Algonquin Power & Utilities Corp (AQN) Q3 2021 Earnings Call Transcript

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Algonquin Power & Utilities Corp (AQN 0.49%)
Q3 2021 Earnings Call
Nov 12, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Algonquin Power & Utilities Corporation 2021 Third Quarter Earnings Webcast and Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions]

And I'd like to hand the conference over to your speaker today, Mr. Amelia Tsang, Vice President, Investor Relations. Please go ahead.

Amelia Tsang -- Vice President, Investor Relations

Thank you. Good morning, everyone. Thanks for joining us this morning for our third quarter earnings conference call. Presenting on the call today are Arun Banskota, our President and Chief Executive Officer; and Arthur Kacprzak, our Chief Financial Officer. Also joining us this morning for the Q&A part of the call will be Jeff Norman, our Chief Development Officer; and Johnny Johnston, our Chief Operating Officer.

To accompany our earnings call today, we have a supplemental webcast presentation available on our website, algonquinpowerandutilities.com. Our financial statements and management discussion and analysis are also available on the website as well as on SEDAR and EDGAR.

Before continuing the call, we would like to remind you that our discussion during the call will include certain forward-looking information, including, but not limited to, our expectations regarding future earnings, capital expenditures and pending acquisitions. At the end of the call, I will read a notice regarding both forward-looking information and non-GAAP financial measures. Please refer to our most recent MD&A filed on SEDAR and EDGAR and available on our website for additional important information on these items.

On our call this morning, Arun will provide an overview of our Q3 performance, Arthur will follow with the financial results and then Arun will conclude with an update on our strategic plan for the business. We will then open the lines for questions. I ask that you restrict your questions to two and then requeue, if you have any additional questions, to allow others the opportunity to participate.

And with that, I'll turn it over to Arun.

Arun Banskota -- President and Chief Executive Officer

Thank you, Amelia. And a very good morning to those who've been able to join us on the call and online. I'm pleased to report solid key financial metrics for the third quarter of the year. Q3 adjusted EBITDA was $252 million, a 27% increase year-over-year and our Q3 adjusted net earnings per share was $0.15, in line with last year.

On our regulated side of the business, operating profit was positively impacted by the addition of our new Empire Wind Facilities as well as the first full year of operations from our Bermuda Electric Utility and ESSAL water utility in Chile, which both closed late last year and have both performed in line with our expectations.

On the renewable side of the business, operating profit from our new facilities such as Sugar Creek and Maverick Creek contributed to increased earnings on a year-over-year basis. Excluding new facilities, production was 7.3% below the same period last year due to lower wind resource. But this was partially offset from other income, including increased renewable energy credit, or REC, revenues.

I'm pleased to report that the company's operating results were not materially impacted by the pandemic this quarter. Recall that in the third quarter last year, the pandemic did have a $0.01 impact on earnings per share. Generally speaking, we are not seeing negative impacts from COVID on our loans [Phonetic] as business conditions in the regions we operate in return to normal.

Our team continues to focus our efforts on Algonquin's three strategic pillars, growth, operational excellence and sustainability. We operate through two primary businesses, regulated and renewables, and we'll spend some time on each for an update.

On the regulated side, one important lever of growth is acquisitions. On that topic, I'm pleased to discuss our recently announced agreement to acquire Kentucky Power Company, a vertically integrated regulated electric utility that services approximately 228,000 customer connections in 20 Eastern Kentucky counties. As part of the transaction, we will also be acquiring AEP Kentucky Transmission Company, Inc., a regulated electric transmission utility operating in the PJM integrated market. We look forward to welcoming the Kentucky Power employees into the Liberty family and working with AEP during the closing and transition process.

The total enterprise value of the acquisition is approximately $2.8 billion, comprised of assumed debt of approximately $1.2 billion and a cash purchase price of approximately $1.6 billion. From our perspective, this represents an attractive value as a multiple of 1.3 times rate base based on an estimated midyear 2022 rate base of approximately $2.2 billion.

This transaction will have the benefit of increasing our pro forma regulatory business mix to nearly 80% of our portfolio from nearly 70% currently and further increasing our service territory and regulatory jurisdiction diversification with a supportive regulatory framework. Upon closing of the transaction, we expect to have approximately $9 billion of rate base, increasing our pro forma electric rate base from 63% to 72% of our total pro forma rate base.

We expect to close the transaction in mid-2022, subject to customary closing conditions, including the receipt of various state and federal regulatory and governmental approvals. We expect the transaction to be accretive to adjusted net earnings per share in the first full year of ownership, which should be calendar year of 2023 and generate mid-single digit accretion to our adjusted net EPS thereafter, while being supportive of our long-term growth trajectory.

Now, I thought I'd spend a few minutes on the rationale behind the acquisition and why we feel strongly that it represents a strategic fit for us. This acquisition fits squarely into our two playbooks of greening the fleet and improving return on equity from non-optimized assets. As I've mentioned in the past, bringing the fleet is an important lever of growth and an area where we have a strong track record through the transition of our Empire and CalPeco utilities.

Just between 2017 and 2020, we successfully reduced absolute carbon emissions at the acquired Empire District Electric Utility by 33% and at the acquired CalPeco Electric Utility by 38% by including renewables in the rate base, use of tax equity and shutting down a 200-megawatt coal plant in the case of Empire District. We plan on leveraging this experience at Kentucky Power. In particular, the Kentucky Power business offers significant opportunities for us to transition the existing fossil fuel generation to renewables, which should reinforce our leading role in the transition to a low carbon economy.

We see a pathway to decarbonize as it is our expectation that the low cost resource to replace retiring or transport coal will be a combination of renewables with support from energy storage. Wind and solar represent the lowest levelized cost of energy today and are expected to provide benefits for our customers. The existing unit power agreement with the Rockport coal-fired plant will expire in 2022, and Kentucky Power's 50% interest in the Mitchell coal-fired plant is expected to be retired or transferred by 2028.

To replace the lost electricity supply from Rockport and Mitchell, we see an opportunity to utilize the integrated resource planning process to explore the potential to replace over 1,100 megawatts of fossil generation capacity with renewables. This would represent our largest greening the fleet opportunity to-date and is aligned with our target to achieve net zero Scope 1 and 2 emissions by 2050.

