Good morning, ladies and gentlemen, and welcome to Hydro One Limited's fourth quarter 2022 analyst teleconference. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the questions on the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. As a reminder, the call is being recorded. 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, thank you for joining us in Hydro One's quarterly earnings call. Joining us today are our President and CEO, David Lebeter, and our Chief Financial Officer, Chris Lopez. In the call today, we will go over our quarterly and annual 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. 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. Today's discussions will likely touch on estimates and other forward-looking information.
You should review the cautionary language in today's earnings release and our MD&A, which we filed this morning, regarding the various factors, assumptions, and risks that could all cause our actual results to differ as they all apply to this call. With that, I'll turn the call over to our President and CEO, David Lebeter.
Thank you, Omar. Good morning, and thank you for joining us for our fourth quarter earnings call. This morning, I will talk about our fourth quarter, our annual achievements, and a look forward. Chris will then take you through the financial results in greater detail. I'm excited to take on the role of the CEO of Hydro One and to continue working with all our employees across Ontario. As many of you know, I've been the COO at Hydro One for the past three years, and I've seen firsthand the hard work and dedication that our teams bring to our organization every day. Together, we have achieved great success, and I'm confident that we will continue to successfully execute our strategy in the years to come.
My top priority as CEO will be to maintain our focus on safety, meet our customers' expectations, drive operational excellence, and invest in our teams to ensure we have the skills and capabilities to meet the demands of the future. In short, we will continue to focus on executing our strategy. As we move into 2023, I want to assure our employees, shareholders, partners, and stakeholders that the transition Bill Sheffield's leadership to mine is smooth and seamless. Our priority is to maintain the momentum. I am proud of the results we have achieved. Our strategy, people, culture, and values are what have made Hydro One successful. I'm committed to building upon that foundation, delivering on our promise to our customers and stakeholders. In Q4, we built on the momentum of the first three quarters and achieved outstanding safety results.
Our focus on and commitment to protecting the well-being of our employees has truly paid off, as demonstrated by our record low recordable and serious incidents. I am proud of the dedication and hard work that has gone into making our workplace safer. While we have made good progress, we have much more work to do. Safety will always be a priority as we continue to make the workplace safer. In 2022, Hydro One achieved our best safety results ever and made significant progress to preventing life-altering injuries and fatalities. Our workplace was safer in 2022 than it has ever been because we had a good plan, the Safety Improvement Plan, which we created with our employees two years ago, and because the entire organization was committed to that plan. The results speak for themselves.
Hydro One's reportable injury of 0.616 per 200,000 hours is well below the world-class benchmark of 1.0. Hydro One saw a significant improvement in the number of high-energy serious injuries over 2021, with only 1 employee sustaining a high-energy serious injury in 2022 compared to the 4 in 2021. This equates to a high-energy serious injury and fatality, or HSIF rate, of 0.012 per 200,000 hours, well below our annual target of 0.066. We are well on our way to eliminating all serious injuries and fatalities by 2024. Our safety results are even more impressive when considered in relation to the adverse storms of 2022.
Our crews, who are committed to providing the highest level of service to our customers, restored power to nearly 760,000 customers after the derecho in May, spent weeks in maritime Canada rebuilding their system after post-tropical storm Fiona, and then restored power to approximately 550,000 customers during the December holiday season storm. While these storms adversely impacted our reliability statistics, I am pleased to report there were no recordable incidents during those events. In addition, we are once again recognized by the Edison Electric Institute for our efforts following the May derecho. This is our 13th Edison Electric Institute award. In late November, the Ontario Energy Board approved our five-year joint rate application. This was a culmination of years of work by many people and establishes a clear path forward.
The rate application was approved because, through the largest customer outreach ever, we knew what Ontarians wanted. We demonstrated year-over-year productivity savings. We were responsive to the concerns of intervenors and had built an investment plan which met the evolving needs of our customers while keeping pace at the maintenance and growth needs of the transmission and distribution system. We believe this plan will benefit all Ontarians by ensuring we are able to provide safe and reliable electricity for years to come. I also want to recognize our regulator, the Ontario Energy Board, for their constructive process. It is only because we submitted a strong investment plan into a robust regulatory process in which all participants, intervenors, the Ontario Energy Board regulators and Hydro One displayed a high level of cooperation that such a complex case was settled so quickly.
