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Operator
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 question and answer 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 a star zero. At this time, I would now like to turn the conference over to Stephanie Amimo. Please go ahead, Ms. Amimo.
Brian
Thanks, Brian, and good morning, everyone, and welcome to Fortis' first quarter 2023 results conference call. I'm joined by David Hutchins, 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. Also, unless otherwise specified, all financial information referenced is in Canadian dollars. With that, I will turn the call over to David.
Brian
Thank you, and 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 Frenney. 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.
Operator
Thanks.
Brian
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 $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 $1 billion of capital in our energy systems, and adjusted earnings per share in the quarter increased 13 cents compared to the first quarter last year, driven by strong 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 Aiken Creek for approximately $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 $1 billion invested in our systems in the first quarter, our $4.3 billion annual capital plan remains on track. Our major capital projects progress during the quarter. In March, FortisBC filed amended transportation rate schedules with the BCUC in relation to the Eagle Mountain Wood Fiber Gas Line 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 to 1.8 billion U.S. through 2030, with six of the 18 projects in tranche one. As you may recall, the $22.3 billion five-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 $5.9 billion for investments to directly support cleaner energy. Over the next five years, we expect rate base to increase by $12 billion, from approximately $34 billion in 2022 to over $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% to 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
Jocelyn McCaffrey- Thank you, David, and good morning, everyone. Slide 9 provides a summary of our first quarter results. Reported earnings were $437 million or $0.90 per common share. Adjusted earnings were $439 million or $0.91 per common share. 13 cents 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 U.S. 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. And lastly, lower depreciation expenses 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 one-cent EPS decrease at Central Hudson was mainly due to higher operating costs and finance costs, partially offset by rate-based growth. ITC and our Western Canadian utilities each contributed a two-cent 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 2 cent EPS increase for the quarter, driven by higher margins and volumes at Aitkin 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 3 cents. The 3 cent decrease in EPS contribution from our corporate segment was mainly driven by higher finance costs. And lastly, EPS decreased by one cent 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 $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 $3.6 billion available on our credit facilities, we continue to maintain a strong liquidity position supporting our $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. First, ITC has rights of first refusal or ROFERS 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 saying enforcement of the ROFR statute and remanding the issue to the district court. Although 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 MISOG. including Planche 1 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, and 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, and 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, and a decision is expected by mid-year. At Fortis Alberta, 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.
Brian
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 to 6 percent 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.
Brian
Thank you, David. This concludes the presentation. At this time, I would like to open the call to address questions from the investment community.
Operator
Thank you. We will now conduct the question and answer period. If you would like to register a question, please press the star followed by the 1 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 answering 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 Choi. You may proceed.
Maurice Choi
I 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? And when you say half of the year-over-year increase in EPS contribution were moderate, Does that mean you need to somewhat give it back about four to five cents over the remainder of the year?
Jocelyn
Maurice, yeah, we indicate that we think it's going to 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. So when we look at the timing, most of them were in Q2 last year. So with that, we just advanced it forward in Q1. So we are expecting some of the wholesale sales to moderate.
Maurice Choi
That makes sense, and thanks for the color on that. And I want to finish off with the sale of the concrete 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?
Brian
Yeah, that's a great question, Maurice. Our job as fiduciaries is to look for value within our company, and that value changes based on a lot of different inputs, one of them being market conditions, interest rates, etc., So, 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. And 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 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. And 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. So that's just all of the right things aligned here.
Maurice Choi
Thanks, Amir. As I thought you mentioned, this is one of the things that's on your list to look at. What else is on that list? And obviously there's some other large unregulated asset in there, like the hydro assets in Belize, with the same logic of selling the gas storage in the Aiken Creek applied to this set of hydro assets? Or is it more complicated because you're sticking Belize electricity?
Brian
Yeah, Maurice, you did not disappoint. I figured that I would have given odds. That would have been your follow-up question. So 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. So we don't have, you know, an agenda here. Appreciate that. Thank you very much.
Operator
Next question, we have Rob Hope with Scotiabank. Please go ahead.
Rob Hope
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. But 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 stakeholders?
Brian
Yeah, I'll turn that over to Susan Gray, who's a CEO of UNS Energy and was just spent some time on that stand in those hearings. So definitely it has been a very... I think, speaking from someone who was sitting in that chair, it seems like it was a very straightforward batch of hearings and, frankly, places of standard disagreement or argument across things like ROE and some other odds and ends. Susan, do you want to provide a little color on that?