We look forward to partnering with the Kentucky Public Service Commission, or KPSC, through the integrated resource planning process and leveraging our greenfield development expertise to deliver low-cost clean energy solutions to Kentucky Power's customers as part of our demonstrated greening the fleet capabilities.

Secondly, Algonquin has had a successful track record of identifying, securing regulatory approvals and closing acquisitions. We have extensive experience in managing the integration of multimodality utilities such as Kentucky Power and Kentucky Transco. As with our previously acquired utilities, we strive to share learnings and best practices among our utilities with the aim of driving consistent improvement in our key performance metrics that provide value for our customers. A number of these acquisitions have been utility acquisitions from large entities and our stewardship of those utilities as part of our Liberty family has helped us to create value for our shareholders and our customers.

Similar with previous utilities, we will utilize our local responsive approach as our local model has been able to reduce disallowances from having transparency of our costs as well as the local model allows us to manage our costs within our regulatory allowances. In addition, we have generally been able to utilize our geographic diversity to deploy capital in a manner that reduces regulatory lag and increases returns as we have done with many of our utilities.

Also contributing to our ability to earn returns is a focus on added regulatory mechanisms. Under our ownership, we have been able to secure decoupling mechanisms, capital trackers, property tax adjustments and similar mechanisms which all help the utilities increase their returns while providing bill stability and adding the necessary capital to allow us to better serve our customers.

For example, after the acquisition of Granite State Electric in New Hampshire, since our first test year, our returns have averaged nearly 9% ROE, whereas on the prior ownership, the returns were frequently under 3%. Similarly and perhaps more pertinently, at Empire District Electric, prior to our acquisition, ROEs achieved were commonly in the 7% to 8% range, whereas under our ownership, we have been able to average nearly 9.5%.

Kentucky Power is primarily regulated by the KPSC which we view as a constructive regulatory jurisdiction and is highly rated by S&P from a regulatory perspective. Kentucky Power is a utility that has historically realized ROE below the authorized levels when compared to peers in Kentucky. We see a compelling path forward to improving the earnings profile to achieve an ROE that is closer to the authorized amount of 9.3% for the distribution rate base through the availability of certain key regulatory features. For instance, forward test years are not currently being employed by Kentucky Power despite its approved use by other regulated peers in the state and could provide for more timely recovery of costs and expenditures.

We look forward to working with the Commission on implementing certain improvements to help us deploy the necessary investments to deliver reliable electric service to Kentucky Power's customers and we plan to maintain Kentucky Power's headquarters in Ashland, along with developing constructive relationships in the local community. Arthur will discuss the financing plan of the acquisition shortly.

Lastly, on the acquisition front, I wanted to provide you with an update on our pending acquisition of New York American Water. We filed our joint proposal signed off by PSC staff and the majority of interveners in early November, with a hearing scheduled for November 16. While this has been a longer process than originally anticipated, we remain confident that the transaction will close and we are on track to do that within the time line set out in the stock purchase agreement, which calls for closing to occur on or prior to January 3, 2022.

Moving on now to operational excellence. In a mission critical industry, safety and reliability are always the most important areas of focus. I'm very pleased to share that we have passed the impressive milestone of over 650 days, that is over nine million work hours, without a single lost-time injury across our North American business, while keeping our customers and communities safe and maintaining our system reliability and resiliency.

I want to thank our employees during the wildfire season, which was really operational excellence in action. During the quarter, the Caldor Fire impacted our South Lake Tahoe area at CalPeco and our local teams worked with incident command and infrastructure protection teams where power lines were shut down for safety. I'm glad to say that operations have returned to normal and our teams were proactive during the evolving event, pruning trees around poles, deploying fire retardant on poles and clearing vegetation. Longer-term, we intend to continue to make investments for system resiliency, system hardening and wildfire prevention.

On the regulatory front, our Missouri rate case continues to progress and we expect the outcome in the middle of next year. In our regulated businesses, we are closely tracking rising gas prices as we head into this winter. We have different regulatory approved hedging policies in place. But overall, we expect the energy cost to increase and for this to flow through the customer bills to our various recovery mechanisms. Affordability is always a concern for us. And so, we continue to work with our various partners on our energy efficiency programs and low income programs to help mitigate these costs where we can.

And finally, we remain firmly committed to sustainability through the inclusion of environmental, social and governance values in our broader corporate strategy and day-to-day operations. I'm pleased to report that last month, we announced our target for net zero for Scope 1 and Scope 2 emissions by 2050. The achievement of our net zero target is supported by our strong decarbonization track record, extensive experience in regulated utility management and deep expertise in renewables development.

I spoke earlier of our greening the fleet capabilities and wanted to highlight our track record of environmental stewardship. Since acquiring the Empire District Utility Company in 2017, Algonquin's total Scope 1 greenhouse gas emissions have been reduced by over 1 million metric tons, and Scope 1 and 2 emissions intensity per dollar of revenue have decreased by 26%. Similarly, at CalPeco, we have already reduced the carbon intensity of CalPeco by 46% since 2017. At 0.0013 per dollar of revenue, Algonquin has among the lowest carbon intensities among its peers in the industry.

Concurrent with the release of our net zero target, we also released our 2021 Sustainability Report, which not only outlined our progress on our ESG initiatives, but also provided a higher level of detail around nine priority ESG targets for 2023, some of which we have already achieved ahead of schedule and others that we are confident in meeting.

With that, I'll pass it over to Arthur, who will speak to our third quarter 2021 financial results. Arthur?

Arthur Kacprzak -- Chief Financial Officer

Thank you, Arun. And good morning, everyone. I'm pleased to report solid third quarter results, reflecting the benefits of Algonquin's diversified and resilient business model and proven track record of disciplined growth. Our third quarter 2021 consolidated adjusted EBITDA was $252 million, which is up approximately 27% from $197.9 million we reported for the same period last year, but slightly below our expectations.

The Regulated Services Group delivered $195.8 million in operating profit in the current quarter, which compares to $146.1 million in the same quarter last year. This improvement primarily reflects contributions from BELCO, our Bermuda electric utility; and ESSAL, our Chilean water utility, as both acquisitions closed in Q4 of last year, as well as contributions from our wind facilities that were placed in service earlier this year as part of the Midwest Greening the Fleet Initiative.