Now that the approval is behind us, it's all hands on deck executing our investment plan and delivering on our promises to our customers and stakeholders. I have no doubt that every person at Hydro One will continue to execute their work to the best of their abilities. Once again, we met our capital investment commitments. This year we deployed CAD 2.132 billion of capital and in service CAD 2.267 billion of assets. I am pleased to say we have done this while being extremely mindful of costs. Every dollar we invest comes at a cost to our customers, which is why we are committed to spending wisely and continually improving productivity. In 2022, we achieved productivity savings of CAD 374 million, which represents an 8.6% increase year- over- year.
Total productivity savings since 2015 now amount to almost CAD 1.5 billion. This is a remarkable effort, especially considering the inflationary pressures faced this past year. We operate in the traditional and treaty territories of more than 100 indigenous communities. In 2022, we were proud to announce a historic partnership model with First Nations when building new transmission lines. This partnership model reflects our commitment to reconciliation, sustainable development, inclusivity, and being a responsible corporate citizen. By working together, we aim to create long-lasting benefits for indigenous people, Ontarians, and Hydro One. The Hydro One equity model offers First Nations a 50% equity stake in new transmission line projects with a value exceeding CAD 100 million, and will transform the benefits of infrastructure development for First Nations.
We believe that this collaboration sets an example for the industry and demonstrates the power of listening, respect, and seeking mutually beneficial outcomes in infrastructure development. As part of our commitment to being a trusted partner to Indigenous communities, this year we also increased total procurement with Indigenous businesses to CAD 95.9 million, our highest spend to date. This is a significant increase from last year and has us well on our journey to purchase 5% of our materials and services from Indigenous businesses by 2026. The Indigenous procurement target is but one of the many goals that are included in our updated sustainability report that was released in August. At Hydro One, we take our commitments to people, planet, and community seriously. We'll continue to keep you informed of our annual progress report.
Following the release of the sustainability pricing on our lines of credit in January 2022, we recently published our sustainability financing framework in January of 2023. The framework, which is a first for a utility in Canada, allows Hydro One and its subsidiaries issue sustainable financing instruments such as sustainable and green bonds, and allocate the net proceeds to investments in eligible green and social project categories. The framework was so well received that we issued Hydro One's first medium-term notes in accordance with the sustainability financing framework. This was the largest aggregate amount in the issuance of sustainable bonds by a corporate issuer to date in Canada. Looking out for our people, the planet, and communities is ingrained in the DNA of our organization.
Hydro One employees personally raised approximately $1.6 million in the annual Power to Give month last September, more than doubling what was raised the year before. It is this commitment to serving others and doing the right thing that makes Hydro One such a special place to work. For the eighth consecutive year, Forbes recognized Hydro One as one of Canada's best employers. It's an honor for me to lead this committed and dynamic group of people. Looking ahead, I see tremendous opportunities for Hydro One. Ontario and Canada are building an economy more reliant on clean electricity. The Independent Electricity System Operator, or IESO, estimates that attaining a decarbonized electricity sector by 2050 will require a system more than double the size it is today at an estimated cost of around $400 billion.
Hydro One has the unique opportunity to be a leading player in achieving that goal. As I take on the leadership role at Hydro One, my top priorities are, one, ensure our safety journey continues. Two, fill the vacancies on our executive team. Three, remain disciplined in executing our maintenance and capital investments. As I conclude my remarks, I want to Bill Sheffield, who stepped in from the board as Interim CEO when the company needed him. Bill, I know you're listening to today's call. On behalf of the company, the executive team, and myself, I want to thank you for your service to the company, its shareholders, partners, customers, and stakeholders. Your leadership and dedication to ensuring a smooth transition has not gone unnoticed, and I'm truly grateful for your unwavering support.
Your guidance has been invaluable and has set a strong foundation for my role as incoming CEO. I'm confident your contributions will have a lasting impact on Hydro One, and I'm eager to build on the progress that you have made. With that, I'll turn it over to Chris to discuss our financial results. Over to you, Chris.
Thank you, David. Good morning, everyone, and thank you for joining us today. David, I'd like to extend my sincerest congratulations on your appointment as CEO. Your leadership, strategic vision, and passion for excellence have been evident in your previous role, and I'm confident that you will bring that same energy to this new role. Your unwavering commitment to our mission and values will be instrumental in driving the company to new heights. I look forward to working with you and our talented team at Hydro One, as together we continue to strive towards achieving our goals and creating long-term value for our stakeholders. Once again, congratulations. In terms of our financial results for the quarter, earnings per share was CAD 0.30 compared to CAD 0.27 last year.