Susan Gray
Sure. Thank you for the question, Rob. 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 interveners. And so 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. And then, yeah, kind of the typical ROE fair value increment, things like that. But 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 judges' recommended opinion and order this summer and then an open meeting to decide the rate case probably early fall.
Rob Hope
Thanks for that. And then sticking with Arizona, a little bit more of a local question. Proposition 412, do you view this as kind of normal course or is there potentially some concessions to be made there?
Susan Gray
Sure, thanks for the follow-up, Rob. So Proposition 412 is our proposition to approve a new franchise agreement with the City of Tucson. And 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. So that's 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. Elections coming up just in a couple of weeks here and hope to hope to get started on building that new transmission line underground Thank you Next question comes from the line of Linda as regardless with TD securities, please go ahead Thank you.
Rob
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 and 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. And then maybe you can also specifically comment geographically on the opportunities you also see in BC with the divestiture of Aiton Creek, but you've got your wood fiber gas line likely proceeding and also some RNG opportunities.
Brian
Yeah, that's a great question or questions, Linda, and appreciate you asking them because I think this provides an opportunity to provide 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, and frankly, that's where we see the additional growth going forward on top of our current existing capital plan. So that's where we're focusing. The others are, you know, back burner off the stove, however you want to think about it. That's clearly not in our sights. When we think about longer term, what we want to look like from a from a company perspective, regulated versus unregulated. We're practically 100 percent 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 think that's the right opportunity to look. And frankly, you know, that's where our core competency lies. And that's where I think we're going to see 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?
Rob
Just BC specifically, because you've got some RNG related opportunities.
Brian
Yeah, so the things that we're looking at in BC from the wood fiber pipeline, regulated utility infrastructure, from Tilbury 1B, regulated utility infrastructure, 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 they have huge growth opportunities. We see them playing a big role in Clean BC and the strategy for decarbonizing that province. And it's just as simple as trading on reg for reg. And so I think that provides a lot of clarity on where we're going forward.
Rob
Thank you. And just a follow-up question on your five-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 kind of stay within the current financing plans?
Brian
So 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. And so the look at what our next capital plan, which will be coming in kind of that September, call it fall timeframe, 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. And, you know, obviously the Acorn Creek gives us, you know, an extra $400 million sitting in there from a funding flexibility perspective as well.
Rob
Thank you.
Operator
Thank you. Our next question comes from the line of Mark Jardee with CIBC. Please proceed with your question.
Mark Jardee
Thanks for everyone. I just want to come back to the strong results at UNS and Justin, you talked a bit about timing and how we might see that your, your comparable moderate a little bit, but kind of implying also that results are up. So are you implying there's some sort of structural tailwind a little around the wholesale market and transmission revenues and what's driving that if there is.
Brian
Yeah. Yeah. For the most part it's, it's volume and, and you know, price differences. It's, it's not, it's, it's market driven. It's a, very specific to, you know, shorter-term, I'll say, shorter-term market perturbations, if you want to think of it in that respect. So, it isn't necessarily on the wholesale side, 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. Now, 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 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. And we also have a forward formula rate that looks just like ITCs. And we have, I think, about a billion dollars of transmission capital and about $900 million or so in the current five-year capital plan at UNS. So some of those things will continue to grow over time.
Mark Jardee
Okay. Thanks for that, David. And then, Jocelyn, coming back to you in terms of you mentioned putting in some hedges around interest rates going forward. They can 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
Mark, I would say that the two you mentioned are two big ones for us, right? I mean, obviously, AIT can freeze up $400 million of our borrowings to give us that flexibility, but 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. So, you know, we're always watching the market to, you know, determine a good time to go in. And so, but 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. But Aiken and interest rate locks certainly do, you know, improve. our position with respect to the volatility we expect to, would expect to see on our business. So, but we're always watching. I don't see, you know, I think we're going to be looking to, for our regulated utilities, potentially looking at timing of their debt offerings. So we're watching the market very closely.
Mark Jardee
We've seen a few more convertible note offerings from U.S. utilities. Is that something you contemplate or is it really not a fit right now for us?
Jocelyn
Oh, definitely always looking at things, but, you know, convertibles are not really in our space right now with our current five-year plan because we don't require any further equity beyond the drip that we've already outlined within the plan. So, but certainly as we, 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, but... commercials definitely is something that's out there these days.