Results also benefited from new rates implemented at EnergyNorth and Peach State gas systems, as well as the Park Water and Apple Valley systems in California. This was offset by the impact of a one-time retroactive rate increase in Q3 of last year at the CalPECo electric system. I should also note that the Regulated Services Group did not experience any material negative impacts from COVID-19 this quarter. However, the comparative results from Q3 2020 were negatively impacted by the pandemic by approximately $4.2 million.

Moving on, the Renewable Energy Group reported a Q3 divisional operating profit of $72.5 million, which compares to $67.1 million in the same quarter last year, an increase of about 8% but below our expectations for this business unit. The addition of Sugar Creek and Maverick Creek wind generation facilities as well as the Great Bay II and Altavista solar generation facilities all contributed to the quarter-over-quarter increase in operating profit.

Our investment in Atlantica also continued to provide benefits with dividends received increasing by $2.8 million over the prior year. However, this increase was partially offset by several factors. We experienced lower overall production at our wind generation facilities, primarily due to resource shortfalls. Excluding the impact of the newly added facilities, production in our existing power generation facilities was 7.3% lower than the same quarter last year or approximately 15.4% below the long-term average. Production shortfalls, along with lower than expected realized pricing, also negatively impacted the results from our investment in the Texas Coastal wind facilities.

Lastly, performance at our Sanger facility was negatively impacted this quarter by higher carbon compliance costs and lower capacity payments. Some of these impacts were partially offset by higher realized renewable energy credit pricing on our US wind facilities as well as operating cost savings.

I should note that during the quarter, the company self-monetized approximately $8.7 million renewable tax credit benefits, which would have been otherwise included as part of the Renewable Energy Group's operating profit and in adjusted EBITA, but reflected in our overall adjusted net earnings. In total, our Q3 adjusted net earnings per share came in at $0.15, which is in line with the $0.15 reported last year.

And I want to spend a few minutes on the financing plan for Kentucky Power -- for the Kentucky Power acquisition, which was designed to maintain our mid-BBB investment grade credit ratings and maintain a strong and resilient balance sheet. Concurrent with the announcement of the transaction, we announced a CAD800 million bought deal offering of common shares to fund a portion of the equity purchase price. This offering is expected to satisfy all of our common equity needs to the expected closing of the transaction in mid-2022.

To fund the remainder of the cash purchase price, we plan to utilize some or all of the following sources. First, hybrid debt, which has seen some very attractive rates in the market recently and provides for an attractive funding source receiving 50% equity credit from S&P and Fitch. We continue to maintain a significant room in our capital structure for this low cost capital.

Second, potential monetization of non-regulated assets or investments. The current low cost capital environment continues to precipitate a strong valuation for quality renewable generation assets. Although our core competency continues to be as a developer, operator and owner of regulated and renewable assets, we believe augmenting these competencies with the introduction of low cost capital through monetization of some of our renewable assets or investments has the potential to drive greater shareholder value.

Lastly, mandatory convertible units. As you've heard me say before, we believe that mandatory convertible units are a great fit in our capital structure, having the potential to be lower cost capital compared to common equity and more effectively match investments of cash -- the investments cash generation profile with its financing. However, recognizing the ultimate conversion to common equity if used as a financing source, we intend to be prudent in the magnitude of their use. While we expect to have the majority of our permanent financing in place at or near the transaction close, we also secured an approximately $2.7 billion acquisition financing commitment to support the acquisition.

Finally, I wanted to say just a few words on the acquisition itself. We view this acquisition to be of compelling value and expect this to be accretive to adjusted net EPS in the first full year of ownership, which would occur in calendar year 2023 based on our anticipated mid-2022 closing. Thereafter, we would expect it to generate mid-single-digit accretion to adjusted net EPS and support growth in our adjusted net EPS over the long-term.

Now moving on to provide some updates on our other financing activities and progress on our 2021 capital plan. Since August of 2020, we have placed into operation approximately 1,400 megawatts of renewable energy projects from our construction pipeline. During the first nine months of the year, Algonquin has deployed capital on initiatives relating to the safety and reliability of our electric, water and gas systems, as well as delivering new renewable generation from our projects, including Maverick Creek Wind, Altavista Solar and our Midwest Greening, bringing the total capital deployed so far this year to approximately $3.4 billion and on track for expected capital deployment in 2021 of over $4 billion.

During the third quarter, the company utilized its ATM program, raising proceeds slightly north of $100 million. We view the ATM program as allowing for cost effective and opportunistic issuance of common stock, but plan to be disciplined in its use. As a result, we do not expect further issuance under the ATM until after the expected closing date of the Kentucky Power acquisition at the earliest.

Lastly, I want to say that our balance sheet remained strong and resilient. At the end of the third quarter, the company had approximately $1.9 billion of liquidity and capital reserves available. We continue to have strong support from our key banking partners and expect to maintain resilient liquidity profile as our business continues to expand.

Before turning things over to Arun, I'd like to provide a brief update on our 2021 adjusted net EPS guidance. Excluding the impact of the market disruption on the Senate Wind Facility related to Winter Storm Uri in Q1, we continue to expect our 2021 adjusted net earnings per share to be in or around the lower end of the company's range of $0.71 to $0.76 that was communicated previously.

We continue to assume our earnings guidance normal -- in our earnings guidance normalized weather patterns in the fourth quarter, as well as resource availability and production of our renewable generating facilities that is within long-term averages. We also assume that the company is able to obtain constructive regulatory outcomes as well as absence of any supply chain delays that would impact our estimated placement service status based on the current equipment delivery and construction schedules.

With that, I will hand it back to Arun to outline our strategic plans.

Arun Banskota -- President and Chief Executive Officer

Thank you, Arthur. Before we close out our prepared comments this morning, I want to give an update on our strategic initiatives. With society and economies working hard and preparing for the energy transition, I'm excited about how Algonquin's Regulated and Renewables businesses are both well-positioned to contribute to and benefit from this decarbonization transition. We remain committed to our strong track record of disciplined growth with many different levers at our disposal.

