Algonquin Power & Utilities (AQN) Q2 2023 Earnings Call Transcript

Algonquin Power & Utilities (AQN -0.81%)
Q2 2023 Earnings Call
Aug 10, 2023, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to the Algonquin Power and Utilities Corp. second quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

[Operator instructions] I will now turn the conference over to Brian Chin, vice president of investor relations. Please go ahead.

Brian Chin -- Vice President, Investor Relations

Thanks, and 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 Huskilson, 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 and 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. Then 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 two 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.

Chris Huskilson -- Interim Chief Executive Officer

OK. Well, thank you, Brian, and 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 and 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, and 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 toward 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 as solid. And over the past 30 years, it 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 with long-term growth. The regulated portfolio has upside potential that can be unlocked through a 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 our 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.

J.P. Morgan 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 two 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 four 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's 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 toward net zero; and keep a close eye on customer affordability, with average aggregate rate increases roughly in line with inflation. Since 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% to 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 gigawatts of gross generating capacity at 46 facilities. It operates in 11 states and six provinces in North America. This provides diversity of geography and markets and is a business of scale.

Our footprint spans seven independent system operators, including PJM, MISO, and ERCOT. Our development pipeline is comprised of over six gigawatts of solar and wind, more than half of which has site certainty and is in interconnection queues. And we have over three-gigawatt hours of storage in development. We've grown this business significantly and believe the business is poised to continue this growth.

We have approximately 650 megawatts 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 the 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. And 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 -- Chief Financial Officer

Thank you, Chris, and 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 22nd, the commission issued an order authorizing a revenue increase of $5.2 million to be implemented over three years, with new rates becoming effective on July 1, 2023. Looking now at recent pending rate proceedings.

Our core growth strategy of the Regulated Service 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 Service 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 Service 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 1 is now fully commissioned as of June, and 75% of the panels have been installed for phase 2. Site preparations also advanced at both the Carvers Creek and Clearview solar projects.

At our Sandy Ridge II 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 a decline in our renewables operating profit.

The Regulated Service 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 recoupment 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 one penny 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 from projects commissioned in 2012.

This extends a year-over-year pattern first seen in late 2022 and is the last quarter 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 costs 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 were 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.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from Dariusz Lozny from Bank of America.

Dariusz Lozny -- Bank of America Merrill Lynch -- 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? And 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.

Chris Huskilson -- Interim Chief Executive Officer

Yeah. So, good morning. Thank you. It's Chris.

So, you know, 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. So, 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 advisor, J.P. Morgan, we believe that this works for the business.

And 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. So, 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 that direction. Your other question was the use of proceeds.

So, clearly, one of the things that will be an opportunity for the business is that the FFO to debt will be able to be reduced as a result of being a pure-play regulated business. And 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. And so, we're hopeful that we'll be able to buy back a significant number of shares to help support our growing business.

Darren Myers -- Chief Financial Officer

And, Dariusz, as Chris mentioned, I mean, the first priority in that equation is the BBB credit rating. So, the first priority is -- in the order is to pay down the debt and then with the balance for the buybacks.

Dariusz Lozny -- Bank of America Merrill Lynch -- Analyst

OK. Thank you, guys, for that color. One more, if I could, just as a quick follow-up. Just 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?

Chris Huskilson -- Interim Chief Executive Officer

We're not making a final decision at this point, but we think that the portfolio as a whole has more value than in parts and especially with the development pipeline attached. And so, that's the way we're looking at it right now, and we believe that that'll create the most value. But 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 -- Bank of America Merrill Lynch -- Analyst

OK. Appreciate the color.

Darren Myers -- Chief Financial Officer

Thanks, Dariusz.

Chris Huskilson -- Interim Chief Executive Officer

Thank you.

Operator

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

Sean Steuart -- TD Securities -- Analyst

Thanks. Good morning, everyone. Follow-on question with respect to the process. Any incremental thoughts on, I suppose, what the target FFO to debt ratio is? Has that changed at all with respect to keeping the BBB credit rating? And then 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 and as the company takes on its new structure?

