Algonquin Power & Utilities - Q2 2023
August 10, 2023
Transcript
Operator (participant)
Hello, welcome to the Algonquin Power & Utilities Corp Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press Star followed by one on your telephone keypad. I will now turn the conference over to Brian Chin, Vice President of Investor Relations. Please go ahead.
Brian Chin (VP of Investor Relations)
Thanks, good morning, everyone, and thank you for joining us on our second quarter 2023 earnings conference call. Speaking on the call today will be Chris Huskerson, Interim Chief Executive Officer, and Darren Myers, Chief Financial Officer. Also joining us this morning for the question-and-answer part of the call will be Jeff Norman, Chief Development Officer, and Johnny Johnston, Chief Operating Officer. To accompany today's earnings call, we have a supplemental webcast presentation available on our website, algonquinpower.com. Our financial statements and management discussion and analysis are also available on the website, as well as on SEDAR+ and EDGAR. We would like to remind you that our discussion during the call will include certain forward-looking information. At the end of the call, I will read a notice regarding both forward-looking information and non-GAAP measures.
Please also refer to our most recent MD&A filed on SEDAR+ and EDGAR. Also available on our website for important information on these items. On the call this morning, Chris and Darren will walk through a few important updates. First, Chris will review the board's decision on company leadership and then the results of the strategic review announced in May. Darren will review our second quarter performance and financial results. We will then open the lines for the question and answer period. Please restrict your questions to 2 and then requeue if you have any additional questions to allow others the opportunity to participate. With that, I'll turn it over to Chris.
Christopher Huskilson (Interim CEO)
Okay, well, thank you, Brian. Good morning, everyone. Before we dive into our second quarter results, I'd like to start off by providing an overview of this morning's announcements. The board announced that I've been appointed interim CEO and that Arun Banskota has stepped down as President and Chief Executive. On behalf of everyone at Algonquin, I want to thank Arun for his contributions over the past three years. Wish him the best in his future endeavors. By means of introduction, I've served on Algonquin's Board of Directors for the past two and a half years, most recently as Chair of the Strategic Review Committee. I've worked closely with the executive team on the review. Some of you may already be familiar with my experience in the utility industry.
I was previously CEO of Emera from 2004 to 2018, and some of that time, Emera was an investor in Algonquin. The board has engaged a nationally recognized search firm to identify a permanent Chief Executive Officer. During this period, however, I am committed to working towards a successful execution of the strategic separation and ensuring a smooth transition. The board's decision to establish new leadership is directly related to the outcome of the strategic review process. After a thorough strategic review, we announced earlier today that the company will pursue a sale of our Renewable Energy Group. With the support of our independent financial advisor, the Strategic Review Committee of the board carefully evaluated both of our strong businesses and determined that we can create more long-term value by focusing on our regulated business and pursuing a sale of the renewables business.
The regulated utility business is well-positioned with diversified assets, multiple modalities, and attractive jurisdictions. We have a proven track record of providing reliable service for our customers and have achieved constructive regulated returns for our shareholders. Excuse me. The renewable business is a solid, and over the past 30 years, has grown into an attractive platform that remains poised to benefit from the acceleration of clean energy. In fact, both businesses are well-positioned to benefit from the energy transition. That said, with the work the board and management has done, we believe our current integrated structure is holding us back from realizing the full value of our both businesses. We have a strong set of regulated assets for long-term growth. The regulated portfolio has upside potential that can be unlocked through more focused organic growth strategy, including a simpler business model and more disciplined approach to capital.
A sale of the renewable business supports the realization of this value opportunity. We also believe our renewables business would be better positioned to accelerate its growth under a different ownership structure. We expect to use the proceeds of a renewables transaction to reduce our debt and fund share repurchases. Our objectives for the transaction are to support our current dividend, reduce our cost of capital, and maintain our investment-grade BBB rating, always with the objective to build long-term value. The timing of the sale will be dependent on value, and we will update the market as appropriate. JPMorgan will be acting as financial advisor for this purpose. We look forward to exiting the sale process as a competitively capitalized, regulated utility with a stable, healthy growth outlook. Let me take a brief moment to highlight some unique aspects of our regulated utility story.
With our first regulated investment in 2001, Algonquin is among the newer investor-owned utility portfolios of our scale in North America. Over the last 2 decades, and especially during the period of lower interest rates, we took the opportunity to build a utility platform by acquiring and investing in undervalued and underperforming assets. Through improved customer and regulatory relationships, as well as cost management, we've been able to improve delivered ROEs and, on average, bring them closer to our allowed returns. We now serve over 1.2 million customer connections in $7 billion of rate base across our utility business. Our portfolio is heavily concentrated in 4 U.S. states: Missouri, California, New Hampshire, and New York. These provide 86% of our U.S. rate base and 73% of our overall rate base.