Having deployed nearly $3.4 billion of capital this year, we remain on track for our 2021 planned capital expenditures. The addition of Kentucky Power will be additive to the company's long-term investment pipeline. Another growth lever on our renewable site that I'd like to touch on is our significant focus on new greenfield development.

As a reminder, this prospect in greenfield pipeline is over and above our long-term capital investment plan. Our greenfield investments are focused on securing new opportunities and continuing to advance the projects that will eventually form part of our best long-term capital plan in future years. We look forward to discussing this in more detail at our upcoming analyst and investor day, which is scheduled for the morning of Tuesday, December 14, where we will be providing the investment community the opportunity to hear from key members of the leadership team for an update on our operations, strategic direction and future growth plans for Algonquin.

In summary, our three strategic pillars of operational excellence, growth and sustainability will be a key foundation as we continue to build the business and strive to bring long-term value to our shareholders. We remain well-positioned to continue to execute on our growth strategies, while forcing our sustainability goals guided by maximizing operational excellence on behalf of our investors and customers.

With that, I will turn the call over to the operator for any questions from those on the line.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Rupert Merer from National Bank. Your line is open.

Rupert Merer -- National Bank -- Analyst

Thank you. Good morning.

Arun Banskota -- President and Chief Executive Officer

Good morning, Rupert.

Rupert Merer -- National Bank -- Analyst

Good morning. So, I'd like to start by asking about plans to finance the Kentucky acquisition and the potential for asset sales. Have you had discussions in the past on selling assets and can we get some thoughts on which assets you might select for sale? Do you think you have some orphans in the portfolio or would you maybe look at selling a share of the whole portfolio?

Arthur Kacprzak -- Chief Financial Officer

Well, first of all, Rupert, anything we do, we're going to be guided by making sure we maintain a very strong balance sheet, right. That's an absolute must for us. And so, from a business risk and credit profile perspective, whatever we do in terms of asset recycling probably will be more on the renewable side of the business where we believe it could be a combination of some of the things you talked about. It could be orphan assets that we perhaps developed or acquired many years ago that need not be a good strategic fit anymore or it may be opportunities to bring in low cost capital while maintaining our strong development and the operational levers. So, we probably will not be obviously announcing which exact assets before we are prepared to do so.

Rupert Merer -- National Bank -- Analyst

Okay. That's fair enough. And then, secondly, if we can talk about supply chain, logistics issues and any inflationary pressures you might see on your operations? I know you [Technical Issues] you're not taking in any potential logistics issues related to [Technical Issues] what sort of risks should we be taking in there?

Arun Banskota -- President and Chief Executive Officer

Sure. So first of all, I do want to give a little bit of context. So, back in 2020, we had 1,600 megawatts of renewables under construction, right. And that was right in the midst of COVID. And I'm very pleased to report that by and large, we were able to bring in that 1,600 megawatts of construction projects into operation earlier last year in 2020 and in 2021.

And so, we have actually really done a lot in terms of ensuring we are able to effectively manage our supply chain efforts. Now, having said that, yes, we are seeing issues around -- shipping issues around delivery from the various ports. But I believe we have a pretty effective supply chain management team and we do not see any huge movements or significant movements in terms of our project milestones.

Rupert Merer -- National Bank -- Analyst

Are you seeing any inflationary pressures either on your construction cost or on your operations and do you anticipate any impact?

Arun Banskota -- President and Chief Executive Officer

So two items, right. So, first of all, many of the EPC contracts and large equipment supply agreements we have, they are under -- by and large, under fixed supply, fixed price contracts, right. Now, for the ones that are coming up, what we tend to do is try to align our equipment supply and EPC agreement contracts as close as possible to the offtake agreements. So, yes, we have seen some pressures and inflationary pressures anywhere from depending on -- especially components 5% to 10%, but we have also seen an increase and uplift in the offtake pricing. So, we have been able to preserve the kinds of returns that we look for.

Rupert Merer -- National Bank -- Analyst

I'll leave it there. Thank you.

Arun Banskota -- President and Chief Executive Officer

Thank you, Rupert.

Operator

The next question comes from the line of David Quezada from Raymond James. Your line is open.

David Quezada -- Raymond James -- Analyst

Thanks. Good morning, everyone. I'm wondering if you can just provide any color on the path you see to improving ROEs, be it timing and what you see as a low-hanging fruit just in terms of whether that's the future test or anything like that?

Arun Banskota -- President and Chief Executive Officer

So look, this is something we're very focused on. And David, as I talked about earlier, we do have a playbook that we have utilized in places like Empire State, in CalPeco and other like Granite State and some of our other utilities as well. All right. So, we are well aware that the ROE is not optimized right now in Kentucky Power. There are a number of different mechanisms. We obviously will be working closely with the Commission to make sure we work this effectively and we do something that's in the best interest of the customers as well.

So, there are things like, for example, the unit power agreement with Rockport, which is a coal plant that is based in Indiana. There are a certain number of costs that have been deferred and disallowed for future inclusion in revenues. So that's one lever. Another one is utilizing forward test years which, as I said in my prepared remarks, are utilized by our other investor-owned utility peers in Kentucky. There are also items such as the 43% equity that we see right now, we believe we have needed to increase that as well, and other capital and operating cost tracking mechanisms that are available. I mean, Kentucky is a very constructive regulatory state. And we definitely look forward to working with the Commission closely to doing what's again best for our customers over the long term.

David Quezada -- Raymond James -- Analyst

That's great color. Thanks, Arun. And then, maybe just one more for me. As you look to green the fleet at Kentucky Power, I'm curious if you had any initial thoughts on what the mix of renewables might be and if you could potentially even include storage there.

Arun Banskota -- President and Chief Executive Officer

So, look, I mean, we look at stories whenever we look at any of the renewable projects these days and it is becoming more and more compelling. We will talk about this a lot more at Investor Day. But by and large, we believe that between solar and wind that in the State of Kentucky, solar has probably better resource availability and better economics. There are pockets in the State of Kentucky where wind is a strong resource. So, we'll have to work through, obviously, sitting, interconnection capacity, all of those things and obviously make sure that we work with the Commission through the integrated IRP process as we firm up our plans.