David
Okay, thanks a lot.
Jocelyn
Thank you.
Operator
Thank you. Next question comes from the line of Ben Pham with BMO. Please ask a question.
Ben Pham
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 a little bit. And 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 not overly impactful to your potential CapEx plan?
Brian
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.
Ben
Yeah, good morning. Thank you, Ben. Yeah, I think in terms of next steps, obviously the Supreme Court has remanded the case back to the district court. And 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 we stated, obviously it doesn't have an impact on the Trunch One projects that have already been issued and awarded. But certainly as we go forward, there's various places that this issue is playing out. One clearly is at FERC. This was clearly an issue that was teed up in the transmission planning NOPR in terms of questions around the continuation of competitive bidding you know, the rofers. And so, you know, we would be hopeful that FERC obviously would, you know, make some decision around the rofer issue. But it is obviously playing out. It's playing out in Texas. We now have it in Iowa. And so, you know, for us sitting here today, you know, we're going to continue to stay focused, you know, on, you know, planning the transmission system with MISO. and obviously advancing sort of both the LRTP1, the LRPT2 projects. You know, but 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. And so, you know, much of our five-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, kind of how all of this plays itself out or what the impact is. you can assure yourself that 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 rofers. It is something that FERC explicitly allowed in their subsequent ruling on competitive bidding. And it is something that FERC recognized that states have the right and the ability to have state rovers. And so we will be actively pursuing defending the ability for states to maintain the decision around who builds in the respective states. And I would just say, 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 is a success story. It's the opposite. It takes more time. There's no evidence to suggest that it's cheaper. And I will give you an example right now, even in the LRTP tranche one, we are 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. And so 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 failed experiment, quite frankly, and we will be continuing to defend vigorously as well as be proactive on this front.
Ben Pham
That's a really good color, Linda. Maybe just sticking with ITC and the remaining 20% minority interest, can you clarify if hypothetically if GIC were to sell that portion through just whether it's a fun life ending or some other reason, does Fortis have a roper on that? And also just any thoughts on ITC just more strategically?
Brian
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, but 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
Perfect. And maybe to close off on asset sales, Aiken in particular, I'm not sure, did you, 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?
Brian
No, we didn't, but Jocelyn can opine on it.
Jocelyn
Yeah. been so we paid around $2.66 U.S., I believe, and $3.50 Canadian. So 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 Aiken quite frequently on the calls because the earnings somewhat are more variable given pricing and volumes. But over the last five years, the average for Aiken has been about four pennies a year. So if you do the math on 400, you're going to get the mid-20 multiple for this transaction. So as David talked about earlier, yeah, it was a good time to do this transaction for us.
Ben Pham
Okay, that's great. Thank you.
Operator
Thank you. Next question comes from the line of David Quesada with Raymond James. Please proceed with your question.
David
Thanks. Morning, everyone. Maybe just 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?
Brian
Yeah, so the system is sending out bills correctly now. And 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. So it's still 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. And then we're just going through the process of making sure that we're getting out there with our customers, our regulators, our government officials, and telling that story and getting everything back on track.
David
Excellent. Thanks for that. And maybe just one more for 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.
Brian
So given that neither Susan nor I are familiar with that, I would probably say no. But when we look at our integrated resource plan that the TEP and our smaller U.S. 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. And believe me, the transmission, to build transmission from Mexico to the U.S., particularly connecting to our system, we tried that about 25 years ago and gave up after about 15 years, I think, of trying to get that built. But that could actually be an opportunity for us to extend transmission. It could be an opportunity for us to look for cheaper renewables, but 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
Thanks for those comments, Dave. Appreciate it.
Operator
You bet. Thank you. Next question comes from the line of Andrew Kuski with Credit Suisse. Please proceed with your question.
Andrew Kuski
Thanks. Good morning. I may be continuing with the transmission theme. Obviously, a lot of skin in the game given ITC and just the other assets you've got. Transmission has always been difficult to build, but there's obviously increased emphasis given the energy transition, and there's a lot of talk on transmission cues and the interconnection problems. So 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?