Our utilities are primarily comprised of electric distribution and water distribution, which is 78% of our rate base, as well as natural gas distribution, making up the final 22%. We believe this mix provides our investors a unique and favorable composition and exposure to clean infrastructure trends and investment opportunities. While our story has been one of growth, largely through acquisition, in a higher cost of capital environment, the company strategy needs to adapt and evolve from our early regulated years. More specifically, we see our strategy focusing more intently on our organic growth, greater operational discipline, and capital discipline. With the plans we're pursuing, we expect to be able to bring additional efficiencies and value to customers while investing in the infrastructure in an affordable way. Clean, affordable, and reliable energy and water will be the focus of our regulated business.
Our plan to accomplish this is underpinned by aiming to invest approximately $1 billion of capital per year by focusing on standardizing our infrastructure, which is expected to provide the biggest impact for our customers through improvements in reliability and creating economies of scale. We are finding investment opportunities that provide the double benefit of improving service and helping customer affordability by OpEx to CapEx investments. By reducing $1 of OpEx, this creates headroom for up to $8 of CapEx investment without increasing rates. Our plan is to continue to modernize our utility systems, supporting safe and reliable delivery of our services, help our customers transition towards net zero, and keep a close eye on customer affordability with average aggregate rate increases roughly in line with inflation.
Our regulated business is capital-intensive, growth rates tend to be lumpy, but we expect our annual Adjusted Net EPS growth over time to be in the 4%-7% range, consistent with the industry and exclusive of near-term headwinds. We also expect to continue to maintain our investment-grade BBB credit rating. Diving deeper into our renewables business, comprised of primarily wind and also containing solar and hydro assets, the renewable portfolio is positioned to benefit from the energy transition. By operating scale, our fleet has approximately 2.7 GW of gross generating capacity at 46 facilities. It operates in 11 states and 6 provinces in North America. This provides diversity of geography and markets and is a business of scale. Our footprint spans 7 independent system operators, including PJM, MISO, and ERCOT.
Our development pipeline is comprised of over 6 GW of solar and wind, more than half of which has site certainty and is in interconnection queues. We have over 3 GWh of storage in development. We've grown this business significantly and believe the business is poised to continue this growth. We have approximately 650 MW of projects in various stages of construction today. That said, for a variety of reasons, its value is not being fully realized as part of the Algonquin integrated business. We believe that a sale of the renewables business will unlock the unrealized value and better position the renewables business for growth and a positive future for our team members that support it. In summary, we have four messages to communicate today. First, we have two strong, growing businesses. Second, we're pursuing a sale of the renewables business.
Third, the current dividend can be supported by the remaining regulated business combined with our intended sale. Fourth, the remaining regulated business will have a strong balance sheet, a lower cost of capital, and a growing rate base. With that, I'll turn things over to Darren to speak about the second quarter.
Darren Myers (CFO)
Thank you, Chris, good morning, everyone.
Let me start with some operating updates, followed by an overview of our financial performance for the quarter. Overall, we had a challenging quarter despite growth from constructive regulatory developments. Unfavorable weather resulted in headwinds to our year-over-year financial results. The map we've provided illustrates how weather-driven, low wind production levels overlapped heavily with our fleet for the quarter. I'll provide more detail on the financial impact of this in a moment. On the regulatory front, we're pleased to report that our Regulated Services Group received final rate case orders at our CalPeco Electric system in California and St. Lawrence Gas Utility in New York. At CalPeco, the CPUC issued a final order on April 27th, authorizing an annual revenue increase of $27 million, with new rates becoming effective in June 2023, retroactive to January 2022. For St.
Lawrence Gas, on June 22, the commission issued an order authorizing a revenue increase of $5.2 million to be implemented over 3 years, with new rates becoming effective on July 1, 2023. Looking now at recent pending rate proceedings, a core growth strategy of the Regulated Services Group is to responsibly invest in our utility systems and target a constructive return on the rate base. While I won't go through each of these, I do want to highlight that the Regulated Services Group filed for new rates at its New York Water and Granite State Electric utilities. The New York Water application seeks an increase in revenues of $39.7 million, based on an ROE of 10% and an equity ratio of 50%.
The Granite State Electric Utility application seeks an increase in revenues of $15.5 million, based on an ROE of 10.35% and an equity ratio of 55%. In total, the Regulated Services Group has pending reviews totaling $95.3 million across six of its utilities. These rate cases reflect our continued commitment to earning as close to our authorized ROE as possible. One more mention, on August 1st, the Western District Court of Appeals affirmed the Missouri Commission's order in the Asbury securitization docket. We will finalize our response in the coming weeks on this long-standing issue. Turning now to an update on construction projects for our Renewable Energy Group. The second quarter of 2023 saw progress on panel installation at our New York Market Solar project.