For the full-year, EPS was CAD 1.75 compared to EPS of CAD 1.61. The main drivers of the higher earnings this year were consistent with our experience throughout the year. They were higher revenues on account of approved rates, which considered our annual investment in the grid and power system, strong electricity demand experience throughout the year, and recognition of conservation demand management or CDM revenues, a one-time item in the fourth quarter. These drivers were partially offset by higher operations, maintenance, and administration, or OM&A expenses on account of higher work program expenditures, including environmental management, stations and line maintenance and IT initiatives. Higher depreciation, amortization, and asset removal costs due to the growth of our capital assets, partially offset by the sale of surplus property, a one-time item in the fourth quarter.
Higher year-over-year financing charges due to the recognition of carrying charges for the deferred tax asset or DTA recovery amounts last year and higher interest rates on short-term notes, as well as higher income tax due to increased pretax earnings, partially offset by higher deductible timing differences. As a reminder, we adjusted for the amounts pertaining to the DTA implementation decision in both revenue and income tax, making them net income neutral. Similarly, we had a tax recovery relating to the capital overhead tax variance in both transmission and distribution following the Joint Rate Application or JRAT decision, which resulted in a reduction in both revenue and income tax, once again making this net income neutral. While our costs were higher this year, I did want to echo David's comments that we continue to be highly productive.
As a result of our efforts, we were pleased to give back approximately CAD 23.5 million to our customers via the earnings sharing mechanism as both our transmission and distribution businesses performed very well this year. On the productivity front, we achieved CAD 374 million in productivity savings in 2022, which brings our cumulative productivity gain since the initial public offering to approximately CAD 1.5 billion. We saw meaningful increases in productivity in areas such as operations and forestry. Overall, productivity was weighted evenly between capital and OM&A. Through these achievements, we are delivering on our multi-year commitment to keep costs as low as possible. Turning to the fourth quarter, net income to common shareholders was higher year-over-year by 11.9%.
Key drivers of the quarter were higher revenues due to approved rates, two one-time items, one in revenue and one in depreciation, as mentioned previously, and upon which I will elaborate further during this call, as well as lower taxes, which was partially offset by higher OM&A. Our fourth quarter revenue net of purchase power was higher year-over-year by 11.8%. The increase is mainly due to revenues resulting from the Ontario Energy Board, or OEB, approved 2022 rates, as well as regulatory adjustments, including the recognition of CDM revenues following the receipt of the JRAT decision, net of earnings sharing. For the transmission segment, revenues were higher by 14%. This increase reflected the recognition of the one-time CDM revenues arising from the JRAT decision on account of the disposition of the variance account associated with CDM revenues from 2018 and 2019.
Going forward, we do not expect there to be any material amounts for CDM revenues from prior years as this account is now closed. These CDM revenues were partially offset by a higher earnings sharing adjustment for 2022 that is recorded in the fourth quarter. We had higher transmission revenues due to OEB-approved rates for 2022. Year-over-year peak demand for the quarter was relatively flat, driven by marginally weaker demand in all three months compared to the same period last year. For the distribution segment, revenues net of purchase power were higher by 9.9%. The main drivers were the OEB-approved rates and positive regulatory adjustments, net of earnings sharing for 2022 compared to last year.
Consistent with the annual analysis, both the transmission and distribution segments had net income neutral items included in revenue resulting from the DTA implementation decision and the capital overhead tax variance. The corresponding offsets are in tax expense, making them net income neutral. On the cost front, operating maintenance and administration expenses were higher year-over-year by approximately 39%. This represents approximately 75% of the annual increase in OM&A. OM&A was higher in the transmission segment due to higher work program expenditures, which included maintenance on stations and lines, higher corporate support costs, and higher property taxes, which were partially offset by lower project write-offs.
In the distribution segment, OM&A was higher due to higher work program expenditures that included a higher volume of emergency restoration and environmental management, higher spend on IT and customer programs, as well as higher corporate support costs and project write-offs in comparison to last year. The level of OM&A expenditure is consistent with our expectations that have been outlined in previous calls as we caught up with our work programs that were deferred on account of storms earlier in the year. Depreciation expense for the fourth quarter was lower year-over-year by 6.5% due to a one-time gain realized on the sale of surplus property to the city of Toronto to facilitate transit. This was partially offset by higher depreciation from the increase in capital assets, which is consistent with our stated capital investment program and higher asset removal costs.
