Fortis - Q1 2023

Transcript

Operator (participant)

Good morning, everyone. Thank you for standing by. My name is Brian, and I'll be your conference operator today. Welcome to Fortis' Q1 2023 earnings conference call and webcast. During the call, all participants will be in a listen-only mode. There will be a Q&A session following the presentation. At that time, those with questions should press star followed by one on their telephone. If at any time during the conference you need to reach an operator, please press star zero. At this time, I would now like to turn the conference over to Stephanie Amaimo. Please go ahead, Ms. Amaimo.

Stephanie Amaimo (VP of Investor Relations)

Thanks, Brian, good morning, everyone, and welcome to Fortis' first quarter 2023 results conference call. I'm joined by David Hutchens, President and CEO, Jocelyn Perry, Executive VP and CFO, other members of the senior management team, as well as CEOs from certain subsidiaries. Before we begin today's call, I want to remind you that the discussion will include forward-looking information, which is subject to the cautionary statement contained in the supporting slideshow. Actual results can differ materially from the forecast projections included in the forward-looking information presented today. All non-GAAP financial measures referenced in our prepared remarks are reconciled to the related U.S. GAAP financial measures in our first quarter 2023 MD&A. Unless otherwise specified, all financial information referenced is in Canadian dollars. With that, I will turn the call over to David.

David Hutchens (President and CEO)

Thank you. Good morning, everyone. Before getting started, I'd like to introduce Chris Capone to his first earnings call since being appointed President and CEO of Central Hudson in February following the retirement of Charlie Freni. For those of you who don't know Chris, he has been with Central Hudson for over 20 years, serving for many years as Chief Financial Officer. Welcome, Chris. We look forward to working with you in this new capacity as you lead the team in New York.

Chris Capone (President and CEO)

Thanks, David.

David Hutchens (President and CEO)

Today, we are pleased to report strong first quarter results, which reflect the diversified nature of our business, favorable market conditions, and the continued delivery of our low-risk capital plan. As we have talked about in the past, we remain keenly focused on meeting our clean energy goals while investing in the resiliency of our energy systems, all in a manner that ensures continued customer affordability. For example, FortisBC received a milestone approval in April from the British Columbia Utilities Commission for a CAD 155 million investment supporting their energy efficiency programs. This is just one of the many ways our utilities are taking the lead on climate action while offering practical options to customers to reduce emissions and their bills.

From a financial perspective, we invested CAD 1 billion of capital in our energy systems, and adjusted EPS in the quarter increased CAD 0.13 compared to the first quarter last year, driven by strong re-regulated growth, which Jocelyn will speak to shortly. On the regulatory front, our applications in Arizona and British Columbia continue to progress with decisions in both expected mid-year. On Monday, we announced that we entered into a definitive agreement with Enbridge to sell our unregulated investment in Aitken Creek for approximately CAD 400 million. Once the sale is closed, we expect to use the proceeds to pay down our corporate borrowings, which strengthens our balance sheet and provides additional funding flexibility to support our regulated utilities growth strategy. The transaction is subject to approval by the BCUC, as well as certain closing conditions and adjustments.

The sale is expected to close in the second half of 2023. With approximately CAD 1 billion invested in our systems in the first quarter, our CAD 4.3 billion annual capital plan remains on track. Our major capital projects progressed during the quarter. In March, FortisBC filed amended transportation rate schedules with the BCUC in relation to the Eagle Mountain – Woodfibre Gas Pipeline project. Approval is expected in May, and once approved, the project will be one step closer to construction. The first tranche of projects associated with the MISO long-range transmission plan are advancing, with stakeholder outreach, routing studies, and design engineering all underway at ITC. In total, ITC estimates transmission investments of $1.4 billion-$1.8 billion U.S. through 2030, with six of the 18 projects in Tranche One.

As you may recall, the CAD 22.3 billion 5-year capital plan consists of virtually all regulated investments and a diverse mix of highly executable low-risk projects supporting rate-based growth across our portfolio of utilities. The plan also includes CAD 5.9 billion for investments to directly support cleaner energy. Over the next five years, we expect rate base to increase by CAD 12 billion, from approximately CAD 34 billion in 2022 to over CAD 46 billion in 2027, supporting average annual rate base growth of 6.2%. With a strong track record of increasing dividends for the past 49 consecutive years, coupled with our low-risk growth strategy, we remain confident in our 4%-6% annual dividend growth guidance through 2027. Now I will turn the call over to Jocelyn for an update on our first quarter financial results.

Jocelyn Perry (EVP and CFO)

Thank you, David, and good morning, everyone. Slide nine provides a summary of our first quarter results. Reported earnings were CAD 437 million or CAD 0.90 per common share. Adjusted earnings were CAD 439 million or CAD 0.91 per common share, CAD 0.13 higher than the first quarter of 2022. Rate-based growth and higher earnings in Arizona were the key drivers of growth for the quarter, which I'll discuss shortly. Foreign exchange also favorably impacted the translation of our US-denominated earnings, while earnings growth was tempered by higher holding company finance costs and higher weighted average shares outstanding.