Phase one is now fully commissioned as of June, and 75% of the panels have been installed for phase two. Site preparations also advanced at both the Carvers Creek and Clearview Solar projects. At our Sandy Ridge Two wind project, site preparations and turbine erection was completed during the quarter, and the project is on track to achieve full COD by the end of the year. In total, we currently have nearly 650 megawatts of wind and solar projects in various stages of construction and expect to bring approximately 450 megawatts in service in 2023. Turning now to our financial year-over-year performance. Quarterly results were negatively impacted by weather, higher interest, and lower HLBV from older project rollovers. Our second quarter revenue increased by 1% year-over-year to $627.9 million.
Growth was primarily attributable to the implementation of new rates, offset by unfavorable weather. Our second quarter consolidated Adjusted EBITDA was $277.7 million, a decline of approximately 4% from the same period last year. Growth in our regulated operating profit was more than offset by decline in our renewables operating profit. The Regulated Services Group delivered $214.4 million in Divisional Operating Profit in the second quarter, a year-over-year increase of 15%. The increase was primarily a result of new rates at certain of the company's utilities, most notably the CalPeco Electric system, with recruitment to the first quarter of 2022, as well as Empire, Belco, and Granite State Electric.
Included in the regulatory results was weather-driven, reduced customer demand, which drove a Divisional Operating Profit headwind of $11 million, or approximately $0.01 of adjusted earnings per share. Moving now to the Renewable Energy Group. Second quarter, 2023 Divisional Operating Profit was $90.6 million, a year-over-year reduction of 26%. Approximately half of the decline was a result of the group's wind facilities operating at 75.1% of the long-term average resource. This decline from weather equates to a negative $0.02 impact on the adjusted earnings per share. Additionally, lower HLBV income accounted for much of the remaining decrease as a result of the end of Production Tax Credit eligibility on projects commissioned in 2012.
This extends a year-over-year pattern first seen in late 2022, and is the last quarter of HLBV rollovers we expect to see for these projects. Our interest expense was $89.7 million in the quarter, a $25.1 million increase year-over-year, with approximately two-thirds of the increase attributable to a higher short-term borrowing cost and approximately one-third attributable to financings to support our growth initiatives. This quarter's increase over the prior year is similar to the pattern observed in late 2022 and in Q1 2023. In aggregate, for the quarter, we delivered Adjusted Net Earnings of $56.2 million and Adjusted Earnings Per Share of $0.08, both representing a year-over-year decline of approximately 50%.
As we look to the balance of the year, we are tracking to the lower half of our previously disclosed 2023 guidance, driven by the unfavorable impact of weather in the second quarter. Please note, our guidance assumes continuing operations accounting treatment for the renewables business. We look forward to updating you as the year progresses. With that, I will now turn the call over to the operator to open the lines up for questions. Operator?
Operator (participant)
Thank you. If you have a question, please press star, followed by one on your telephone keypad. To withdraw your question, simply press star one again. One moment, please, for your first question. Your first question comes from Dariusz Lozny from Bank of America.
Dariusz Lozny (Senior Investment Analyst)
Hey, guys. Good morning. Thank you for taking the question. Maybe just at the outset on the planned renewables sale, can you comment a little bit on, obviously, some of your publicly traded peers have announced similar transactions in recent months. Can you comment on what you're seeing from initial conversations as far as some of the valuations we've seen on those other announced transactions, and how that may potentially inform the valuation that you see, in your planned transaction? Then also related, could you potentially stack or somehow rank the priorities for proceeds, paying down parent debt and buying back shares? If you could put any specifics around that, that'd be very appreciated.
Christopher Huskilson (Interim CEO)
Yeah. Good morning. Thank you. It's Chris. You know, when we, when we did the separation, calculations, one of the things that we did was look hard at where the market is and also look at our portfolio. We have a very, very strong portfolio with an extremely strong development pipeline. And so when we look at that and compare it with where the markets are trading right now, in consultation with our, our advisor, JPMorgan, we believe that this works for the business. What we've said is, that the result of that, is that we would be able to support our dividend, reduce our cost of capital, and maintain our credit rating in the regulated business. You know, that's the way we've looked at it.
The work that we've done has taken us to those views, and so we're going to move in, in that direction. Your other question was the use of proceeds. You know, clearly, one of the things that will be an opportunity for the business is that the FFO to Debt will be able to, to be reduced as a result of being a pure-play regulated business. So some of it will go to debt, but we will look at putting the FFO to Debt in the right place, and then the remainder will go to buying back shares. So, you know, we're, we're hopeful that we'll be able to buy back a significant number of shares to help support our growing business.
Darren Myers (CFO)
Dariusz, as Chris mentioned, I mean, the first priority in that equation is the, you know, BBB credit rating. You know, first priority is, and the order is the pay down the debt, and then with the balance for the buybacks.