Chris Huskilson -- Interim Chief Executive Officer

Darren, do you want to go ahead and take that?

Darren Myers -- Chief Financial Officer

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 what that new target FFO to debt would be.

But in the past, we've talked about needing to be over 14% as an integrated business. Clearly, that does come down as a pure-play regulated. So, directionally, it would allow us to have a lower FFO to debt. And 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, we see an opportunity to invest approximately $1 billion a year on the regulated side. So, 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 key goal.

Sean Steuart -- TD Securities -- Analyst

OK. Thanks for that, Darren. And 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 a tighter regional platform as well?

Chris Huskilson -- Interim Chief Executive Officer

Well, I mean, I'd say, first of all, we're focused on the separation. And so, that's our -- that's where our focus is going to be, on getting to that point and maximizing the value of those assets. But I guess the other thing is, is that we are going to bring a focus to the regulated business. And I think that that's going to be a renewed focus.

That's going to allow us to look very hard at the business and see how it grows best. But when we think about that business, the diversity of modalities, the diversity of the business, we think, is an advantage. And in fact, 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.

So, you know, at this point, we've got to 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.

Sean Steuart -- TD Securities -- Analyst

OK. Thanks very much for the detail. That's all I have.

Darren Myers -- Chief Financial Officer

Thanks, Sean.

Operator

Your next question comes from the line of Robert Hope from Deutsche Bank.

Robert Hope -- Deutsche Bank -- Analyst

Good morning, everyone, and good for -- to hear from you, Chris. It's been a little while.

Chris Huskilson -- Interim Chief Executive Officer

Nice to hear your voice.

Robert Hope -- Deutsche Bank -- Analyst

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. Could you just dive a little bit deeper into this? Like have you already got some inbounds in terms of valuation that kind of gave you comfort, as well as will this be 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?

Chris Huskilson -- Interim Chief Executive Officer

Well, I mean, I think that's what we would mean by the value essentially being part of what we're thinking about. I mean, we're not going to give these assets away. I'll start with that point. But we don't see any need to.

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. And the modeling we've done to look at where the reg business would be after that is in line with what JPM thinks we can achieve with this sale. And to your question about inbounds, we have actually had inbounds already and some very interesting opportunities where people are interested in new portfolios, and this is one. It is a portfolio of scale.

It has a tremendous development pipeline, and we think it's going to be very attractive to the marketplace.

Robert Hope -- Deutsche Bank -- Analyst

I appreciate the color there. And then just moving over to the dividend, appreciate the commentary on sustaining the existing dividend level. As you take a look out in the outer years, 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?

Chris Huskilson -- Interim Chief Executive Officer

Well, as you can imagine, near term, it's going to be a pretty reasonably high payout. There's no question about that. But in the long term, we just want to get to where the industry is. And we believe the growth that we have in this business will allow us to get there in a reasonable time.

And so, it allows us to support the dividend in the way that we think we should. You know, we've done the work to tell us what we think this is -- how this is going to evolve. And with the evolution we see of this business, we're very comfortable with where we are today.

Robert Hope -- Deutsche Bank -- Analyst

Thank you.

Operator

Your next question comes from the line of Rupert Merer from National Bank.

Rupert Merer -- National Bank Financial -- Analyst

Hi. Good morning, everyone. Thanks for taking the questions. Now, 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?

Chris Huskilson -- Interim Chief Executive Officer

Yeah. I don't think we've tried to break it out that way. But I think what we would say, though, is 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 megawatts under construction.

That, by itself, is a nice starting point. And the fact that half of the six gigawatts that we have under development are already in interconnection queues and have locations, those -- 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?

Jeff Norman -- Chief Development Officer

Yeah. No, I'd say, Chris, 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 going to 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 -- National Bank Financial -- Analyst

And thank you. And 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?

Chris Huskilson -- Interim Chief Executive Officer

Yeah. Well, we certainly will need to keep some of that capability because the regulated business will continue to develop clean assets. And so, that's something we'll have to work our way through as we configure what the actual renewable business is. But that's something that we have in mind.