The waterfall chart on slide 10 highlights the EPS drivers for the quarter by segment. At our U.S. electric and gas utilities, EPS increased by $0.08 for the quarter, with UNS contributing $0.09 and Central Hudson down $0.01. A number of items impacted UNS's results for the quarter. Most notably, higher wholesale sales and FERC transmission revenues were mainly driven by favorable market conditions. Additionally, UNS benefited from gains on investments that support retirement benefits. Higher retail sales, including the favorable impact of weather, also increased earnings. Lastly, lower depreciation expense associated with the retirement of the San Juan facility last June more than offset higher operating costs. About half of the increase in EPS contribution from UNS is expected to moderate given timing of wholesale and transmission revenues compared to 2022.

The CAD 0.01 EPS decrease at Central Hudson was mainly due to higher operating and cost and finance costs, partially offset by rate-based growth. ITC and our Western Canadian utilities each contributed a CAD 0.02 EPS increase, driven mainly by rate-based growth. At ITC, earnings growth was tempered by higher holding company finance costs. Our energy infrastructure segment contributed a CAD 0.02 EPS increase for the quarter, driven by higher margins and volumes at Aitken Creek and higher hydroelectric production in Belize. A higher U.S. dollar to Canadian dollar foreign exchange rate favorably impacted the translation of our U.S.-denominated earnings, which increased EPS by approximately CAD 0.03. The CAD 0.03 decrease in EPS contribution from our corporate segment was mainly driven by higher finance costs. Lastly, EPS decreased by CAD 0.01 due to higher weighted average shares outstanding related to our Dividend Reinvestment Program.

All in all, a very strong quarter, even after excluding the timing of earnings at UNS and foreign exchange impacts. During the quarter, our regulated utilities raised over CAD 600 million in long-term debt, largely in support of their capital programs. We also recently entered into interest rate hedges to mitigate holding company refinancing risks. Despite broader market volatility during the quarter associated with the banking crisis, there remains a strong appetite for low-risk, strong credit quality issuers like Fortis. With our recent debt issuances coupled with CAD 3.6 billion available on our credit facilities, we continue to maintain a strong liquidity position supporting our CAD 22.3 billion five-year capital plan. We remain comfortably positioned within our investment-grade credit ratings as we execute our capital plan and pursue incremental organic growth opportunities.

Turning to an update on some of our ongoing regulatory proceedings since we last updated the market. ITC has right to first refusal or ROFR for regional transmission projects in Iowa, Michigan and Minnesota. In March, the Iowa Supreme Court granted certain parties standing to challenge the Iowa ROFR, issuing a temporary injunction, staying enforcement of the ROFR statute and remanding the issue to the district court. The timing of this proceeding and impact on future projects is unknown, the decision is not expected to impact projects already approved and awarded by MISO, including tranche one of MISO's long-range transmission plan located in Iowa. In Arizona, TEP's case continues to progress. TEP's requested rate base of $3.6 billion and equity layer of 54% are consistent with Arizona Corporation Commission staff recommendations.

Staff has also recommended an allowed ROE of 9.5% compared to TEP's current ROE of 9.15%. Hearings concluded in April, a recommended order and opinion from the administrative law judge is expected mid-year. We expect new rates later this year. In New York, there are no updates on the show cause order regarding the deployment of Central Hudson's new customer information system. Central Hudson did file a response to the show cause order in January, the timing and outcome of this proceeding remains unknown. Turning to Western Canada, FortisBC filed its final reply arguments on its generic cost of capital proceeding, a decision is expected by mid-year. At FortisAlberta, proceedings related to the generic cost of capital and the third PBR term effective in 2024 are progressing with evidence filed.

A decision is expected from the Alberta Utilities Commission later this year on both proceedings. With that, I'll now turn the call back to David.

David Hutchens (President and CEO)

Thank you, Jocelyn. 2023 is off to a great start, both operationally and financially, highlighting the balance and strength of our regulated utility businesses. Looking ahead, we expect to continue to provide long-term value to our shareholders through the execution of our growth strategy, supporting our 4%-6% annual dividend growth guidance through 2027, while concurrently delivering a cleaner energy future and safe, reliable and affordable service to our customers. That concludes my remarks. I will now turn the call back over to Stephanie.

Stephanie Amaimo (VP of Investor Relations)

Thank you, David. This concludes the presentation. At this time, we'd like to open the call to address questions from the investment community.

Operator (participant)

Thank you. We will now conduct the Q&A period. If you would like to register a question, please press the star followed by the one on your telephone. If your question has been answered and you would like to withdraw your question, please press the pound sign. If you are using a speakerphone, please lift your handset before entering your request, and we kindly request you speak loudly and slowly to ensure all participants can hear your questions. One moment please for your first question. First question comes from the line of Maurice Choy. You may proceed.