Dariusz Lozny (Senior Investment Analyst)
Okay. Thank you, guys, for that color. One more, if I could, just as a quick follow-up. Just to... It's a, it's a fairly diverse operating portfolio, in terms of, both types of assets and also, ownership structures. In terms of your on-balance sheet assets and also the stake in AY, do you envision this as a series of discrete transactions or potentially, one kind of holistic one?
Christopher Huskilson (Interim CEO)
We're, we're not making a final decision at this point, but we think that the, the portfolio as a whole has more value than in parts, and especially with the development pipeline attached. You know, that's the way we're looking at it right now, and we believe that that'll create the most value. Remember, it's a competitive process, and so through that competitive process, we could get offers that look different than that, but that's our current view.
Dariusz Lozny (Senior Investment Analyst)
Okay. Appreciate the color.
Darren Myers (CFO)
Thanks, Dariusz.
Christopher Huskilson (Interim CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Sean Steuart from TD Securities. Your line is live.
Sean Steuart (Managing Director of Equity Research)
Thanks. Good morning, everyone. Follow-on question with respect to the process. Any incremental thoughts on what the target FFO to Debt ratio is? Has that changed at all with respect to keeping the BBB credit rating? Further to that, any incremental ambition to have a little bit of a liquidity cushion left over to provide room for growth in the regulated side of the business as the company takes on its new structure?
Christopher Huskilson (Interim CEO)
Darren, do you want to go ahead and take that?
Darren Myers (CFO)
Yeah, sure. Good morning, Sean. Yeah, I think the way to think about, we're not going to get into the numbers today in terms of, you know, what that new target FFO to Debt would be. In the past, we've talked about needing to be over 14% as an integrated business. You know, clearly, that does come down as a pure-play regulated. Directionally, it would allow us to have a lower FFO to Debt. The other thing, of course, we would want to make sure we've got room to invest. You know, as Chris mentioned in his prepared remarks, you know, we see an opportunity to invest, you know, approximately $1 billion a year on the regulated side.
You know, finding the, you know, getting to the right sweet spot to make sure we've got the appropriate liquidity to manage $1 billion of spend a year will be the, the, the key goal.
Sean Steuart (Managing Director of Equity Research)
Okay. Thanks for that, Darren. Then this might be a question for the permanent CEO successor, but do you have any thoughts on the regulated mix that the company has? Is there any benefit to potentially streamlining the regulated portfolio, one around a tighter group of modalities, or-
Darren Myers (CFO)
... a, a tighter regional platform as well?
Christopher Huskilson (Interim CEO)
Well, I mean, I'd, I'd say, first of all, we're focused on the separation. You know, that, that's our- that's where our focus is going to be, on getting to that point and maximizing the value of those assets. I, I guess the other thing is, is that we are gonna bring a focus to the regulated business. You know, I think that that's going to be a renewed focus. That's going to allow us to look very hard at the, at the business and see how it grows best. When we think about that business, the, the diversity of modalities, the diversity of the business, we think is an advantage.
In fact, you know, we are uniquely a regulated company of scale that actually has water attached, and we think that that's also a unique opportunity for the business as a whole. You know, at this point, we gotta stick with the focus that we have, which is to get the separation done and to sell the current assets, and focus on growing that regulated business.
Darren Myers (CFO)
Okay. Thanks very much for the detail. That's all I have.
Christopher Huskilson (Interim CEO)
Thanks, Sean.
Operator (participant)
Your next question comes from the line of Robert Hope from Scotiabank.
Robert Hope (Managing Director of Equity Research)
Good morning, everyone, good to hear from you, Chris. It's been a little while.
Christopher Huskilson (Interim CEO)
Nice to, nice to hear your voice.
Robert Hope (Managing Director of Equity Research)
I, I did actually want to go back to one of your comments in the prepared remarks. It said that the timing of the sale was going to be dependent on value. Can we just dive a little bit deeper into this? Like, have you already got some inbounds in terms of valuation that kind of give you comfort, as well as will this be, you know, a, a set formal process with a kind of wholesale divestiture as the end goal, and if valuations do not come where you expect them, could we see this deferred?
Christopher Huskilson (Interim CEO)
Well, I mean, I think that's what we would mean by the, by the, the value, essentially being, being part of what we're thinking about. I mean, we're not, we're not going to give these assets away. I'll start with that point. We don't see, see any need to. We, we think that this is a very attractive portfolio, and the work we've done with JPM would tell us that we believe this portfolio will be valued appropriately. The modeling we've done to look at where the reg business would be after that, is, is in line with what JPM thinks, we can achieve with this sale. To your question about inbounds, we have actually had inbounds already, and some very interesting, interesting, opportunities, where people are interested in, in new portfolios, and this is one.
It is a portfolio of scale. It has a tremendous development pipeline, and we think it's gonna be very attractive to the marketplace.