David Quezada -- Raymond James -- Analyst

Excellent. Thanks for that. I'll turn it over.

Arun Banskota -- President and Chief Executive Officer

Thanks, David.

Operator

Your next question comes from the line of Nelson Ng from RBC. Your line is open.

Nelson Ng -- RBC Capital Markets -- Analyst

Great. Thanks. Good morning, everyone. First question is just to follow-up on David's question on Greening Kentucky. So, just in terms of the Rockport facility rolling off the UK at the end of 2022, what is Kentucky Power's requirement to backfill that capacity? Do you have enough spare capacity for now for that facility to roll off or can you just provide a bit more details, like, if you have to get new capacity by the end of -- at the end of 2022?

Arun Banskota -- President and Chief Executive Officer

Sure. So, at present, Kentucky Power has several sources for its load. Right? You've got the Rockport coal facility. You've got Mitchell coal. You've got Big Sandy gas. And then, you have purchases from the grid. Right? And interestingly enough, over the last several years, what we've seen is purchases from the grid are in fact a lower cost than purchases from the coal plants. So, when Rockport EPA expires, that should actually be positive in terms of us being able to procure lower-cost energy from the grid as compared to Rockport.

Nelson Ng -- RBC Capital Markets -- Analyst

Okay. But there's no requirement to have available capacity as backup or anything, right?

Arthur Kacprzak -- Chief Financial Officer

There are some utility capacity requirements, and we will be working with AEP to replace the Rockport contract on a short-term basis to make sure we stay in compliance with those.

Nelson Ng -- RBC Capital Markets -- Analyst

Okay. Got it. And then, my next question just relates to BELCO. I believe there was a $35 million rates increase request. I didn't get a chance to call the rate case filing. But can you just talk about the key drivers of the increase? And is it mainly just due to higher oil prices that you've been seeing?

Johnny Johnston -- Chief Operating Officer

Yes. I mean, I think the two main drivers, Nelson, you've hit on one of them, which is the increased fuel prices. And then, in the last rate agreement, there were some deferred costs being in the middle of the COVID pandemic. And maybe as a reminder, in context for everyone, traditionally we've been filing an annual rate case with the RA in Bermuda. This is us now going to our first sort of multi-year filing. This will be a two-year rate case.

Nelson Ng -- RBC Capital Markets -- Analyst

Okay. Thanks, Johnny. I'll leave it there and get back in queue.

Arun Banskota -- President and Chief Executive Officer

Thanks, Nelson.

Operator

Your next question comes from the line of Julien Dumoulin-Smith from Bank of America. Your line is open.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Hey. Good morning, team. Thanks for the time and the opportunity.

Arun Banskota -- President and Chief Executive Officer

Good morning, Julien. Yeah.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Hey, it's a pleasure.

Arun Banskota -- President and Chief Executive Officer

We agree.

Julien Dumoulin-Smith -- Bank of America -- Analyst

As always. Indeed. Hey. So, maybe just following up, let me just first focus on Kentucky here. Just as you think about the, first off, Mitchell, could that be transferred sooner here just as you think about the timeline to exit coal here, if you can elaborate on that? And then also, can you quantify a little bit, I know you alluded to earlier, the earned ROE, just what the timeline is there? And again, I know this is ahead of your Analyst Day. But as you're thinking about that coal transition, how much coal is in rate base today as you think about that outlook that you're going to provide, as well as the timeline to get to your earned ROE given the sort of cadence, the rate cases around this?

Arun Banskota -- President and Chief Executive Officer

Sure. So, first on Mitchell, Julien, right, so, as you -- as I'm sure you're aware, the Kentucky Commission basically approved the investment for CCR, which takes the project capable of delivering -- continuing to operate through 2028. And the Commission did not approve the investments in EOG, which would have actually enabled the plant to continue to operate through 2040. So, given that order, our view is that we will be able to transfer that ownership from Kentucky Power to the West Virginia subsidiary of AEP in 2028.

Are there compelling reasons for us to be an economics for us to be able to transfer that earlier? That's something we obviously look at. But again, we'll have to work with the Commission on that account. On your -- on ROE question, the allowable ROE in Kentucky is 9.3%. And I believe some of the earlier comments I made, Julian, around the disallowance of costs under the Rockport UPA, the potential to increase the equity thickness from 43% to something higher through utilization of forward test years and some of the other mechanisms that are already available in Kentucky that we will -- we hope to be able to come closer -- much closer to the allowable ROE. However, we have continued to be fairly conservative in our modeling as to our forward-looking views on that. So we remain pretty confident to be able to get much closer to the allowable ROE.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Got it. And so, just to clarify that, when you say you're considering your modeling, you're saying you're not necessarily fully assuming that as you look at your outlook over the five-year period?

Arun Banskota -- President and Chief Executive Officer

That's right. Look, we assume that we will get closer to it over time. And we believe that our first rate filing will be in 2023.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Got it. Excellent. And then, just can you clarify the call in rate base here? Just as you said, as you think about like that pivot over time, what's the starting point that we're at today if you think about sort of the degradation from coal rate base to transition to renewable over time?

Arun Banskota -- President and Chief Executive Officer

So, clearly, the transition will start happening at the end of 2022, right? And obviously, another big point in time is 2028 when we will no longer have ownership of Mitchell. The third part, obviously, is how quickly can we bring renewables into the rate base? We're working through the IRP process. And given the state of the economy in Eastern Kentucky, given the much lower LCOE of renewables, we believe that we should be able to start layering in renewables as perhaps -- even as early as toward the end of 2024.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Got it. Excellent. Sorry, if I can -- I know we're all so fixated myopically on Kentucky here, but I've got to ask you the question around BBB here, reconciliation. How are you thinking about your prospects under this legislation, especially given how you guys talk about renewables at times? And specifically also, I'd be curious if you could comment on how you think about HLBV given this legislation too? I mean, obviously an expanding opportunities that got some nuances I imagine for tax and how you guys recognize them too.

Arun Banskota -- President and Chief Executive Officer

Well, let me first answer on the Build Back Better, right? Look, what I usually say to folks is that renewables has gone beyond policy. It's becoming, it's already becoming economic value proposition, right. What, all of these tailwinds that are out there based on the things like Build Back Better can only help us, right?