Maurice Choy (Managing Director and Senior Equity Analyst)

Just wanted to dive a little deeper into the Q1 results at UNS. Could you elaborate a little more on the nature of the timing of these wholesale electricity sales and transmission revenue? What happened during the quarter for these items to emerge? When you say half of the year-over-year increase in EPS contribution will moderate, does that mean you need to somewhat give it back about $0.04-$0.05 over the remainder of the year?

Jocelyn Perry (EVP and CFO)

Maurice, yeah, we indicate that we think it's gonna moderate just really based on looking at how we transacted last year for wholesale sales in particular. We had done some wholesale sales in third quarter, and I believe some in the fourth. You know, it's just early in the year to make predictions of how and when these transactions are actually going to unfold. When we look at the timing, most of them were in Q2 last year. With that, we just advanced it forward in Q1. We are expecting some of the wholesale sales to moderate.

Maurice Choy (Managing Director and Senior Equity Analyst)

Got it. That makes sense then. Thanks for the color on that. I want to finish off with the sale of the Aitken Creek gas storage facilities. Can you take us back to when you first thought about selling the asset? Why do you feel selling an asset was the right thing to do? Why was this right asset to sell, and also why now?

David Hutchens (President and CEO)

Yeah, that's a great question, Maurice. You know, it's our job as fiduciaries to look for value within our company, and that value changes based on a lot of different inputs. One of them being market conditions and interest rates, et cetera. So, you know, given that we are always looking for finding that additional shareholder value, some of these things are just kind of on our list to be looking at. When things align, when you can find a good opportunity, good value, and a good counterparty to look at these assets and find even more value than we can find in them, that's what triggers a deal.

It's, it wasn't anything like we, you know, we're sitting here trying to figure out how to sell this for years and years and years. This is just, you know, something that we were being very opportunistic with. Now, you know, given the market conditions, provides us, particularly in a volatile market period, provides us that additional funding flexibility, balance sheet strength, et cetera. That's just all of the right things aligned here.

Maurice Choy (Managing Director and Senior Equity Analyst)

Thanks. I mean, as a follow-up, you mentioned this is one of the things that's on your list to look at. What else is on that list? Obviously there's some other large unregulated asset in there, like the hydro assets in Belize. Would the same logic of selling the gas storage in Aitken Creek apply to this set of hydro assets, or is it more complicated because-

David Hutchens (President and CEO)

Yeah.

Maurice Choy (Managing Director and Senior Equity Analyst)

it's at stake in Belize Electricity?

David Hutchens (President and CEO)

Yeah. Maurice, you did not disappoint. I figured that I would've given odds that would've been your follow-up question. The only other, you know, appreciable regulatory assets we have, period, is Belize. We don't have, you know, some sort of schedule to be looking at, you know, these assets. It again, is just us being opportunistic, you know, across our portfolio and finding that value. We don't have a, you know, an agenda here.

Maurice Choy (Managing Director and Senior Equity Analyst)

Appreciate that. Thank you very much.

Operator (participant)

Next question. We have Rob Hope with Scotiabank. Please go ahead.

Rob Hope (Director and Equity Research Analyst)

Good morning, everyone. First question is Arizona. Going into the hearing, you were a little confident that you could get a stipulation agreement which didn't come to bear. Can you give us some color on how the hearings went and kind of where you see yourself more aligned or less aligned with the stakeholder?

David Hutchens (President and CEO)

Yeah. I'll turn that over to Susan Gray, who's the CEO of UNS Energy and was just spent some time on that stand in those hearings. Definitely, it has been a very, I think, speaking from someone who was sitting in that chair, it seems like it was a very straight-forward batch of hearings, and frankly, places of, you know, kind of standard disagreement or argument across, you know, things like ROE, and some other odds and ends. But Susan, you want to provide a little color on that?

Susan Gray (President and CEO)

Sure. Yeah. Thank you for the question, Rob. Yeah. I think that the hearings were as expected. Prior to the hearings, we were able to narrow some of the contested issues with the other stakeholders and or interveners. I feel like we had a pretty straightforward hearing in terms of issues that we covered. I would say a lot of discussion around

The System Reliability Benefit, which is an adjuster mechanism that we're proposing to reduce regulatory lag for our new clean energy investments. There's also some conversation about the coal community transition and potential customer funding, which hasn't really been set as a policy by the Arizona Corporation Commission. Yeah, the kind of the typical ROE fair value increment, things like that. I think that we're pretty close. I think closer than we've been in years past in terms of what staff has put forward and what we're recommending. Looking forward to the judge's recommended opinion and order this summer, and then a open meeting to decide the rate case, probably early fall.

Rob Hope (Director and Equity Research Analyst)

Thanks for that. Sticking with Arizona, a little bit more of a local question. Proposition 412, kinda, do you view this as kind of normal course, or is there potentially some concessions, to be made there?