Robert Hope (Managing Director of Equity Research)
I appreciate the color there. Then just moving over to the dividend, appreciate the commentary on just getting the existing dividend level. You know, as you take a look out in the, you know, in the outer years, you know, have you an update on where you want the payout ratio to go on a longer-term basis and where you think it will be, I guess, more near term?
Christopher Huskilson (Interim CEO)
Well, well, as, as, as you can imagine, near term, it's, it's going to be, you know, a pretty reasonably high payout. There's no question about that. In the long term, we just want to get to where the industry is, and, and we believe the growth that we have in this business will allow us to get there in a reasonable time. It allows us to support the dividend in the way that we think we should. You know, we've, we've done the work to tell us, what, what we think the, this is how this is going to evolve. With the evolution we see of this business, we're very comfortable with where we are today.
Robert Hope (Managing Director of Equity Research)
Thank you.
Operator (participant)
Your next question comes from the line of Rupert Merer from National Bank.
Rupert Merer (Managing Director and Senior Equity Analyst)
Hi. Good morning, everyone. Thanks for taking the questions. Now, you've, you've talked about the strength of your development platform. How important is this going to be in the sale process? Do you have any metrics, you know, maybe perhaps what percentage of the value of the sale price you think could come from the development platform?
Christopher Huskilson (Interim CEO)
Yeah, I don't think we've tried to break it out that way, but I think what we would say, though, is that, that for the right buyer, the development platform will be a very attractive thing. Because at the end of the day, being able to have, already teed up opportunities to invest... You know, we've already got 650 MW under construction. That by itself is a nice starting point, and, and the fact that half of the 6 GW that we, that we have under development are already in interconnection queues and have locations, that's, I think that's somewhat unique, at least for something that's being offered. I don't know, Jeff, is there anything you want to add to that?
Jeffery Norman (Chief Development Officer)
Yeah, no, I'd, I'd, I'd say, Chris, that the pipeline, given where we are with the energy transition and the amount of excitement within the U.S. market, that I think the pipeline is certainly gonna have good value on the in-construction projects and the near-term development assets, but we're also going to see kind of a sweetener in that longer-term positioning of someone who wants to play in that market.
Rupert Merer (Managing Director and Senior Equity Analyst)
Thank you. When you look at selling that development capability, how much of that capability do you need to keep in-house for the regulated operation if you're looking to continue to green the fleet and head to net zero? How do you separate that business?
Christopher Huskilson (Interim CEO)
Yeah. Well, we certainly will need to, to keep some of that capability because the, the regulated business will continue to develop clean assets. You know, that's something we'll have to, to work our way through as we, as we configure what the actual renewable business is. That's something that we have in mind. You know, I think one of the significant opportunities for the reg business is to continue to build clean assets and also to build for the electrification of the entire, of the entire economy. Those two things are things that are absolutely in mind when we look at how we're gonna configure the company going forward.
Rupert Merer (Managing Director and Senior Equity Analyst)
All right, thank you. I'll, I'll get back in the queue.
Christopher Huskilson (Interim CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Nelson Ng from RBC Capital Markets.
Nelson Ng (VP and Senior Equity Analyst)
Great. Thanks, good morning, everyone. My first question relates to Atlantica. Can you talk about your Atlantica investment? Is it kind of excluded from the strategic review of the Renewable Energy Group? Like, obviously, Atlantica's, they have their own strategic review that's ongoing. Any color you have there would be great.
Christopher Huskilson (Interim CEO)
Go ahead.
Darren Myers (CFO)
Yeah. Yeah, Nelson, it's Darren. Good morning. Yeah, no, in terms of the Atlantica, I mean, I think the first, the first point that we wanna leave you with is we are moving to a pure play regulated business. We are continuing with, with regards to Atlantica, that is a separate process that they're running in terms of their strategic review, and we continue to be supportive of that process that they're running.
Nelson Ng (VP and Senior Equity Analyst)
Okay, got it. My second question, which relates to the sale of the renewables business. Chris, you mentioned that I guess timing will be dependent on value. Like, if the value isn't there, could you see a scenario where you retain the renewables business or kind of spin it out rather than outright sell it?
Christopher Huskilson (Interim CEO)
Well, again, when we look at the portfolio, we see that it does have value to the market, and the development pipeline itself, we think, is, is uniquely valuable. So we're not expecting to be in a position that you're describing. And so, you know, I would probably leave it at that. At the end of the day, our objective will be to sell this in a competitive process, and we believe that that will work very well. That's why we employed JPM to help us with this. And obviously, they're very experienced in doing this business. And they and we believe that this will actually come off in the way that we expect.
Nelson Ng (VP and Senior Equity Analyst)
Okay. Just finally, you talked about the value of your development pipeline. How large is the development team currently?
Jeffery Norman (Chief Development Officer)
It's, it's Jeff, Nelson. The development team is a little over 100 people at this point in time, which includes the construction team, the development team, and the origination team for wind and solar, and our international team, which is relatively small, but the international team is in that 100 to 110 number.