On financing, we saw an increase of 4.1% in interest expense in the quarter due to a higher weighted average rate on short-term notes, partially offset by gains on interest rate swap agreements. As David mentioned, on January 12, 2023, we announced our sustainable financing framework. Under this framework, we can issue green, social, or sustainable bonds, loans, or commercial paper for several purposes. The use of proceeds allows us to raise financing for initiatives including the transmission and distribution of clean energy, smart grid technology and other uses that promote energy efficiency, facilitation of clean transportation, including EVs, biodiversity conservation, climate change adaptation, socioeconomic advancement of indigenous peoples, and access to essential services like broadband. On January 27, 2023, Hydro One Inc. issued an inaugural offering of CAD 1.05 billion of medium-term notes under the sustainable financing framework.
This consisted of CAD 300 million maturing in 2029 with a coupon rate of 3.93%, CAD 450 million maturing in 2033 with a coupon rate of 4.16%, and CAD 300 million maturing in 2053 with a coupon rate of 4.46%. This was the largest aggregate corporate sustainable bond issuance in Canada and a further demonstration of our strong commitment to sustainability. We continue to be pleased with the stability of our balance sheet and robust investment-grade credit rating. As we look forward, we will continue to access the debt markets opportunistically. Income tax expense was CAD 41 million for the quarter compared to CAD 55 million in the same quarter last year.
The decrease in income tax expense was due to higher deductible timing differences and net income neutral items that are also captured in revenues. These were partially offset by taxes on higher earnings for the quarter. The effective tax rate this quarter was 18.6% versus the effective tax rate last year of 25.5%. On a full-year basis, income tax expense for 2022 was CAD 288 million, compared to CAD 178 million in 2021. The increase in income tax was primarily due to the net income neutral items discussed earlier and higher pre-tax earnings, partially offset by higher deductible timing differences. The effective tax rate for 2022 was 21.4% versus 15.5% in 2021.
This is consistent with the annual guidance we provided last year of 14%-22% over the next five years. Following the approval of the joint rate application and the corresponding capital plan, we are now updating the ETR guidance to 13%-16% over the next five years, with the most significant impact occurring in 2023 due to the recovery of the previously shared DTA amounts. Moving to investing activities. Capital investments for the fourth quarter were CAD 570 million, which is a 7.1% increase from the fourth quarter in 2021. The increase came primarily from the distribution segment, which had a higher spend on storm-related asset replacements and higher volume of work on customer connections.
There was a marginal increase in the transmission segment, which had a higher volume of refurbishment and replacement work on transmission stations and lines, and a higher volume of work on wood poles. This was partially offset by a lower volume of work on customer connections. For the full- year 2022, capital investments were relatively flat, with a 0.3% increase compared to the full- year 2021. You'll also note that the future capital investment profile for both segments have been updated since our last call. The primary reason being to reflect the adjusted timing and pacing of future capital investments and reprioritization of work. The overall increase in transmission capital reflects the projects that are outside of the joint rate application.
In the fourth quarter, we placed over CAD 1 billion of assets in service for our customers, a 38.7% increase compared to the prior year. The year-over-year increase in the transmission segment of 44.7% related to completion of large replacements for end-of-life air blast circuit breakers, higher customer connections, timing of IT initiatives, and refurbishment and replacement of transmission lines. In the distribution segment, the 26.8% increase was on account of the partial in-servicing of a feeder development project, storm-related asset replacements, and miscellaneous assets placed in service for IT initiatives and customer connections. On a full-year basis, assets placed in service were higher by 29%. On guidance, as most of you know, we are unique in the Canadian utility sector because we provide earnings guidance along with projected rate base and targeted dividend growth estimates.
This not only demonstrates the confidence we have in our ability to execute, but also the stability and predictability of our earnings in our business. As promised, we updated our earnings guidance to reflect our view of the next five years. We have also provided normalized earnings for 2022, which can be used as a waypoint for our guidance. The updated slide is available in the investor presentation that is posted on the website. Our view of normalized basic EPS is $1.61 after adjusting for items that we view as non-recurring and for rebasing due to the new rate period commencing in 2023. Starting at the 2022 reported EPS of $1.75, we make two adjustments for one-time items that we discussed earlier on this call.