Susan Gray (President and CEO)

Sure. Thanks for the follow-up, Rob. Proposition 412 is our proposition to approve a new franchise agreement with the city of Tucson. I would say what's new in this franchise is that we have added a 0.75% increase to the rate, which was previously 2.25%, in order to cover the undergrounding costs for a new transmission line that we're building through the city of Tucson, and that would provide recovery over about a 10-year period. We've also designated 10% of those new funds to fund the city's climate action and adaptation plan. That's what the agreement that we came to with the city, and that's what's being proposed in Prop 412.

I think this is fairly new for the city, so I'm not sure I would call it normal course of action. I mean, franchise fees are normal. This is just a little bit of a twist on it. The election's coming up just in a couple of weeks here and hope to get started on building that new transmission line underground.

David Hutchens (President and CEO)

Thank you.

Operator (participant)

Next question comes from the line of Linda Ezergailis with TD Securities. Please go ahead.

Linda Ezergailis (Managing Director and Institutional Equity Research Analyst)

Thank you. Just wanted to step back to a very high level and get your updated views on the likelihood and the relative attractiveness of potential unregulated but contracted energy infrastructure investments. I recall in recent history, kind of delegating a search for these types of opportunities to some of your regional heads. Just wondering if the overabundance of utility investments now has kind of put those opportunities to the back burner or if they're less attractive or maybe you can comment on over time, how much of your overall company might be unregulated, if any?

Maybe you can also specifically comment geographically on the opportunities you also see in BC with the divestiture of Aitken Creek, but you've got your Woodfibre gas line likely proceeding and also some RNG opportunities.

David Hutchens (President and CEO)

Yeah. That's a great question or questions, Linda. Appreciate you asking them because I think this provides an opportunity to provide some very, some clarity. One is, are we interested in doing unregulated renewables? The answer is no. We have a lot to do in our regulated utilities, frankly, that's where we see the additional growth going forward on top of, you know, our current existing capital plan. That's where we're focusing. The others are, you know, back burner, off the stove, however you wanna think about it. That's not clearly not in our sights.

When we think about longer term, what we wanna look like from a, from a company perspective, regulated versus unregulated, we're practically 100% regulated other than that, investment in the Belize hydro generation that we have. We like that. We think that's what our investors like too. We, we think that's the right opportunity to look. Frankly, you know, that's where our core competency lies, and that's where I think we're gonna see a plenty of growth opportunities as we go through the clean energy transition on a going forward basis. Can you remind me what the last part of your question was?

Linda Ezergailis (Managing Director and Institutional Equity Research Analyst)

Just BC specifically, because you've got some RNG related opportunities.

David Hutchens (President and CEO)

Oh, BC. Yeah, yeah. The things that we're looking at in BC from the Woodfibre pipeline, regulated utility infrastructure. From Tilbury 1B, regulated utility infrastructure. It is don't try to read anything into us getting out of an unregulated storage facility as a view on our BC company. We love that BC company. We think that, you know, they have huge growth opportunities. We see them playing a big role in CleanBC and the strategy for decarbonizing that province. We're it's just as simple as trading unreg for reg. I think that provides a lot of clarity on where we're going forward.

Linda Ezergailis (Managing Director and Institutional Equity Research Analyst)

Thank you. Just a follow-up question on your 5-year capital expenditure plan. As it continues to evolve, and as you layer on new opportunities, especially potentially facilitated by the IRA in the U.S.

Might you look for alternative, not alternative financing, but might you augment your current financing plan and add to it? Or might you defer some more discretionary capital to stay within the current financing plans?

David Hutchens (President and CEO)

As we build out that capital plan, I don't want to get ahead of our next release as we're drawing up our current plans. The look at what our next capital plan, which will be coming in kind of that September, call it fall time frame, that will be the time that we'll update anything related to, you know, obviously the capital plan timing, and how we'll fund it. you know, obviously the Aitken Creek gives us, you know, an extra CAD 400 million sitting in there from a funding flexibility perspective as well.

Jocelyn Perry (EVP and CFO)

Thank you.

Operator (participant)

Thank you. Next question comes from the line of Mark Jarvi with CIBC. Please proceed with your question.

Mark Jarvi (Equity Research Analyst)

Thanks. Good morning, everyone. just wanted to come back to the strong results at UNS. Jocelyn, you talked a bit about timing and how we might see that year-over-year comparable moderate a little bit, but kind of implying also that results are up. Are you implying there's some sort of structural tailwind a little around the wholesale market and transmission revenues? What's driving that, if there is?

David Hutchens (President and CEO)

Yeah. Yeah. For the most part, it's volume and, you know, price differences. It's not the. It's market-driven. It's very specific to, you know, shorter term. I'll say, shorter-term market perturbations, if you want to think of it in that respect. It isn't necessarily on the wholesale side a, you know, a view that there's, you know, this long-term additional wholesale, you know, sales that can, you know, that will continue on, you know, on a going-forward basis. On the transmission side, there is just a lot more use of our transmission system than we've had in the past. That's probably, you know, likely to continue.