And, 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 economy. And so, those two things are things that are absolutely in mind when we look at how we're going to configure the company going forward.

Rupert Merer -- National Bank Financial -- Analyst

All right. Thank you. I'll get back in the queue.

Chris Huskilson -- Interim Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Nelson Ng from RBC Capital Markets.

Nelson Ng -- RBC Capital Markets -- Analyst

Great. Thanks and good morning, everyone. My first question relates to Atlantica. So, can you talk about your Atlantica investment? Is it kind of excluded from the strategic review of the renewables business? Obviously, Atlantica has -- or they have their own strategic review that's ongoing.

So, any color you have there would be great.

Chris Huskilson -- Interim Chief Executive Officer

Go ahead.

Darren Myers -- Chief Financial Officer

Yeah. Nelson, it's Darren. Good morning. Yeah, no, in terms of the Atlantica, I mean, I think the first point that we want to leave you with is we are moving to a pure-play regulated business.

We are continuing -- 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 -- RBC Capital Markets -- Analyst

OK. Got it. And then my second question, which relates to the sale of the renewables business. Chris, you mentioned that, I guess, timing will be dependent on value.

But 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?

Chris Huskilson -- Interim Chief Executive Officer

Well, again, when we look at the portfolio, we see that it does have value to the market and we -- and the development pipeline itself, we think, 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 -- RBC Capital Markets -- Analyst

OK. And then just finally, you talked about the value of your development pipeline. How large is the development team currently?

Jeff Norman -- Chief Development Officer

So, it's Jeff, Nelson. And so, 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, 110 number.

Nelson Ng -- RBC Capital Markets -- Analyst

Great. Thanks, Jeff. I'll leave it there.

Operator

Your next question comes from the line of Mark Jarvi from CIBC Capital Market.

Mark Jarvi -- CIBC World Markets -- 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? And 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?

Chris Huskilson -- Interim Chief Executive Officer

Yeah. So, we're not going to get into numbers today. As I said, we've done the work. We've looked at what values we believe can be achieved here.

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 flavor that competitive process, and we'd like to maximize value. So, we're not prepared to do that today.

I don't know. Did you want to speak to the second half?

Darren Myers -- Chief Financial Officer

Yeah. Mark, 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. But we've obviously done a thorough analysis of the tax impact as we looked at the -- and made the decision that we've announced today.

Mark Jarvi -- CIBC World Markets -- Analyst

And then anything on the APCo notes in terms of them having to be repaid, I guess, if you sell the renewable business?

Darren Myers -- Chief Financial Officer

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 sales process.

Mark Jarvi -- CIBC World Markets -- Analyst

OK. And then in the slide deck, you talked about ramping up, I guess, the capex. You're moving to $1 billion in the 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 regulatory lag? So, 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 -- Chief Operating Officer

Yeah. No. This is -- it's 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 -- CIBC World Markets -- Analyst

And just to clarify, the 4% to 7% growth rate, is that essentially underlying rate-based growth but assuming that you're just staying around your authorized ROEs when you put those numbers out there?

Chris Huskilson -- Interim Chief Executive Officer

Yeah. I think the rate-based growth might be slightly higher than that, but we think that that's what the net of the EPS will be.

Mark Jarvi -- CIBC World Markets -- Analyst

Great. Thanks, everyone, for the time today.

Chris Huskilson -- Interim Chief Executive Officer

Thank you.

Darren Myers -- Chief Financial Officer

Yup. Thanks, Mark.

Operator

Your next question comes from the line of Ben Pham from BMO.

Ben Pham -- BMO Capital Markets -- Analyst

All right. Thanks. Good morning. I just -- I wanted to clarify, I think you mentioned in response to a question that EPS payout could be going up on pro forma net of share buybacks.

I just want to make sure that you mentioned that. And if so, is really the value creation exercise ultimately expansion utility multiple?

Chris Huskilson -- Interim Chief Executive Officer

Well, I think 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 rate -- the credit rating is probably higher than the renewables business needs. So, we would not -- because we're financing off our balance sheet, we're not actually optimally financed.