Nelson Ng (VP and Senior Equity Analyst)
Great. Thanks, Jeff. I'll leave it there.
Operator (participant)
Your next question comes from the line of Mark Jarvi from CIBC Capital Markets.
Mark Jarvi (Managing Director and Senior Equity Analyst)
Yeah, thanks. Good morning, everyone. I wonder if you guys could share a range of expected proceeds based on what you think valuations would be? I mean, many other companies have done that. Just could you do that? I guess otherwise, the other thing would be any implications around tax and any associated debt that have to be repaid if you sell the renewables assets?
Christopher Huskilson (Interim CEO)
Yeah, well, we're not gonna get into numbers today. As I said, we've, we've done the work, we've, we've looked at the, at what values we believe can be achieved here. We've, we've consulted, you know, expertise in that area, and we feel comfortable with where we are. It's a competitive process. If we started putting numbers out there, that might, that might flavor that competitive process, and we'd like to maximize value. We're not prepared to do that today. Did you want to speak to the second half?
Darren Myers (CFO)
Yeah. Yeah, Mark, on, on tax, it's a little hard for me to comment on that today. There's lots of complexities in the way this could be sold and different things depending on the buyers and what have you. We've obviously done a thorough analysis of the tax impact as we've looked at the... And made the decision that we've announced today.
Mark Jarvi (Managing Director and Senior Equity Analyst)
Then anything on the OpCo notes, in terms of them having to be repaid, I guess, if you sell the renewables business?
Darren Myers (CFO)
Nothing that we would talk about today. Obviously, we're looking at all the all aspects, including the notes as part of a part of the the sales process.
Mark Jarvi (Managing Director and Senior Equity Analyst)
Okay. In, in the slide deck, you talked about ramping up, I guess, the CapEx or moving to $1 billion in utility relative to, I think, around $700 million this year. You know, just wanted to make sure that that $300 million increase relative to what you're spending this year, it could be done within the context of current approved rate plans, whether or not you'd have to run into issues of, you know, regulatory lag. Just that confidence level in getting to $1 billion of spending on the utility business here, on the other side of a sales process.
Johnny Johnston (COO)
Yeah, no, this is Johnny here, Mark. We feel very confident that we'll be able to ramp up to the that billion-dollar mark very quickly within our existing plans. We've got a number of capital trackers, and as long as we continue to focus those investments on things that are providing benefits to our customers, we feel very confident that we'll be able to get the return of those with minimal lag.
Mark Jarvi (Managing Director and Senior Equity Analyst)
Just to clarify, the 4%-7% growth rate, is that essentially underlying rate-based growth, with assuming that you're just staying around your authorized ROEs when you put those numbers out there?
Christopher Huskilson (Interim CEO)
Yeah. I think the rate-based growth might be slightly higher than that, but we think that that's what the net of the, of the EPS will be.
Darren Myers (CFO)
Great. Thanks everyone for the time today.
Christopher Huskilson (Interim CEO)
Thank you.
Jeffery Norman (Chief Development Officer)
Yep, thanks, Troy.
Operator (participant)
Your next question comes from the line of Ben Pham from BMO.
Ben Pham (Managing Director and Senior Analyst)
Hi, thanks. Good morning. I, I wanted to clarify, I think you mentioned in response to a question that EPS payout could could be going up on pro forma net or share buybacks. I just, just wanted to make sure that you, you mentioned that. If, if so, is really the value creation exercise ultimately a expansion in utility multiple?
Christopher Huskilson (Interim CEO)
Well, I think when, when you, when you think about this business, the way it sits today, it's not optimized for either of the businesses. You know, the FFO to debt is higher than it would be if we were pure-play regulated, and the credit rating is probably higher than the renewables business needs. We would not because we're financing off our balance sheet, we're not actually optimally financed. It's a combination of the financing getting in an optimal place for both businesses and seeing the growth that is, can be there. Yes, the multiples will get in the right place as well, once we get in that structure.
The other thing I would say is, is that as we've set today, we essentially have to constrain the capital that goes into the renewables business, because we can't support as much as, as they could actually develop. Jeff told you earlier, we have quite a strong development team. That's something we've ramped up over about the last two years, and that development team can produce a lot more megawatts than, than our existing business can finance. When you put all those factors together, that's really why the integrated business wasn't going to continue working. It wasn't sustainable anymore in the state that it was in.
Another factor that really goes into that is that the overall business got to a scale, that the amount of renewables you had to build to, to not be holding back the other part of the business, was more than we could sustain. Put all that on the table, and that's really what's driven us to the decision we've made.