I think one of the things that folks forget is that UNS and TEP, Tucson Electric Power in particular, has a large portion of their rate base that is for jurisdictional transmission. We also have a forward-looking formula rate that looks just like ITC's. We have, I think about $1 billion of transmission capital and about $900 million or so in the current 5-year capital plan at UNS. Some of those things will continue to grow over time.

Mark Jarvi (Equity Research Analyst)

Okay. Thanks for that, David. Jocelyn, coming back to you in terms of you mentioned putting some hedges around, you know, interest rates going forward. The Aitken Creek allows you to take out some short-term debt here. Is there anything else you'd like to do in terms of managing any holding company debt or bringing down interest expense costs?

Jocelyn Perry (EVP and CFO)

Mark, I would say that the two you mentioned are two big ones for us, right? I mean, obviously, Aitken frees up $400 million of our borrowings to give us that flexibility. We did enter into both here and at ITC at the holding company level into interest rate hedges for the upcoming holding company financings that we have to do this year. You know, we're always watching the market to, you know, determine a good time to go in. It's good to take that risk off the table, right? The markets are still volatile, and so we're laser-focused on taking that risk off.

Aitken and interest rate locks certainly do, you know, improve our position with respect to the volatility we would expect to see on our business. We're always watching. I, you know, I think we're going to be looking to, for our regulated utilities, potentially looking at timing of their debt offerings. We're watching the market very closely.

Mark Jarvi (Equity Research Analyst)

We've seen a few more convertible note offerings from U.S. utilities. Is that something you contemplate or is it not a fit right now for Fortis?

Jocelyn Perry (EVP and CFO)

Definitely always looking at things. You know, convertibles are not really in our space right now with our current 5-year plan because we don't require any further equity beyond the DRIP that we've already outlined within the plan. Certainly, as David mentioned, as we now look to our next five-year capital plan and as we look at, you know, the investment profile over the next five years, we'll look at all funding options. Convertibles definitely is something that's out there these days.

Mark Jarvi (Equity Research Analyst)

Okay. Thanks a lot.

Jocelyn Perry (EVP and CFO)

Thank you.

Operator (participant)

Thank you. Next question comes from the line of Ben Pham with BMO. Please ask your question.

Ben Pham (Senior Energy Infrastructure Research Analyst)

Hi. Thanks. I wanted to ask on the Iowa situation with ITC and what are your thoughts on next milestones to look for your overall thoughts on the process? Probably touched on a little bit. In terms of materiality, are you thinking this is more of the CapEx you have in there is not going to change or you might see some changes and it's just not overly impactful to your potential CapEx plan?

David Hutchens (President and CEO)

Thanks for that question, Ben. I'm going to punt that one right over to Linda. She has all the details that you're looking for.

Linda Apsey (President and CEO)

Good morning. Thank you, Ben. I think in terms of next steps, obviously the Supreme Court has remanded the case back to the district court. So obviously there now will be sort of a proceeding involving all the parties to litigate through the constitutionality of the ROFR. Unfortunately, we don't really have a good sense as to what the timing of that will be or the decision. As, you know, we stated, obviously, it doesn't have an impact on the tranche 1 projects that have already been issued and awarded. Certainly, as we go forward, you know, there's various, kind of, I guess, places that this issue is playing out. One clearly is at, is at FERC.

This was clearly an issue that was teed up in the transmission planning NOPR, in, in terms of sort of questions around, the continuation of sort of competitive bidding, you know, the ROFRs. You know, we would be hopeful that FERC obviously would, you know, make some decision around the ROFR issue. But there it is, it obviously playing out. It's playing out in Texas. We now have it in Iowa. You know, for us sitting here today, you know, we're gonna continue to stay focused, you know, on, you know, planning the transmission system with MISO, and obviously advancing sort of both the LRTP one, the LRTP two projects.

You know, I would mention that, you know, there are a lot of carve-outs for certain types of projects that are precluded from competitive bidding. Certainly projects that utilize existing right of way, projects that are rebuilds, projects that are clearly just reliability projects. I mean, there's a lot of different categories of projects that are not subject to competitive bidding. You know, much of our 5-year plan obviously is, you know, our base capital, and, you know, we would continue to, you know, have the right, the responsibility to execute on those projects that are ours. You know, I would say it's premature to know exactly or understand, you know, kinda how all of this plays itself out, or what the impact is.

You can sort of assure yourself that sorta we are, you know, we will be positioned and are positioned, I would say, to both be defensive and offensive on this front. We're taking every step that we can to prevail on the ability to have ROFRs. It is something that FERC explicitly allowed in the well, their subsequent ruling on competitive bidding. And it is something that FERC recognized that states have the right and the ability to have state ROFRs. We will be actively pursuing defending the ability for states to maintain the decision around who builds in the respective states.