And so, it's a combination of the financing getting in an optimal place for both businesses and seeing the growth that can be there. And then yes, the multiples will get in the right place as well once we get in that structure. The other thing I would say is that as we've sat today, we essentially have to constrain the capital that goes into the renewables business because we can't support as much as they could actually develop. And as Jeff told you earlier, we have quite a strong development team.

That's something we've ramped up over the last two years, and that development team can produce a lot more megawatts than our existing business can finance. And so, 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. And another factor that really goes into that is that the renewable -- the overall business got to a scale that the amount of renewables you had to build to not be holding back the other part of the business was more than we could sustain.

So, put all that on the table and that's really what's driven us to the decision we've made.

Ben Pham -- BMO Capital Markets -- Analyst

OK. Thanks for that, Chris. And I'm also wondering, too, because you did -- you're running in there when you're trading at a premium valuation and Algonquin before, the recent dividend cut and whatnot, they trade at a premium, even though you had -- they had renewables in that business. And can you maybe talk about really the conditions that was driving that pre-Algonquin dividend cut and why you don't think those conditions are going to continue going forward and supporting the premium valuation, even if you stayed together the renewables and utility business?

Chris Huskilson -- Interim Chief Executive Officer

Well, again, if you think about it, because of this -- so we now have 7 billion of rate base on the regulated side. So, 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. And so, it's that combination of scale. So, 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 -- 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. But now, at the scale that the business is, it just -- it's just the math just doesn't work anymore.

Darren Myers -- Chief Financial Officer

And then obviously, the other big difference is the change in the interest rate environment. I mean, we're in a different environment now, and that makes the model that much harder to do with higher rates and the changes in the capital markets.

Chris Huskilson -- Interim Chief Executive Officer

Exactly.

Ben Pham -- BMO Capital Markets -- Analyst

OK. I got you. So, maybe that premium valuation, of course, is predicated on our perceptions of higher growth rate and regardless of business mix, and sounds like the split makes more sense because both companies will grow much higher going forward.

Chris Huskilson -- Interim Chief Executive Officer

Yeah.

Ben Pham -- BMO Capital Markets -- Analyst

OK.

Chris Huskilson -- Interim Chief Executive Officer

But, Ben, just remember, though, in order to maintain our credit rating, we had to keep the regulated at above 70%. And that -- you know, it was a very tight set of criteria and a knife edge that the company was on at the time.

Ben Pham -- BMO Capital Markets -- Analyst

All right. Got it. OK. Thank you.

Operator

[Operator instructions] Your next question comes from Andrew Kuske from Credit Suisse.

Andrew Kuske -- Credit Suisse -- Analyst

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 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?

Chris Huskilson -- Interim Chief Executive Officer

Well, Jeff may want to speak to that, but certainly, more than we were doing. That's for sure. Go ahead.

Jeff Norman -- Chief Development Officer

Yeah, no. Andrew, 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 a gigawatt a year in additions, which then obviously puts balance sheet constraints on in terms of the business mix. But we do feel we can ramp up to -- we've done 1,600 megawatts in a year in construction between the reg and the nonreg, which was overseen by that team, and we can certainly ramp up into a material number that's north of 500, potentially, gigawatt.

Andrew Kuske -- Credit Suisse -- Analyst

OK. Appreciate that. Thank you. And I guess as the financials go in transition from being maybe more complicated to being streamlined ex the renewable group in the future, are there other opportunities for other optimizations? And just if we think about partnership capital that some utilities have used for selling a 19.9% interest in either an underlying DisCo or transmission asset, what is the appetite for that? I know that's not part of the strategic review on the renewable side, but I guess are you open to that and have you been approached on that kind of concept?

Chris Huskilson -- Interim Chief Executive Officer

Yeah. Again, Andrew, I think we really have to go back to what our focus is right now. We really have to get some momentum on the sale, and we need to bring a renewed focus to the existing regulated business. And so, I think that's where our focus is going to be.

But, 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 -- Credit Suisse -- Analyst

OK. Great. Thank you very much.

Chris Huskilson -- Interim Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Naji Baydoun from iA Capital Markets.