Ben Pham (Managing Director and Senior Analyst)
Okay, thanks, Chris. I'm also wondering, too, because you, you did -- you're running Emera when just trading at a premium valuation and Algonquin before the recent dividend cut and, and whatnot, did trade at a premium, even though you had, they had renewables in their business. Can you talk about really the conditions that was driving that pre-Algonquin dividend cut, and why you don't think those conditions are gonna continue going forward and, and supporting the premium valuation, even if you stayed together, the renewables and utility business?
Christopher Huskilson (Interim CEO)
Well, again, if you think about it, because of this, we now have $7 billion of rate base on the regulated side. In order for the renewables to keep up and not be a drag on earnings growth, they actually have to invest a tremendous amount of capital. It's that combination of scale, we've gotten to a scale that we need to grow a lot faster than we were growing, which was why we ultimately ramped up the development. But that's at that point, the scale actually made it unsustainable. You know, when the company was a lot smaller, then it was a lot easier for that to happen. Now at the scale that the business is, it just the math just doesn't work anymore.
Jeffery Norman (Chief Development Officer)
Then, obviously, the other big difference is the, the change in the interest rate environment. I mean, we're in a different, we're in a different environment now, and, and, that, that makes the model that much harder to do with, with higher rates and the changes in the capital markets.
Christopher Huskilson (Interim CEO)
Exactly.
Ben Pham (Managing Director and Senior Analyst)
Okay, I got you. I mean, that premium valuation was predicated on our perceptions of high growth rate and regardless of business mix, sounds like the split makes more sense because it, both companies will grow much higher going forward.
Christopher Huskilson (Interim CEO)
Yeah.
Ben Pham (Managing Director and Senior Analyst)
Okay.
Christopher Huskilson (Interim CEO)
Ben, just remember, though, in order to maintain our credit rating, we had to keep the regulated at above 70%, and that, the, you know, it, it, it was a, it was a very tight set of criteria and a knife edge that the company was on at the time.
Ben Pham (Managing Director and Senior Analyst)
All right, got it. Okay, thank you.
Operator (participant)
Again, if you'd like to ask a question, press Star, then 1 on your telephone keypad. Your next question comes from Andrew Kuske from Credit Suisse.
Andrew Kuske (Managing Director)
Thanks. Good morning, and welcome back, Chris. Maybe just building upon the comments of the math not working for the renewables growth rate, and I know it was said earlier on that there's about 100 people in the development group. You know, if, if that business group was unconstrained, which obviously it wasn't on your balance sheet, you know, how much growth per annum in, say, megawatts, do you think you could pull off each year?
Christopher Huskilson (Interim CEO)
Well, well, Jeff may want to speak to that, but certainly more than we were doing, that's for sure. Go ahead.
Jeffery Norman (Chief Development Officer)
Yeah, no, Andrew, it's, it takes, it takes time to move things through the pipeline, but we started to ramp up our investment in the greenfield pipeline a couple of years ago, as Chris said, and our target for ramping that up was to get to 1 gigawatt a year in additions, which then obviously puts balance sheet constraints on in terms of the business mix. We do feel we can ramp up to, you know, we've done 1,600 megawatts in a year in construction between the reg and the non-reg, which was overseen by that team. We can certainly ramp up into a material number that's north of 500 and potentially 1 gigawatt.
Andrew Kuske (Managing Director)
... Okay, appreciate that. thank you. I, I guess as the financials go in transition from being maybe more complicated to being streamlined, you know, ex the Renewable Energy Group, in the future, are there other opportunities for other optimizations? Just if we think about partnership capital that some utilities have used for, you know, selling a 19.9% interest in either an underlying DISCO or a transmission asset, you know, what, what is the appetite for that? I know that's not part of the strategic review on, on the renewable side, but, I guess, are you open to that, and have you been approached on that, that kind of concept?
Darren Myers (CFO)
Yeah, again, Andrew, I think we really have to go back to what our focus is right now. We, we really have to get some momentum on, on the sale, and we need to bring a renewed focus to the existing regulated business. So I think that's where our focus is gonna be. You know, at the end of the day, we will run this business in the best possible way to create value for our shareholders. That's what we'll be focused on doing.
Andrew Kuske (Managing Director)
Okay, great. Thank you very much.
Darren Myers (CFO)
Thank you.
Operator (participant)
Your next question comes from the line of Naji Baydoun from IA Capital Markets.
Naji Baydoun (Director and Equity Research Analyst)
Hi, good morning. Just wanna go back to the topic of Atlantica Yield or Atlantica Infrastructure. It's very clear that from the renewable portfolio sale, you're gonna allocate a portion to deleveraging and a portion to buybacks. I, I assume the potential sale of Atlantica would be incremental to that. If, if that process does work its way through, what would be the use of proceeds potentially for that type of deal?
Darren Myers (CFO)
At the end of the day, all proceeds will go to the balance sheet. That's exactly the way we're gonna look at it. We want to have, you know, a competitively structured balance sheet for this reg business, which will make us, Which will create the most value for us.