I mean, we have been pretty vocal through all of our comments in the FERC front, in terms of you know, we fundamentally don't believe competitive bidding, you know, is a success story. It's the opposite. It takes more time. There's no evidence to suggest that it's cheaper. I will give you an example right now, even in the LRTP tranche one, you know, we are off, you know, off and running in terms of siting, engineering, preparing our regulatory applications. Meanwhile, the couple of projects that are subject to competitive bidding probably won't even have the decision on who builds those for at least another year.

How this is compatible with the overall sort of national federal goals for carbon reduction and the need for investment in transmission is really a serious question that I think all the parties need to seriously consider. I just don't think this is a, you know, a failed experiment, quite frankly. We will be continuing to defend vigorously, as well as be proactive on this front.

Ben Pham (Senior Energy Infrastructure Research Analyst)

That's really good color, Linda. Maybe just sticking with ITC and the remaining, excuse me, 20% minority interest, can you clarify, you know, if hypothetically, if GIC were to sell that portion through just whether it's a fund life ending or some other reason, does Fortis have a ROFR on that? Also just any thoughts on ITC, just more strategically?

David Hutchens (President and CEO)

I'm checking around the room and yes, apparently we do have those rights. If GIC was to sell for us to, I don't know if it's a rights of first offer or rights of first refusal. I totally wouldn't expect GIC to be interested in selling that part of ITC. I can't speak for them, of course, but they do like that investment.

Ben Pham (Senior Energy Infrastructure Research Analyst)

Okay. Perfect. Maybe to close off on asset sales, Aitken in particular. I'm not sure. In your prepared remarks, did you comment on how to value compared to your hold value or your current trading multiple and impact on future EPS?

David Hutchens (President and CEO)

We didn't, but Jocelyn can opine on it.

Jocelyn Perry (EVP and CFO)

Yeah, Ben, we paid around $266 U.S., I believe, and CAD 350. It's a little bit of a higher value than what we had paid a couple of years ago. With respect to multiples, you know, I would say, as you can recall, we talk about Aitken quite frequently on the calls because the earnings somewhat are, more variable, given pricing and volumes. Over the last five years, the average for Aitken's been about CAD 0.04 a year. If you know, if you do the math on CAD 400, you're gonna, you know, get the mid-20 multiple for this transaction. As David talked about earlier.

It was a good time to do this transaction for us.

Ben Pham (Senior Energy Infrastructure Research Analyst)

Okay, that's great. Thank you.

Operator (participant)

Thank you. Next question comes from the line of David Quezada with Raymond James. Please proceed with your question.

David Quezada (VP and Equity Research Analyst)

Thanks. Morning, everyone. Maybe just on starting with the billing system at Central Hudson, any news or updates you can share there, like how far away you are from correcting those issues and any expectations around higher O&M costs related to that?

David Hutchens (President and CEO)

Yeah. The system is sending out bills correctly now. As far as additional costs, we are spending some additional money to hire customer service folks, additional, you know, billing people, et cetera, to make sure that we're, you know, fully recovered and on a going-forward basis, we see those bills going out correctly. Still a little bit of mop up here and there from the blip that we had when we put it in service, but those are getting towards the very tail end here.

You know, we're just going through the process of making sure that we're getting out there with our customers, our regulators, our, you know, government officials and telling that story and getting everything back on track.

David Quezada (VP and Equity Research Analyst)

Excellent. Thanks for that. Maybe just one more from me. I understand there have been some news reports suggesting, pretty big renewable energy plans in the Mexican state of Sonora with some plans to export that to the U.S., including into Arizona. Just curious if that's something that could ultimately be factored into the IRP for UNS or if that affects your business there in any way.

David Hutchens (President and CEO)

Given that neither Susan nor I are familiar with that, I would probably say no. When we look at our integrated resource plan that the TEP and our smaller UNS Electric company are both doing here later this year, we do look across a broad swath of different projects. It would just be whether or not projects like that, if they showed up, they would likely show up in one of our all source RFP. There is very limited transmission capacity from Sonora up to Arizona.

Believe me that to build transmission from Mexico to the U.S., particularly to connect into our system, we tried that about 25 years ago and gave up after about 15 years, I think, of trying to get that built. That could actually, you know, be an opportunity for us to extend transmission. It could be an opportunity for us to look for cheaper renewables. There's plenty of sunshine in Arizona and our neck of the woods that connects to our existing transmission system or would need much less infrastructure to attach to our grid.

David Quezada (VP and Equity Research Analyst)

Thanks for those comments, Dave. Appreciate it.

David Hutchens (President and CEO)

You bet.

Operator (participant)

Thank you. Next question comes from the line of Andrew Kuske with Credit Suisse. Please proceed with your question.

Andrew Kuske (Managing Director)

Thanks. Good morning. Maybe continuing with the transmission theme. Obviously, you have a lot of skin in the game given ITC and just the other assets you've got. Transmission's always been difficult to build, but there's obviously increased emphasis given the energy transition, and there's a lot of talk on transmission queues and the interconnection problems. I guess how do you think is the best way to resolve it? I know that's like a big question, but what steps can you take or should the industry take overall just to sort of tackle the problems that exist ahead?