Naji Baydoun -- iA Capital Markets -- Analyst

Hi. Good morning. Just want to go back to the topic of Atlantica Yield, Atlantica infrastructure. So, it's very clear that from the renewable portfolio sale, you can allocate a portion to deleveraging and a portion to buybacks.

But I assume the potential sale of Atlantica would be incremental to that. So, if that process does work its way through, what would be the use of proceeds potentially for that type of deal?

Chris Huskilson -- Interim Chief Executive Officer

At the end of the day, all proceeds will go to the balance sheet. That's exactly the way we're going to look at it. We want to have a competitively structured balance sheet for this reg business, which will make us -- which will create the most value for us.

Naji Baydoun -- iA Capital Markets -- Analyst

So, you don't necessarily have a target for incremental buybacks or just creating more -- or putting more capital to work in there on the utility side.

Darren Myers -- Chief Financial Officer

Yeah. Naji, it really comes down to the same equation. It's the BBB -- BBB investment-grade rating is our anchor. And whether it's the sale proceeds from Atlantica, if that ends up resulting in a sale plus, you know, what we've announced today, it goes to that first and then, as we've mentioned, buybacks.

And, you know, we're going to capitalize the balance sheet so we can grow and support the billion dollars of growth that we've mentioned today for the regulated business. So, equation, it's going to be the same thing, you know, with both processes.

Naji Baydoun -- iA Capital Markets -- Analyst

OK. Got it. And just going back to the topic of sort of constrained and slower growth in the renewables business, I think earlier this year, you were maybe thinking about a 5% to 8% annualized growth rate 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 would make sense to kind of go forward with the separation. But how you kind of view the stand-alone growth profile of the utilities -- the renewable business?

Darren Myers -- Chief Financial Officer

Yeah. Naji, what we had talked about before in that 5% to 8% was kind of a baseline for regulated of the 4% to 6%, and then, you know, a sweetener from renewables of 1% to 2%. And so, that got you to the math, the 5% to 8%. And, you know, obviously, 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% to 8%. But then when we look at the 4% to 7% and all the modeling we've done through this process and with our regulated business, you know, one is we think it's in line with the industry for regulated companies. And secondly, we think with our assets and focus on operational effectiveness and capital discipline, you know, we certainly can deliver within that 4% to 7%.

Naji Baydoun -- iA Capital Markets -- Analyst

Appreciate that. And just one final quick question. I know you've been asked already in terms of other corporate simplification processes. Just maybe a question on the one that sticks out, which is the Chilean utility business.

Any updated thoughts on where that fits within the portfolio going forward?

Chris Huskilson -- Interim Chief Executive Officer

Again, our focus at this time is on the renewable sale and on -- focus on operational aspects of the regulated business. So, that's where we are right now, and we'll get that done.

Naji Baydoun -- iA Capital Markets -- Analyst

Understood. Thank you.

Operator

There are no further questions at this time. I'll turn the call back over to Chris Huskilson.

Chris Huskilson -- Interim Chief Executive Officer

OK. Well, thank you all for listening to our call today and our second quarter results, and I personally look forward to talking to all of you in the future. Please continue to stay on the line and listen to our disclaimer. Thank you all very much.

Brian Chin -- Vice President, 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 uncertainty -- 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 is 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. And with that, operator, we'll conclude this call.

Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Brian Chin -- Vice President, Investor Relations

Chris Huskilson -- Interim Chief Executive Officer

Darren Myers -- Chief Financial Officer

Dariusz Lozny -- Bank of America Merrill Lynch -- Analyst

Sean Steuart -- TD Securities -- Analyst

Robert Hope -- Deutsche Bank -- Analyst

Rupert Merer -- National Bank Financial -- Analyst

Jeff Norman -- Chief Development Officer

Nelson Ng -- RBC Capital Markets -- Analyst

Mark Jarvi -- CIBC World Markets -- Analyst

Johnny Johnston -- Chief Operating Officer

Ben Pham -- BMO Capital Markets -- Analyst

Andrew Kuske -- Credit Suisse -- Analyst

Naji Baydoun -- iA Capital Markets -- Analyst

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