The gain on sale of surplus properties sold to the City of Toronto and the recognition of the disposition of the CDM revenues that were approved as part of a joint rate application. The resulting figure is an EPS of $1.67 that has been normalized for one-time items. This is slightly above the target of 4%-7% EPS growth, a possibility we communicated in last quarter's call. We normalize earnings to factor in the allowed return on equity or ROE for both segments, as well as 100 basis points of potential overrun. This step is necessary to rebase for all the productivity savings, favorable demand, and impact of low interest rates that will now benefit customers in the next rate period.
The rebasing is a great example of a constructive regulatory incentive rate making model that has worked as intended to deliver positive outcomes for the long-term benefit of the customer. The resulting normalized EPS for 2022 is CAD 1.61. That waypoint in hand, we move to the future. We are updating our guidance and introducing a range of EPS for 2027 of CAD 2.05-CAD 2.26. This range translates into a compound annual growth rate of 5%-7% over the period 2022 to 2027 on normalized EPS of CAD 1.61 in 2022. The long-term projected rate base growth currently stands at 6%. It could be expected that dividends, with the approval of the board of directors, would follow this level of rate-based growth.
We anticipate funding this growth through internally generated cash with no need for external equity issuance. As important as it is to know the growth figures, it is equally important to know what is not included in this forecast and how we intend to update it. The EPS growth range does not factor in growth from broadband, LDC consolidation, and five of the six transmission lines that have been previously awarded to us, but only have preliminary estimates, as well as any amounts from externally driven variance accounts. We will update guidance if there is a material change to the growth range when we have further clarity and concrete estimates on these specific initiatives. We will not provide quarterly or annual reconciliations going forward unless there are material events that impact the guidance discussed here. We also don't expect to provide rolling guidance.
Future guidance is expected to mirror the term of the rates filed. This is an exciting time for Hydro One. We have a strong culture of performance. This is proven through our historical ability to deliver on our predictable capital plan and our ability to realize significant operational efficiencies year-over-year. We have plans to grow our business through investment in our aging assets and in support of the growing Ontario economy. Lastly, we have a strong balance sheet that provides stability and underpins our growth plans. I'll stop there, and we'd be pleased to take your questions.
Thank you, David and Chris. We ask the operator to explain how they'd like to organize the Q&A polling process. In case we can't address 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 one follow-up. If you have any additional questions, we request you to rejoin the queue. Please go ahead.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Robert Hope with Scotiabank. Your line is now open.
Good morning, everyone. David, the question's for you. What has been your focus in the first few days as CEO? You know, as you look forward, I do appreciate kind of the priorities that you did lay out in your prepared remarks. Diving into that a little bit deeper, any areas where you'd wanna focus on more than has been a focus in the past?
Good morning, Robert, and thank you for joining us on the call today. Clearly my focus in the first few days, weeks in this role has been reestablishing the executive team, filling the vacancies that we do have, and I'm very confident we're gonna be able to fill them from internal. We have a strong bench strength of people coming up within the organization as was evidenced by my promotion into the CEO role. In terms of the other priorities, there's not much more detail I'd like to actually provide. Safety continues to be a paramount focus for us. It's been a long-term goal of ours to reduce all fatalities and serious injuries and one which I indicated in my prepared remarks that we're well on our way to. Maintaining our focus on delivering or executing on our maintenance and capital programs.
That is really our priority. That's how we live up to our promise to our shareholders, our stakeholders, and our customers.
Thanks for that. Then maybe, a little bit more of a detailed question. On the broadband opportunity, you know, you spoke quite a bit about that with your last quarter results. You know, when you take a look at the opportunity set in front of you, how are the opportunities coalescing, and when would you expect to see meaningful capital being put to work on that opportunity?
The broadband program, the intent is to have all Ontarians connected up by the end of 2025. Our role in that program is really to facilitate access to our infrastructure so the internet service providers can attach their equipment and connect customers. To that extent, the program is really driven by their pace. We started to see some ramp up in the back half of 2022. We're continuing to see some increased activity right now. We expect that to accelerate through 2023 and onward towards that completion date of 2025.
Appreciate it. Thank you.
Thank you. Our next question comes from the line of Linda Ezergailis with TD Securities. Your line is now open.
Thank you. I'm wondering if you could help us understand some of the elements or potential opportunities that are not embedded in your guidance. What could that add potentially to your earnings growth out-outlook? What's the magnitude?