David Hutchens (President and CEO)

Yeah. There's multiple fronts that you have to address this on. FERC is addressing several of them. One, you know, one primarily that you mentioned is the interconnection queue. That NOPR, as of last week, we hear it's, you know, it should be pretty soon, where they get to a final ruling on how to, in essence, untangle the interconnection queue. I think that they're definitely doing it in the right manner, which is first ready, first served. If that goes through and we can get, you know, that queue cleaned up and start getting more of those interconnections done, obviously that's a big uptick for ITC and their business.

I should note that NOPR doesn't address cost allocation on those interconnections. That would be the next thing that we would look at. There's a lot of conversations at FERC. There's a lot of conversations in the federal government in the U.S. that's really focused on trying to reduce the amount of time, red tape, et cetera, associated with permitting and siting. We're very hopeful that something gets done there. It feels to me like that's a very bipartisan topic. Everybody sees the need for transmission for the clean energy transition.

It's obviously gonna be needed for building the additional capacity that we'd like to build, not just to support the Inflation Reduction Act and the amount of renewables, but also the manufacturing that is trying to be brought back into the United States, that can actually help provide some of those batteries and renewables, et cetera. I, I think it's on everybody's to-do list, which is a good spot to be. We definitely need to be pushing through all of the industry groups that we, and particular ITC works with, to try to find a better way to do this.

The federal government and, you know, one of the main things that they're focused on is trying to figure out how to, you know, create a little bit of an easier path through all the different agencies that have to approve, siting. Of course, FERC has a role there too, with their backstop authority, and whether or not or how they choose to use that or redefine it.

Andrew Kuske (Managing Director)

Okay. Appreciate that color. I guess let's just assume we land this in a positive spot and some of the industries do get untangled, to use your language. How much upside do you think exists to the growth that you've already got?

David Hutchens (President and CEO)

That's stay tuned for September. you know.

Andrew Kuske (Managing Director)

Okay.

David Hutchens (President and CEO)

We still have to, you know, there's no number I can put there, obviously. It's really about the ability to execute and to get it done faster. At this point, it would probably be more of a conversation around timing versus dollars.

Andrew Kuske (Managing Director)

More bringing forward things versus a much larger number.

David Hutchens (President and CEO)

Like, in specifically, Tranche 2, which, you know, we expect to be, you know, looked at over the next year or so in MISO, that the timing on that could change, you know, hopefully significantly, not the timing on when the projects get awarded, but the timing on when the projects can actually get built if we can figure out how to, how to tighten up some of these, permitting and siting requirements.

Andrew Kuske (Managing Director)

Okay. Appreciate the time. Thank you.

David Hutchens (President and CEO)

Thank you, Andrew.

Operator (participant)

Thank you. Next question comes from the line of Matthew Weekes with iA Capital. Please proceed with your question.

Matthew Weekes (Equity Research Analyst)

Good morning. Thanks for taking my questions. Just wanted to get your sort of high-level thoughts, you know, directionally on the Canadian federal budget. You know, just wondering if anything specifically kind of stands out to you there, how you're sort of looking at different opportunities right now, and just general comments on that? Thanks.

David Hutchens (President and CEO)

Yeah. Thanks, Matthew. It's a bit of a mini Inflation Reduction Act. A lot of the same pieces are in that. There's two in particular. One is related to tax credits for new clean energy projects. The other is tax credits related to manufacturing. And those two things are very good from an economic and clean energy or economy and clean energy transmission standpoint. They don't necessarily have a direct impact for us and our businesses, which are mostly, you know, energy delivery, in Canada.

However, the indirect impact is this is all gonna mean that we need additional transmission and distribution, which is our business, to deliver the clean energy and to supply new manufacturing opportunities across Canada. It's, it's more of an indirect view from a Canadian perspective on that. Plus there's still a lot TBD, particularly around hydrogen and what that credit might look like. That might be the one opportunity where we have more of a direct benefit, say in FortisBC for us to look at different hydrogen development opportunities within the regulated construct there.

Matthew Weekes (Equity Research Analyst)

Okay. That makes sense. Thank you. Just one more from me, maybe, and I think I know the answer to this. Obviously, plenty of opportunities to grow in your regulated portfolio that you've highlighted, you know, organically. Just wondering if there's any kind of place for M&A, you know, opportunistically, whether it's anything, you know, larger or small scale or just any kind of sort of room for that in the growth plan. Thanks.

David Hutchens (President and CEO)

Yeah. As you mentioned, we got a pretty healthy capital budget that we're really focused on, and we're gonna spend most of our energy focused on finding out how to take that to the next level and then execute at that next level. That's where our main focus is here. You know, obviously, as fiduciaries, we keep our, you know, eyes and ears open, but, you know, that's not a priority for us.