I will also go beyond that. One of the fairly easy things, I think, the Biden administration could do through an executive order, in fact, is direct purchases through the federal government of renewables. We already have the Grade B solar project where the General Services Administration of the federal government is the off taker.

So we have all of the accounting regulatory policies and processes in place to in fact directly contract with the federal government as well. So with all of the tailwinds and what the Biden administration is trying to do to accelerate the pace of renewables, we believe that all of these tailwinds can only benefit us. Arthur, why don't you respond to the HLBV question?

Arthur Kacprzak -- Chief Financial Officer

Good morning, Julien. Look, from the plan basically. I mean, a lot of tailwinds and increased flexibility, obviously with the proposals around the extension of the tax credits just makes -- tax equity financing continue to be viable for us also with the direct pay proposals that that obviously provides another dimension of financing. And as well as I said before, we continue to tax up the site internally so that we can continue, we can look at monetizing some of our own tax credits as well. So from an overall perspective, It provides flexibility, and we'll use it to basically enhance project economics as best fit.

Julien Dumoulin-Smith -- Bank of America -- Analyst

All right, guys. Thanks for the time. Best of luck.

Arun Banskota -- President and Chief Executive Officer

Thank you, Julien.

Operator

Your next question comes from the line of Sean Steuart from TD Securities. Your line is open.

Sean Steuart -- TD Securities -- Analyst

Thanks. Good morning, everyone.

Arun Banskota -- President and Chief Executive Officer

Good morning, Sean.

Sean Steuart -- TD Securities -- Analyst

Couple of -- good morning. Just a couple of questions. Newark American Water, just so I understand it ahead of the hearing next week, if there are still dissenting parties on this transaction, how does that play out post this hearing? And how does that inform your thinking around the closing date of early January worst case scenario?

Johnny Johnston -- Chief Operating Officer

Hey. Good morning, Sean. This is Johnny. So, I think, in the joint proposal that we filed with the Commission, we had all parties bar one signing on. And so, I think we feel very confident in terms of the process that we've gone through the large degree of alignment in with all the parties down in Long Island. And so, we really feel pretty confident coming through the hearing that we should be seeing an order in the not too distant future.

Sean Steuart -- TD Securities -- Analyst

Okay. Thanks, Johnny, for that. Second question is on Aegis, and so you've got the new partnership in place. Can you give us some context on what Aegis brings to the table for you guys and thoughts on advancing that vehicle using it as a growth lever going forward?

Arun Banskota -- President and Chief Executive Officer

So, with Aegis, as you know, we have had Abengoa as a partner and based on everything that is out in the public, it was a challenging partnership given the financial challenges that they have been going through. So, with Aegis, what we have is a very solid financial partner for us to work through our development and construction financing. And rather than also bringing in a bespoke partner every time we do a project, you now have the contractual terms and conditions and everything pretty much with one partner. And also, there's no conflicts of interest given that they are a financial partner. And they're now looking to enhance their own EPC capability or anything of the sort. But we do intend to retire the Aegis name and basically do everything now under Liberty development, all of our development activities globally. So, you'd probably be not hearing about Aegis going forward from us.

Sean Steuart -- TD Securities -- Analyst

Okay. That's understood. That's all I have. Thanks very much, Arun.

Arun Banskota -- President and Chief Executive Officer

Thank you, Sean.

Operator

Your next question comes from the line of Rob Hope from Scotiabank. Your line is open.

Rob Hope -- Scotiabank -- Analyst

Good morning, everyone. I want to circle back on Arun's comments that you're seeing a little bit of cost inflation on newer and older projects, but PPA pricing is coming up as well. How are discussions going for the next phase of contracts and renewable projects? Could we see a little bit of an air pocket here, if the PPA off-takers want a little bit more certainty on whether or not the inflation is transitory or if it's here for a while? Just want to get a sense of how discussions are going.

Arun Banskota -- President and Chief Executive Officer

And just to make sure I understand, Rob, so basically what I was trying to say in my comments is that we are seeing inflationary pressures depending upon certain commodities, but also it could include things like shipping and other transportation costs, things of the sort. But what I was saying is that on the flipside, by and large, we have seen higher off-take prices as well. So, we have been able to preserve the economics of our project.

And one of the things we do is really try to make sure we sign off on the EPC and major equipment supply contracts as close to the off-take agreements as possible. So there's really little, if any, daylight between the two where we are exposed. That's really what I was trying to say in my remarks. I don't know if I miss anything from -- particular from your question or feel free to ask me again, Rob.

Rob Hope -- Scotiabank -- Analyst

Yeah, maybe just to clarify. So, the next phase of renewables are the ones that you still need to secure a PPA. How are the pace of conversations going on those to get those secured and they -- have the inflationary environment slowed it down or are they still making good progress?

Arun Banskota -- President and Chief Executive Officer

No, we're still making good progress, Rob. We continue to advance those discussions. We'll be sharing more at Investor Day on some of those discussions. But we also -- we'll anticipate as we move forward that the counterparties are willing to transact at higher prices. But we have to have the difficult discussion of -- if there's uncertainty and things that are unknown, how do we take advantage of that risk because we typically do not take that on and we remain disciplined. So, if we have to push a project out, we'll push a project out. But the discussions directly to your question have been going well.

Rob Hope -- Scotiabank -- Analyst

Okay. Good to hear. And then, a second question just in terms of how you're looking at the Atlantica stake, we haven't seen a ton of dropdowns, but you do have this capital requirement coming at us with Kentucky. Do you view dropdowns to Atlantica as an attractive source of capital? And I guess, secondarily, how are you viewing Atlantica from a strategic point of view?

Arun Banskota -- President and Chief Executive Officer

Sure. So, look, Atlantica remains a very attractive investment, especially given the price at which we are able to enter Atlantica, right? It's also very aligned with our overall ESG posture. I mean, they have been rated the most number one renewable energy company globally. And so, we are very aligned on that front as well. We continue to work with them fairly well. We, in fact, have dropped down last quarter one of our assets in Colombia that was under construction, that is now fully operational. So we have done dropdowns.

