to date and reported to the OEB. Every utility is doing that, by the way. In that number, there's CAD 14 million of bad debt. We've deferred that essentially. That's related to non-recovery of revenues, and then the remaining part is mostly OM&A. We had CAD 5 million from Q1, which we reported in Q1, and CAD 22 million in Q2. There was a small amount for lost revenue of CAD 4 million, but a minor amount. CAD 28 million is the largest piece, which is OM&A. Like I said, we do not expect that to continue to increase at the rate you saw in Q2. There might be some small flow-through costs in Q3.
Our first job is to minimize that as much as possible, and that's what we're doing. To the extent we can offset, we need to look at the way that you calculate the net impact of COVID-19. Part of it is the actual impact, but then there are some savings from potentially doing things differently. How much of that gets ascribed to COVID-19? The ideal situation is if the industry could offset overall, but again, that will come through the consultation process, and not every utility has the same ability to do that. Where we can do that, we'll lead by example. We're not expecting every utility to be in the same position that Hydro One is. The second part is we need to look at the impact on load. Given that we've had a very positive weather impact.
How does that sort of get squared away with COVID-19? We've not been reporting impacts on loads for COVID-19, even through the tracking accounts. We want to discuss that through the consultation process and ensure that we're all aligned, because that's going to affect transmitters as well as generators, as well as distribution units. We're going to take part in the consultation process that comes out. Right now, our focus is on minimizing those costs as far as we can.
Makes sense. Thanks for the color.
Thank you. Our next question comes from Andrew Kuske with Credit Suisse. Your line is open.
Thank you. Good morning. The question really relates to your customer satisfaction scores, and they've been rising. I guess the real question is, where do you want to be on the satisfaction scores? Obviously higher, where would you like to be? What's the endpoint, how do you benchmark yourselves relative to other munis across the province?
Yeah, great question, Andrew. You're right, we do want to be higher. We are at some of the highest we've seen in customer sat, and a lot of that's driven by the support we've been giving for our customers and the improvements we've made in our customer service, both in the call center as well as in our connections processes. We are seeing a good improvement and increase. We're actually looking at how we can benchmark to other utilities across the sector, both in Canada and U.S. There isn't actually a good, consistent way in which utilities measure customer satisfaction, which we've found so far. We're working on what that might look like, and we're also working through the Canadian Electrical Association to see if we can standardize that, at least across the Canadian utilities, so that we can know how we compare to others.
The reasons why customers are satisfied with us so far is really kind of improvements in our time to restore power outages or improvements in reliability. The work we've been doing for advocating for customers, such as our relief measures for COVID-19, as well as trusted partners we've been lobbying for or advocating for customers with things like off-peak time of use pricing and working with governments to provide some relief for customers. Areas that we can improve so that we can drive up our customer even higher is improving our tree clearing and maintenance efforts. We've been doing that through our OC&PRE program, we'll continue to do that. Obviously, electricity prices, even though we're a small percentage of that, continues to be on the customers' minds.
I don't have a target yet, but we are looking at what is a good comparator way of consistently measuring customer satisfaction that we can compare to other utilities, and we hope to have something this year on that.
Okay. That's great color. When you think about that collection of activities and efforts you've had through the system and your customer base, is that part of your calling card when you have M&A discussions with other munis around the province?
Yeah, we think that our results are demonstrating the value that we can bring to the table and we can bring to the table for other LDCs. It's not just us saying it, that's our customers telling us that now with some of the highest customer sat scores, as well as our proof points such as our productivity improvements and things like that. Absolutely, Andrew, I think that demonstrating that we're the best at what we do is a good way to incent others to look at us as either a partner or possibly a good acquirer of their assets.
That's great. Thank you.
Thank you. Our next question comes from Patrick Kenny with National Bank. Your line is open.