Matthew Weekes (Equity Research Analyst)

Okay. Thank you. I'll turn the call back. Thanks.

Operator (participant)

Thank you. Next question comes from the line of Michael Sullivan with Wolfe Research. Please ask your question.

Michael Sullivan (Director of Equity Research)

Hey, good morning.

David Hutchens (President and CEO)

Morning, Michael.

Michael Sullivan (Director of Equity Research)

Hey Dave. Yeah, this got asked earlier, but I just wanted to be really direct on it. Can you just explain why you think you were unable to reach a settlement in Arizona, and what kind of changed from when you were kind of indicating that that may be the case on the last call?

David Hutchens (President and CEO)

Yeah. It's just getting a bunch of people in a room to agree. Frankly, you know, you've got a short timeframe to do that. It just didn't happen. I mean, it's one of those things that you try to get done, but you can't control, you know, the different counterparties. I'll say I was extremely pleased with Susan and the team at TEP and their ability to get it down to just those, you know, couple issues to be really discussed in earnest in the hearings.

When you're sitting here at, you know, 9.5% at 9.7%, 9.75% from a ROE perspective on staff's versus ours, the rest of the pieces that have come in, and the conversations have all been constructive. It didn't, you know, at the end of the day, it didn't really bother us that we had to go through a couple weeks of hearing. It didn't bother me because I didn't have to testify. You know, it's always better if you can get a settlement just from an expeditious standpoint. This was the next best thing because in the end, it wasn't a lot of topics here that we were thorny.

Michael Sullivan (Director of Equity Research)

Okay. Appreciate the color there. Also just related to sticking with Arizona, specifically the renewables rider request and then discussion around the system improvement benefit mechanism. Maybe just where, where does that stand? Where, where do you see that going? Can that be resolved within the rate case or outside and it becomes longer dated? Just, where are we at on that?

David Hutchens (President and CEO)

Yeah. I'll turn that over to Susan for color on that new that new tracker that we're talking about.

Susan Gray (President and CEO)

Sure. The tracker is the System Reliability Benefit, and that was a change from what we had originally proposed. It was actually suggested by the staff that we look at something that was more similar to an existing adjuster that's used for water companies. We did submit a plan of administration through the testimony process. In the hearing, staff offered to work with us to come to an agreement on what that plan of administration should look like. At this point, we're waiting for the judge to put it in her recommended opinion and order, and then for the commissioners to say, "Yeah, we do want you to work on that plan of administration." We wouldn't actually have one in place until after the rate case is actually decided.

Michael Sullivan (Director of Equity Research)

Okay. very clear. Thank you very much.

David Hutchens (President and CEO)

Thanks, Michael.

Operator (participant)

As a reminder, everyone, if you wish to ask a question, please press star followed by the number one on your touchtone phone. Next question we have Dariusz Lozny with Bank of America. Please proceed with your question.

Dariusz Lozny (Senior Investment Analyst)

Hey, good morning. Thank you for taking my question. Just to maybe follow up on the Q1 EPS drivers that you guys reported. You call out that at both UNS and ITC, an increase in the market value of some, looks like it's assets, in some of your retirement plans as an upside driver for both UNS and ITC. Any way to maybe just quantify that? Like, what proportion of the $0.12 upside that you guys realized in Q1 was related to that mark-to-market impact?

Jocelyn Perry (EVP and CFO)

Dariusz. It is in UNS and ITC. It's about $0.01 each in each of those utilities.

Dariusz Lozny (Senior Investment Analyst)

Okay. Thank you. Just coming back to the discussion on wholesale sales in both Q1 but also prospectively, it sounded, I think from Jocelyn's comments earlier, that it might be a negative driver in Q2. I think you mentioned that last year, the majority of those sales were in Q2. Can you maybe just comment on that as far as the shaping of that for the balance of the year? Would you expect that to maybe be a modest negative in Q2?

David Hutchens (President and CEO)

Yeah, that's probably too much in the weeds because the timing, quarter-to-quarter and year-over-year is different. I think we did it in a couple different quarters last year, we might the two quarters this year. I don't know if I could, you know, pick out of a hat. Overall, we expect it to, you know, kind of obviously moderate, year-over-year. We can't really put that kind of quarter-over-quarter clarity there.

Dariusz Lozny (Senior Investment Analyst)

Okay. Fair enough. Thank you very much. I'll pass it along here.

David Hutchens (President and CEO)

Okay. Thank you.

Operator (participant)

Thank you. There. All right. If there are no further questions, I would now like to turn the call back to Ms. Armijo.

Stephanie Amaimo (VP of Investor Relations)

Thank you, Brian. We have nothing further at this time. Thank you for participating in our first quarter 2023 results conference call. Please contact investor relations should you need anything further. Thank you for your time, and have a great day.

Operator (participant)

Thank you for participating. This concludes today's conference call. You may now disconnect.