Naji Baydoun (Director and Equity Research Analyst)
you don't necessarily have a target for incremental buybacks or just creating more.
Darren Myers (CFO)
Yeah.
Naji Baydoun (Director and Equity Research Analyst)
Putting more capital to work in, in the euro, on the utility side?
Darren Myers (CFO)
Yeah, Naji, it really comes down to the same equation. It's, it's the BBB, you know, BBB investment grade rating is, is our anchor. Whether it's the sale proceeds from Atlantica, if, if that ends up resulting in a sale, plus, you know, what we've announced today, it goes to that first, then, you know, as we've mentioned, buybacks. You know, we're gonna capitalize the balance sheet so we can grow and support the $1 billion of growth that we've, we've mentioned today for the regulated business. The equation, it's gonna be the same thing, you know, with, with both processes.
Naji Baydoun (Director and Equity Research Analyst)
Okay, got it. Just going back to the topic of sort of, constraint and, slow growth in the renewables business. I, I, I think earlier this year, you were maybe thinking about a, a 5% to 8% annualized growth rate as, as a North Star. Now it's 4% to 7% with the regulated group. Is the way to read that to say that, you know, sort of 1% per year EPS growth was sort of the incremental value of the renewables business today, and then to your point earlier, you know, constrained in growing it, so it, it would make sense to, to, kind of go forward with this separation. Is that how you kind of view the standalone growth profile of the utilities bus- the re- the renewable business?
Darren Myers (CFO)
Yeah, Naji, what we had talked about before in that 5-8 was kind of a baseline for regulated of the 4-6, then, you know, a sweetener from renewables of 1, you know, 1-2. So that, that got you to the math, the 5-8. You know, obviously, you know, one of the, one of the complications is both businesses trade a little bit different. You know, the naturally, inherently, renewables isn't as focused on earnings per share, so that does create a little bit of lumpiness, relative to that 5%-8%. When we look at the 4%-7% and all the modeling we've done through this process and, and with our regulated business, you know, one is we think it's in line with the, the, the industry for regulated companies.
secondly, we think with our assets and focus on operational effectiveness and, and capital discipline, you know, we certainly can deliver within that 4%-7%.
Naji Baydoun (Director and Equity Research Analyst)
Great, appreciate that. Just one final quick question. I know you've it's been asked already in terms of other corporate simplification, processes. Just maybe, a question on, on the one that sticks out, which is the Chilean utility business, and any updated thoughts on where that fits within the portfolio going forward?
Darren Myers (CFO)
Again, our focus at this time is, is on the renewable sale and on, and on focus on operational aspects of the regulated business. That's where we are right now, and, we'll, we'll, we'll get that done.
Naji Baydoun (Director and Equity Research Analyst)
Okay. Understood. Thank you.
Operator (participant)
There are no further questions at this time. I'll turn the call back over to Chris Huskilson.
Christopher Huskilson (Interim CEO)
Okay. Well, thank you all for listening to our call today and, and our second-quarter results. I, I personally look forward to talking to all of you in the future. Please continue to stay on, on the line and listen to our disclaimer. Thank you all very much.
Brian Chin (VP of Investor Relations)
Thanks, Chris. Our discussion during this call contains certain forward-looking information, including but not limited to statements regarding expected future dividends, growth, earnings, and rate base, as well as statements regarding the separation of the company's renewables and regulated business through a sales process, including the expected benefits and outcomes and the use of proceeds therefrom. This forward-looking information is based on certain assumptions, including those described in our most recent MD&A and Annual Information Form filed on SEDAR+ and EDGAR, and also including an assumption that the Renewable Energy Group remains in continued operations for accounting purposes for the remainder of 2023. In addition, this forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information.
Forward-looking information provided during this call speaks only as of the date of this call and is based on the plans, beliefs, estimates, projections, expectations, opinions, and assumptions of management as of today's date. There can be no assurance that forward-looking information will prove to be accurate, and you should not place undue reliance on forward-looking information. We disclaim any obligation to update any forward-looking information or to explain any material difference between subsequent actual events and such forward-looking information, except as required by applicable law. In addition, during the course of this call, we may have referred to certain non-GAAP measures and ratios, including but not limited to adjusted earnings, adjusted net earnings per share or adjusted net EPS, Adjusted EBITDA, Adjusted Funds From Operations, and Divisional Operating Profit.
There's no standardized measure of such non-GAAP measures, and consequently, our method of calculating these measures may differ from methods used by other companies and therefore may not be comparable to similar measures presented by other companies. For more information about forward-looking information and non-GAAP measures, including a reconciliation of non-GAAP financial measures to the corresponding GAAP measures, please refer to our most recent MD&A filed on SEDAR+ in Canada and EDGAR in the United States and available on our website. With that, operator, we'll conclude this call. Thank you.
Operator (participant)
This concludes today's conference call. You may now disconnect.