As we think about green, possibly monetizing our -- some of our renewable energy assets, we will do what's best from a balance sheet perspective, first and foremost, but also what is best in the context of -- for our shareholders. And if it is found that dropdowns into Atlantica is probably the best outcome, we will give that serious consideration as well.

Rob Hope -- Scotiabank -- Analyst

Thank you.

Arun Banskota -- President and Chief Executive Officer

Thanks, Rob.

Operator

The next question comes from the line of Ben Pham from BMO Capital Markets. Your line is open.

Ben Pham -- BMO Capital Markets -- Analyst

Hi, thanks. Good morning. So there's some commentary or a sentence in the MD&A mentioning your targeted utility exposure, 70% to 80%. And I think that's maybe a first time I've seen maybe some more specific numbers being put there, correct me if I'm wrong. And really, my question is that -- is that really you made to frame us how are you thinking about that?

I mean, Kentucky brings to 80%. So you're basically saying you don't want to accelerate the utility expansion or M&A as much anymore post Kentucky, does it impact how you sell renewable assets because that's going to change the mix router business [Phonetic] maybe credit rating driven?

Arun Banskota -- President and Chief Executive Officer

Good morning, Ben. First and foremost, balance sheet, right. Again, were laser focused on making sure that we do not degrade our BBB credit rating. Business mix obviously is a part of that. There is no very, very clear red line on what exactly that business mix should be, which gives us optionality, frankly on how we grow regulated versus renewables.

The higher regulatory mix, pro forma with Kentucky Power, obviously takes us closer to 80%, which obviously has a positive impact on business risk, credit profile and so on and so forth. It also gives us optionality on accelerating our growth on the renewables side because it is lifting if we were to come back to 70%, which is still within the right mix for our credit ration. That opens a room just on the renewable side of the business for over 2,700 megawatts. Now, that's over and top of whatever we could do in terms of greening the fleet in Kentucky. So, it really does accelerate significantly our potential growth of renewables both in rate base in Kentucky as well as on the renewables side of the business.

Ben Pham -- BMO Capital Markets -- Analyst

Okay.

Arun Banskota -- President and Chief Executive Officer

Does that answer your question, Ben?

Ben Pham -- BMO Capital Markets -- Analyst

Yes, it does. That's helpful. And maybe to follow-up on some of our first comments around the remaining funding for Kentucky. It sounds like -- I just maybe want a confirmation as I guess, if you were to clear the funding near-term, it sounds like your bias right now is hybrid securities, maybe a little bit of non-regulated asset sales, but less of a desired, a lot of mandatory converts given that future equity dilution. Is that correct?

Arthur Kacprzak -- Chief Financial Officer

Look, I think, I mean, one thing I can say about the remaining funding plan, it gives us a lot of flexibility, right? I mean, just five seconds. Hybrids are very attractive. We've got flexibility with mandatories. And we've talked about potential asset recycling opportunities that could be there. But right now, we really have of -- this provides us flexibility.

Ben Pham -- BMO Capital Markets -- Analyst

Okay. And is there -- I know you feel quite good about not needing external equity at ATM through mid-2022, but is there any sort of scenario, like a dark sky scenario that could happen or maybe even more robust growth opportunity that you expect that could drive an equity issuance in that time frame?

Arthur Kacprzak -- Chief Financial Officer

Well, look, I mean one of the things that's non-negotiable for us is our strong balance sheet. We need to maintain a strong balance sheet. So, there's -- we can speculate, I guess, a lot here and I won't speculate. I mean, that could be a lot of dark cloud scenarios. But I mean, right now, as we're looking forward, I think what we stated in my remarks continues to hold.

Ben Pham -- BMO Capital Markets -- Analyst

Okay. And maybe a cleanup question on the tax credits. You mentioned your book in this year year-to-date, it look like it's probably priced around $0.05 or so. Like, do you expect that $0.05 to be more of maybe a structural impact to EPS going forward? Do you expect it to increase, decrease?

Arun Banskota -- President and Chief Executive Officer

That's a great question. And I would say, you know, yes, I mean, as we kind of look through it, I spoke to the flexibility that now we'll have actually under the Build Better Back plan as well. The ability to self-monetize is going to be there for us and is one of the ways that we'll look to potentially fund projects again, whichever way best optimizes the particular project's economics. So, yes, I would say that is a tool that we'll have to continue to manage our overall effective tax rate.

Ben Pham -- BMO Capital Markets -- Analyst

Okay. Great. Thank you.

Arun Banskota -- President and Chief Executive Officer

Thanks, Ben.

Operator

Next question comes from the line of Andrew Kuske from Credit Suisse. Your line is open.

Andrew Kuske -- Credit Suisse -- Analyst

Thanks. Good morning. I guess the question is for Arun. And it's really around the whole notion of the organization getting thicker, which you've been on a great growth trajectory for a while and then you've got another acquisition in the fold. How do you maintain the entrepreneurial culture and status of the organization that is historically been known for as you expand the entire enterprise?

Arun Banskota -- President and Chief Executive Officer

It's a great question, Andrew. And look, one of the things I'm really, really pleased about at Algonquin is that very entrepreneurial culture. It's one of our guiding principles. And that -- and strategic thinking is both on the renewable side of the business and on our regulatory side of the business. So, as you see, things like greening the fleet on the regulatory side of the business as well, we have been successful in putting in a significant amount of renewables into rate base, putting in tax equity perhaps as pioneers and doing that into the rate base.

So, we're doing things like renewable natural gas. We've got a lot of storage pipeline. We're doing community solar projects. So, this is a lot of different levers we have. But really, everything is really around the whole decarbonization plans for omission [Phonetic] right? What I am extremely excited about is that that opens up huge amounts of opportunities. And we absolutely stand to benefit hugely from that transformation over the next 10, 20 years. And that's where we're really trying to align the entire company. And all of our entrepreneurial vent is really toward that.

Andrew Kuske -- Credit Suisse -- Analyst

That's helpful. And then, maybe just a follow-up and related. If you think about your overall portfolio now, 10 years ago, some of the acquisitions that were done were meaningful to the company and those assets aren't that meaningful now. But maybe they have positional value and there's things that could be done around those assets. So, how do you think about just rationalizing parts of the portfolio to maybe help out the financial structure versus the entrepreneurial efforts that can be driven off of sort of the assets that are across North America.