Brian
Yeah, there's multiple fronts that you have to address this on. And FERC is addressing several of them. One primarily that you mentioned is the interconnection queue. And that NOPR, as of last week, we hear it should be pretty soon where they get to a final ruling on how to, in essence, untangle the interconnection queue. And I think they're definitely doing it in the right manner, which is first ready, first served. And if that goes through and we can get 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, but 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 going to 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 think it's on everybody's to-do list, which is a good spot to be. But we definitely need to be pushing through all of the industry groups that we, and in particular ITC, works with to try to find a better way to do this. The federal government, one of the main things that they're focused on is trying to figure out how to create a little bit of an easier path through all the different agencies that have to approve And then, 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 Kuski
Okay, I appreciate that, Keller. And then 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?
Brian
Stay tuned for September. 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 Kuski
Okay, so more bringing forward things versus a much larger number.
Brian
Yeah, like specifically tranche two, 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 tighten up some of these permitting and siting requirements.
Andrew Kuski
Okay. I appreciate the time. Thank you.
Operator
Thank you, Andrew. Thank you. Next question comes from the line of Matthew Weeks with IA Capital. Please proceed with your question.
Andrew
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.
Brian
Yeah, thanks, Matthew. It's kind of like 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 energy delivery in Canada. However, the indirect impact is this is all going to mean that we need additional uh... transmission and distribution which is our business uh... to deliver those create the the clean energy into supply uh... new manufacturing opportunities across canada so it's it's more of an indirect uh... from a canadian perspective on that and and and plus there's they're still uh... a lot tbd uh... particularly around hydrogen and what that credit might look like that might be the one opportunity where we have more of a direct uh... benefit uh... say and and for the species for us to look at uh... different hydrogen development opportunities within the regulated construct there.
Andrew
Okay, that makes sense. Thank you. And just one more from you, Nadia, 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 time.
Brian
Thanks. Yeah, as you mentioned, we've got a pretty healthy capital budget that we're really focused on, and we're going to spend most of our energy focused on finding out how to take that to the next level and then execute at that next level. So that's where our main focus is here. Obviously, as fiduciaries, we keep our eyes and ears open, but that's not a priority for us.
Andrew
Okay, thank you. I'll turn the call back next.
Operator
Thank you. Next question comes from the line of Michael Sullivan with Wolf Research. Please ask your question.
Michael Sullivan
Michael Sullivan, Wolf Research, Hey, good morning. Michael Sullivan, Hey, Dave. 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?
Brian
Yeah, it's just getting a bunch of people in a room to agree. And frankly, you know, you've got a short timeframe to do that. And 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. And I'll say I was extremely pleased with Susan and the team at TEP and their ability to get it down to just those couple issues to be really discussed in earnest in the hearings. When you're sitting here at 9-5 at 9-7-5 from a ROE perspective on staffs versus ours, And 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 here. It didn't bother me because I didn't have to testify. But, you know, it's always better if you can get a settlement just from an expeditious standpoint. But this was the next best thing because in the end, there wasn't a lot of topics here that were thorny.
Michael Sullivan
Okay, appreciate the caller there. And also just related to sticking with Arizona, specifically the renewables rider request and then discussion around the system improvement benefit mechanism. Maybe just where does that stand? Where do you see that going? And can that be resolved within the rate case or outside and it becomes longer dated? Just where are we at on that?
Brian
I'll turn that over to Susan for color on that new tracker that we're talking about.
Susan Gray
Sure. So 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. And so 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. So 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. So we wouldn't actually have one in place until after the rate case is actually decided.
Michael Sullivan
Okay, very clear. Thank you very much.
Brian
Thanks, Michael.
Operator
As a reminder, everyone, if you wish to ask a question, please press star followed by the number one on your touchstone phone. Next question we have at Argus Lozny with Bank of America. Please proceed with your question.
Lozny
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 12 cents upside that you guys realized in Q1 was related to that market impact?
Jocelyn
Yeah, Darius, it is in UNS and ITC. It's about a penny each in each of those utilities.
Lozny
Okay, thank you. And 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?
Brian
Yeah, that's probably too much in the weeds because the timing quarter to quarter and year over year is different. So I think we did it in a couple different quarters last year and so we might, the two quarters this year, I don't know if I could you know, pick out of a hat. But overall, we expect it to, you know, kind of obviously moderate year over year. So we can't really put that kind of quarter over quarter clarity there.
Lozny
Okay, fair enough. Thank you very much. I'll pass it along here. Okay, thank you.
Operator
Thank you. All right. If there are no further questions, I would now like to turn the call back to Ms. Alaino.
Brian
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
Thank you for participating. This concludes today's conference call. You may now disconnect.
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