Hi, Linda, it's Chris. Thanks for that. Yeah, what we attempted to do here in the guidance is stay consistent to what we've done previously for 2019 to 2022, which is show the base growth rate, which is what we're showing you here, 5%-7%, which really tracks the 6% in the joint rate application effectively. That's the midpoint.
Things that can force that up or can help us, you know, earnings above a 100 basis point overrun, which is good for everybody if we get there by 2027 because it means that we can give more back to our customers. Savings off interest rates, for example, if we can secure rates that are lower than what was previously secured. A good example was the recent one we just did that gave us some benefit on that. If we can continue to do that and time those allocations, that would be useful. I think what you're asking is what additional investments could come in. Broadband was already asked, and I think what the question that Robert had was, you know, when could we expect some guidance on that number?
The more insight we get into the demand program on broadband, that's when we'll have confidence in bringing that forward. You know, I've said in the past, it could be anywhere from. It's in the hundreds of millions CAD. It's not in the billions CAD. It could be CAD half a billion to CAD 1 billion. We won't know that until we see more of this demand coming through. That's one example. The other one is the transmission lines. We said five of the six are not included. The only one that's in here right now is Chatham to Lakeshore, CAD 268 million. Again, I don't have an estimate for you today of what each transmission line is worth. You can have an assessment yourself. Again, that can be in the hundreds of millions CAD. The final one is the acquisition of LDCs.
It's set out on the slide on the website. That one there, we target CAD 100 million-CAD 200 million per year, so that can add another, you know, certain amount. I've said that one in the past, for every CAD 100 million that we acquire of rate base, it's about CAD 0.01 of credit. Those items are not in this guidance range. If they came through in any material way, it would cause us to reissue guidance, and it would push us above that range.
Thank you. Just as a, as a follow-up, in your core business, you've got an approved joint rate application. Clearly, some opportunities there to benefit all stakeholders as you execute and implement your plans around that. What are the priorities and the milestones of putting things in place to pivot to that new regime? Where do you see the challenges in executing that?
Morning, Linda. It's David. I'll answer that question. The joint rate application is very consistent with our previous strategy. We're focusing on our investments, maintaining our assets and, you know, new builds, as Chris outlined. There's really no change, there won't be a pivot as we move forward.
Where do you see the biggest challenges, like continued inflationary pressures or attracting and retaining the right talent to execute that?
My apologies. I forgot the second half of your question, so thank you for reminding me. The challenges are, it's actually gonna be the inflationary pressure. Far, we've experienced about 6%. It is different by category. I'm really pleased with the way our team has responded to that inflationary pressure. We've looked at alternative sources of supply. We've purchased long lead times in ahead of purchased long lead time items. A lot of our procurement has locked in rates that are formulaically driven based on the price, base price of commodities underneath. That's gonna be our biggest challenge in the short term. Talent for us, we're very, very fortunate that, in general, we have very low turnover, somewhere around 1%.
When we do go to the market to recruit people, we have many people that apply and wanna come work for us. There are a few sectors that are a bit more challenging for us, IT, cybersecurity being two of them that come to mind. To date, we've been very successful in filling the vacancies we have and acquiring the talent that we need to continue to deliver on our strategy.
Thank you, and congratulations on your promotion. I'll jump back in the queue.
Thank you.
Thank you. Our next question comes from the line of Dariusz Lozny with Bank of America. Your line is now open.
Hey, guys. Good morning, and thank you for taking my questions. First one is I just wanted to maybe reconcile a couple of the statements made in the opening remarks, and in your presentation. I understand that over the long term, you're targeting a 70%-80% dividend payout range. I think with the dividend update this morning, you're tracking a little bit below that. So curious, if you could maybe speak to those dynamics a little bit, as far as relative growth rates of the dividend payouts over this five-year timeframe that you laid out the new EPS CAGR for.
Thanks, Darius. It's Chris. You're correct. We didn't have an increase this morning. We've traditionally done that in May. You can expect that to occur in May of this year.
We have not changed the target. It is 70%-80%. There will be an increase recommended to the board. They'll need to approve it, but there'll be an increase recommended. I would expect in those remarks, as I said, that the dividend increase would track our rate base growth. You know, in the past, it's been around five, and I expect it to be six going forward. You can expect that in May. I think that will get closer to your number, Darius. I think we're in the low 60s right now. It'll take you up into that 70 range. The lower end of that, which again, we're very pleased with our balance sheet and gives us a lot of flexibility for growth moving forward. Great. Thanks for that, Chris.