Arun Banskota -- President and Chief Executive Officer

And again, we do want to look at that very strategically, right? I mean -- so, frankly, each of our assets and jurisdictions, we should be looking at it from a perspective of, do we grow, do we hold, or do we divest, right? And at the end of the day, what is best for our shareholders? And so, we do look at it from that perspective. And like I said earlier, at the edge, there may be certain assets that we may have acquired in 10, 15 years ago that may not be good strategic fit for us.

So, when we think about things like asset recycling, those will obviously be at the top of the heap for us. But other than that, we also have -- we have lots of opportunities given our scale on the renewables side to really continue to use the flywheel in terms of basically bringing in lower cost capital, utilizing some of that for continued development, continue to provide the kinds of growth and returns that we want to provide to our shareholders. So there's a lot of good that that could come from that process as well.

Andrew Kuske -- Credit Suisse -- Analyst

Okay. Thank you very much. That's very helpful.

Arun Banskota -- President and Chief Executive Officer

Thanks, Andrew.

Operator

Next question comes from the line of Naji Baydoun from iA. Your line is open.

Naji Baydoun -- iA -- Analyst

Hi. Good morning. I just wanted to start off with some questions on Kentucky and some of the comments you made on the strategic fit of certain assets. I guess to be clear, there's no currently any preference too, so others, taken Atlantica or an existing asset to help finance the Kentucky acquisition?

Arun Banskota -- President and Chief Executive Officer

Look, Naji, what we have talked about is that various financing sources, and one of them could be asset recycling. But I think what Arthur has also said repeatedly is that we, in fact, have -- especially given our recent bought deal that we have a lot of flexibility on how we are going to fund the remainder of the balance. Again, hybrid debt looks very attractive right now, but we could be looking at other sources as well, such as asset recycling.

Naji Baydoun -- iA -- Analyst

Okay. Okay, got it. I just wanted to get, I guess, a bit more of your thought process behind the Kentucky acquisition. It seems like there's a lot of value you can unlock, maybe AP couldn't or wasn't interested in doing. How do you view these assets in terms of risk return profile, maybe relative to some other M&A opportunities you're seeing in the market, especially when you take into consideration the size of the transaction?

Arun Banskota -- President and Chief Executive Officer

Right. So look, what we're excited about is several things, right? First of all, it's a very compelling value asset. When you think about 1.3 times rate base and you just look at the other transactions that are being done out there, right, this is a very compelling valuation, right?

Second of all, you look at the fact that Kentucky is in fact a highly rated constructive regulatory jurisdiction. That's another plus as well. Third, you look at the greening the fleet potential that I talked about earlier, especially given the fact that from the perspective of Kentucky, one of the coal plants from where we're purchasing power is in the State of Indiana. And the other coal plant from which we're purchasing power and own 50% is in West Virginia. And so, from the perspective of Kentucky, being able to add significant amount of lower cost renewable energy in the State of Kentucky, to replace the energy that is being brought in from either Indiana or West Virginia, and that is coal and at a higher cost that has to be extremely compelling as well, right?

And on top of that, what I talked about is the other playbook that we have, where examples like Granite State, examples like Empire, which were underperforming when we acquired them. And the fact that we have been able to bring them back to at or close to the LIBOR ROE, I think that playbook also speaks for itself. So, for all of those reasons, we're actually really excited about this opportunity.

Naji Baydoun -- iA -- Analyst

Okay. Got it. Very clear. Just one final quick question, if I can, on the Empire Missouri rate case. Just any preliminary thoughts on the staff recommendation in that rate case? I know it's still ongoing, but just any thoughts.

Arthur Kacprzak -- Chief Financial Officer

I think at this point in time, is we're in the middle of the process. It's probably not the right time to comment. We're looking forward to engaging with -- through the process and look forward to getting a fair outcome.

Naji Baydoun -- iA -- Analyst

Okay. Thank you.

Arun Banskota -- President and Chief Executive Officer

Thanks, Naji.

Operator

There are no further questions at this time. I would like to turn the conference back to Arun Banskota.

Arun Banskota -- President and Chief Executive Officer

Thank you, operator, and thank you very much for those who were able to join us today for taking the time on our call today. With that, please stay on the line for our disclaimer.

Amelia Tsang -- Vice President, Investor Relations

Our discussion during this call contains certain forward-looking information, including, but not limited to our expectations regarding earning capital expenditures, pending acquisitions, potential future greening the fleet initiative and potential future funding sources and transaction. This forward-looking information is based on certain assumptions, including those described in our most recent MD&A filed on SEDAR and EDGAR and available on our website and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking formation.

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 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 financial measures, including but not limited to adjusted net earnings, adjusted net earnings per share, or adjusted net EPS, adjusted EBITDA, adjusted funds from operations and divisional operating profit. There is no standardized measure of such non-GAAP financial measures. And consequently, AQN's method of calculating these measures may differ from methods used by other companies and therefore they may not be comparable to similar measures presented by other companies.

For more information about both forward-looking information and non-GAAP financial measures, including a reconciliation of non-GAAP measures to the corresponding GAAP measures, please refer to our most recent MD&A filed on SEDAR in Canada or EDGAR in the United States and available on our website. And that concludes our call. Thank you for joining.

Operator

[Operator Closing Remarks]

Duration: 75 minutes

Call participants:

Amelia Tsang -- Vice President, Investor Relations

Arun Banskota -- President and Chief Executive Officer

Arthur Kacprzak -- Chief Financial Officer

Johnny Johnston -- Chief Operating Officer

Rupert Merer -- National Bank -- Analyst

David Quezada -- Raymond James -- Analyst

Nelson Ng -- RBC Capital Markets -- Analyst

Julien Dumoulin-Smith -- Bank of America -- Analyst

Sean Steuart -- TD Securities -- Analyst

Rob Hope -- Scotiabank -- Analyst

Ben Pham -- BMO Capital Markets -- Analyst

Andrew Kuske -- Credit Suisse -- Analyst

Naji Baydoun -- iA -- Analyst

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