Good morning, guys. Just on the back of the strong quarter here, thanks to weather, plus the positive impact to FFO still to come here from the DTA decision. Can we just get a refresh on how much dry powder you see there being on the balance sheet to pursue LDC consolidation opportunities over, say, the next 12-18 months?
Yeah, Chris, do you want to talk to that?
Sure. I think definitely a strong quarter, but the strong quarter really just underpins the current position that we've always set around our FFO. To maintain the current ratings, we need to stay above 11% FFO to debt. We are comfortably above that at this moment in time. The benefit from the DTA decision won't be factored into our FFO to debt calculation until there is certainty around when the DTA will be recovered through rates. As I said in one of the earlier questions, that could be as late as 2023. It's too soon, Pat, to call what that dry powder is.
We have enough flexibility in our balance sheet today to continue to acquire the smaller LDCs in Ontario. I think that's where we can deliver the most value in two, three, four, five per year if we wanted to. There is no restriction there. That's not a limiting factor for us. Any particular uptick from the DTA is still some time off. It's too soon to give you a figure on just how much flexibility that will provide.
Okay, that's helpful. Thanks for that. Over on the ESG front. As you look to establish more concrete targets this year, such as GHG reductions, I know most of your emissions come from your vehicle fleet. Curious, as you continue to switch certain customers over from propane to electricity, if that will count as a net reduction to your emissions. I guess just maybe how material this switching opportunity might be for the company from a load standpoint, say, over the next five years.
Yeah, good question. I'm not sure I have the details for the answer to that. Right now, our GHG emissions, the main sources, as you point out, one is our fleet, the other is we do have diesel generation for some of our non-integrated or off-grid facilities, as well as SF6 gas, which is an insulating gas we use in our equipment. Those are the three big areas that we're going to look to offset and set targets on how we can reduce those. The switching from propane to electricity, because it's not included in our base GHG emissions right now, we'll have to determine on how we take credit for, or if we take credit for the reduction in GHG as a result of that switch.
Right now, we're seeing a small uptick in our fuel-switching program, so getting off of other fuel gases or oil-based heating or propane to electricity. I don't see it as a big part of our future growth or a big part of our GHG focus. It's something for us to think about, Patrick.
Okay. That's great. Thanks.
Thank you. Our next question comes from Mona Nazir with Laurentian Bank. Your line is open.
Good morning. I'm not sure if you have this, just looking at the runway of potential LDC consolidation and targets, what kind of cumulative growth do you think that could bring? Perhaps another way to think about it is even on an annual basis, is there a number of targets that you have in mind, whether that's one or two? Thanks.
Yeah. Chris leads our growth portfolio. I'm going to ask Chris to speak to that.
Hi, Mona. Thanks for the question. I think it really depends on a willing seller and a willing buyer. We're definitely a willing buyer, and we think we can bring the most benefit to those utilities that are within our service area today. They're more in the remote locations, and we can bring significant synergies there that will benefit customers in the long term, but also just let's hope a fair price in the short term. I think it really does come down to that, and I think Mark answered the question previously around COVID-19 and the pressures they may be facing. Right now, really, we know municipalities are focused more on helping their residents and ensuring the safe and reliable power, just like we do today. We're really helping support them as we go forward today as a customer of ours.
They've been normally within our service territory. We can help them in any other way as we move forward. We stand really and able to partner with any of them. We'll continue to be there. In terms of the opportunity that's left, there is around CAD 9 billion of rate base left in the province that is not in the hands of, say, Hydro One or Alectra, where there's a consolidation of smaller LDCs. The largest of which is Toronto Hydro, so if we exclude that, there's around CAD 5 billion, just under, of smaller LDCs around the province, ranging anywhere from tens of millions up to over the billion-dollar mark or close to the billion-dollar mark out of Ottawa. We'd be willing to speak to all of them.