Actually, you alluded to my second question in your response there. I just wanted to ask about the specific headroom that you have on your balance sheet as far as obviously we're talking quite a bit about upside to your 5%-7% as far as LDCs, acquisitions, transmission projects, et cetera. At what point, assuming that those pieces of upside materialize, would you anticipate needing additional financing, including potentially external equity throughout this five-year plan? So, Dariusz, I said earlier, based on the joint rate application itself, no need. LDCs are interesting because, you know, we end up getting synergies off them very early on too. They're actually not dilutive to our borrowing capacity. Effectively, you know, for the smaller ones, it's quite supportive of our debt metrics.
We would not need it for the smaller ones. Now, if we had a very large capital program on transmission, for example, that's where you might need it, but it wouldn't be in this 5 years. Because remember, we only balance up equity and debt when we actually put the asset in service. You know, if new transmission lines are announced beyond the 5 or the 6 that have already been announced, it's unlikely they would go into service by 2027. The time we would need equity would be on this 5-year period in any case. I'm fairly confident that the requirement for equity is very low in this period. It's non-existent right now. I don't see a position where that would come in the next 5 years.
Okay, terrific. Thank you for those responses. I'll pass it along here.
Thank you. Our next question comes from the line of David Quezada with Raymond James. Your line is now open.
Yeah, thanks. Excuse me. Morning, everyone. Just one for me. Just curious, when you look over your coming five years and thinking about, I guess, things that are not in your capital plan. I know that, in the province of Ontario, there's new storage capacity that's gonna be integrated, potentially some additional renewables and other generation sources. I'm just curious if you see any opportunities there incrementally over above your current plan or guidance from integrating those new generation sources and storage.
Hi, David, it's David. Good morning. There will be opportunities as we move forward and the future becomes clearer. Right now, we do have some battery storage within our own joint rate application. As always, we will always connect customers, whether they be load customers or generation customers that come along. As you can imagine, the energy transition or electrification of Ontario's economy is really just starting to pick up steam. We're watching all this, and we're paying attention to it, and we're really excited by the ISO's Independent Electricity System Operator's report on Pathways to Decarbonization. That points to, as you pointed out rightly so, increased investments in batteries and renewable generation. We're following all that.
We're in active discussions with the ISO as well as the Ontario Energy Board, as well as the province of Ontario on how this plays out. We remain an active participant and a facilitator.
I think, David, just one thing to add to that would be that similar to the question we had earlier on when would those material investments come up and even in Pathways. It, a material amount of that opportunity would be outside this 2027 period. When we're providing guidance today to 2027, we will update that on our next application as well, like as we've done in the past. That's when you could expect to see more of those kind of opportunities come out. There's more and more discussion on them. There are more announcements being made. It's still gonna take time for those investments to be made and put into the system.
Excellent. Thanks very much for the call. I appreciate it.
Thank you. As a reminder, to ask a question at this time, please press star one one on your touchtone telephone. Our next question comes from the line of Maurice Choi with RBC Capital Markets. Your line is now open.
Thank you and good morning. just wanna follow up on the guidance range. Chris, you mentioned that the approach in designing this guidance is the same as when you put out the 2022 guidance. In deriving this, CAD 1.61 normalized EPS for 2022, you've removed CAD 0.06 for a 100 basis points over earn. When we look at the 2025 and 2026 for 2027, does that include the 100 basis points over earn? Put differently, any reason why we shouldn't expect you to also deliver this over earn over the next 5 years?
Hi, Maurice. Thanks for the question. The 100 basis points is in both numbers. In the guidance we put forward back in 2019, we took it out of the starting number, and we left it in the back end, and that sort of tilted the growth rate up. In this one here, we have left the 100 basis points in the base here, and it's in the final year as well to show, you know, we expect we may not reach it in every year, but we would expect that over five years, you would absolutely reach that number. That's part of incentive rate making, is that we are encouraged to do that or incented to do it because our customers benefit from it in the future.
In short, Maurice, it's in both numbers and, you know, we're committing to achieving that for the benefit of all stakeholders.
Perfect. Maybe just to follow up on the DPS question earlier on about your dividend payout ratio. Suppose you get into a situation where your EPS obviously outstrips your DPS growth. When you think about the next five years and the propensity for this to be perhaps on the lower end of your dividend payout ratio, what would propel you to or motivate you to consider increasing that rate or even changing your target payout ratio to be perhaps closer to some of your peers south of the border?
I think, Maurice, it's always a matter for the board, and I get the lucky position of recommending what we should do, but the board will approve it. My thoughts are this, that look, it's a way of financing new growth. We don't have any restriction right now on how we're gonna finance new growth, so the dividend will absolutely match Our rate base growth. I could see at 6%, we have no challenge with that. At 7%, it still would be okay. I would see it tracking it at that point.
It's when you get up, if I think about, you know, David spoke about ESO Pathways and so on beyond 2027, when you start getting into much higher growth rates that are potentially there, that's when we would think about do you chase the dividend payout all the way up, or do you use that as a form of financing? You know, what I would do, and I said it before, Maurice, is I would consult with our shareholders and all stakeholders to work out what is the best way of financing that growth for the longer term. because there are shareholders that depend on the dividend payout. We'd look at all forms of financing, but I don't see any need to change it at this point. It would be 70%-80%. I think it would...
If rate base went up to 7%, it would chase it to 7%. You know, we'd look at it as and when needed. I don't expect any change or departure from that policy in this five-year period.
Got it. Thank you.
Thank you. Our next question comes from the line of Mark Jarvi with CIBC. Your line is now open.
Thanks. Good morning, everyone. I wanna come back to the Pathways to Decarbonization of the IESO report. You know, like in 2021, you guys were, you know, awarded or directed to advance some transmission projects. Given the sort of grander scope on the Pathways to Decarbonization, what do you think the process going forward is? Do you expect them just to continue to direct projects as needed, or do you think you start to become sort of longer term planning here that, you know, provides maybe a bit more visibility in terms of your transmission needs over the next decade?
Morning, Mark. This is David here. You're absolutely right. The Pathways report lays out some pretty ambitious investments that we need to make for Ontario to decarbonize the electric grid by 2050. In the past, we have seen direct awards to Hydro One. We've also seen direct awards to other organizations with respect to transmission infrastructure. It's unclear at this time how the government plans to award transmission in the future. I know it's a topic they're discussing at Queen's Park and what approach they're gonna take. We're certainly actively involved participating, recommendations, but at this point, it really is in their ballpark, and we hope that they do decide to award them to Hydro One.
If they were to go down the path of competitive transmission, we're quite prepared to compete with anybody else.
Okay. Then Chris, coming back to you in terms of some assumptions on the EPS growth. Just can you clarify whether or not there's any change in view in terms of whether financing cost interest expense is a drag or a net positive? Then maybe just elaborate on your comment around the most recent sustainable financing and the potential positive impacts it has in terms of EPS.
Thanks, Mark. In short, we've not in this range. For us to go above, if you've got 6% rate base growth, for us to go above six, a way that we could do that is by, you know, achieving better all-in financing costs. It's not included in the base number, but it's included in the range, if you like. It's a way of getting above 6% growth and into the higher end, like seven, for example. We did quite well in the last period because rates were accommodative. You know, we're fairly confident that, you know, opportunities will come. Again, we maintain a lot of flexibility on our balance sheet, so we can do that. My point, Mark, about this last financing is we managed to time that at the right point.
If I, if I was to issue it today, those rates are already 30 to 40 basis points higher than where they were when we did the issuance a few weeks back now. It's capturing those moments throughout the year. If we can do that, and we were very successful in doing that in the last rate period. If we can do that, we actually get lower all-in rates over this period, and it benefits everybody. It benefits our shareholders now because you'll get it through this rate period. When we go back in for new rates, the ratepayer gets the benefit over the longer term. That's what I was talking about. On the last one, we did the sustainable bond itself. We got a greenium.
It was pleasing to see that when you do all the work and you're a good ESG citizen, that there is a benefit to that. It was 3-4 basis points. Again, not a lot, but it shows that there is some spread now for that kind of activity. Again, all in lower cost of financing. Every time we do this, it's the gift that keeps on giving. It gives today, it gives for the next five years for the shareholder, and after that, it gives for the next, you know, in the case of a 30-year bond, another 25 years to our customers.
Understood. Okay. Thanks, Chris.
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 and Hydro One thanks everyone for their time with us this morning during what is a busy period. We appreciate your interest and your ownership. If you have any questions that weren't addressed on the call, please feel free to reach out and we'll get them answered for you. Thank you again and enjoy the rest of your day.
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.