It's just a case of when does it make sense and how do we bring the most value to the municipality and the rate base. We did talk a little bit about our balance sheet. Our balance sheet can support a lot of these smaller roll-ups, if and when they occur. Right now, for this year, we're focused on closing Peterborough and Orillia. We just closed Peterborough here in August. Orillia will be in September or in Q3. We want those to be very successful acquisitions, again, to further demonstrate how we partner and benefit the communities in which we work and we supply power. That's our focus going forward. There is no specific number, Mona, but there's around CAD 4 billion of rate base there, CAD 4 billion-CAD 5 billion, that we think is available when the time is right for both parties.
Perfect. That's very helpful. Just lastly, I'm wondering if you could share perhaps one of the biggest surprises or takeaways when you've been dealing with COVID's impact on the overall business. Thanks.
Yeah. It's Mark here. Maybe I'll respond to that one. Really, I was impressed with the organization's ability to quickly transition to working from home and our deployment of technology to enable that working from home, as well as our crew's ability to safely get back to work fairly quickly after the pandemic broke out and we put our safety measures in place. I've been proud of and impressed with the organization's ability to adapt overall. I also think it's really accelerated our use of digital tools and technologies that we've been using or looking at for a while, and this has really provided an opportunity or otherwise forced us to really use those that I think some of those will stick long-term and provide long-term benefits.
That's great. Thank you.
Thank you. We have time for one last question. Our last question is from Elias Foscolos with Industrial Alliance. Your line is open.
Good morning. With respect to the revenue beat, or sorry, the strong year-over-year revenue, I guess, in Q2, you attributed the majority, I believe, to the warmer weather, but would it be more accurate to call it the warmer weather plus the combination of load shift to residential?
Yeah. Welcome to the call, Elias. I'll start that and let Chris pick up on that. Definitely, we've seen a shift based on behaviors, and COVID's brought some of that on, being more people working from home, yet offices still being open. Hotter weather has had an impact on that and drove the peak demand overall. We did see that. The overall consumption is how much energy our customers used and the customers of the other LDCs used is dependent on the sector, as I talked about before, whether that be residential, commercial or industrial. It's a different story for each of them.
I think, dissecting, as I said before, what are the impacts of COVID versus what are the impacts of the hotter weather and how do you separate those out is something that we'll work through with the other utilities as well as the OEB going forward. Chris, do you want to add to that at all?
Sure. Hi, Elias. I would say if I looked at revenue overall, an amount of that did come from, we say, volume, which is the higher peak demand. What drove that? It appears to be primarily weather, not increased consumption. It could be a shift in load about when we're using those peaks now with more people being at home. We could be changing the shape of the peak, but not particularly higher load consumed at home. I just remind you that a chunk of our distribution business is fixed. For example, if you consume more power, there's a flow-through cost of power. That doesn't come to Hydro One. We buy the power, but we just flow that through. There is no increase in net revenue to Hydro One as a result of that.
There's a second part of that, which is when we received our decision on transmission, we received it in Q2, and we received a number of one-time benefits from that. We talked about conservation and demand management revenue. Once that decision was received, we're able to book that. That relates to prior years. We're also able to book catch-up revenue from Q1 because the decision didn't come to Q2. I would say roughly half of it comes from these one-time benefits. That was just the timing of the decision, and the other half comes from peak demand, which is not increased consumption, but it's a change on where the load peak has occurred. I would say it's about 50/50, is the way to answer that question, Elias.
Great. Yeah. That in the end was kind of what I was looking for, Chris. I appreciate the roundabout way I asked it and your direct answer.
Great. Thank you.
Thank you. That does conclude our Q&A session for today. I'd like to turn the call back over to Omar Javed for any further remarks.
Thank you, Shannon. The management team here at Hydro One thanks everyone for their time with us this morning during what is definitely a busy period. We appreciate your interest and your ownership. If you have any further questions that weren't addressed on the call, please feel free to reach out and we'll get them answered for you. Thank you again and enjoy the rest of your day, and be safe.
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.