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spk05: 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 speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by one on your telephone keypad. I will now turn the conference over to Brian Chin, Vice President of Investor Relations. Please go ahead.
spk16: 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 Huskelson, 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 CEEDARplus 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 CEEDARplus 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 re-queue if you have any additional questions to allow others the opportunity to participate. With that, I'll turn it over to Chris.
spk11: Okay, 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 Venkata 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 the nationally recognized search firm to identify a permanent chief executive officer. During this period, however, I am committed to working towards a successful execution of the strategic separation and ensuring a smooth transition. The Board's decision to establish new leadership is directly related to the outcome of the strategic review process. After a thorough strategic review, We announced earlier today that the company will pursue a sale of our renewable energy group. With the support of our independent financial advisor, the strategic review committee of the board carefully evaluated both of our strong businesses and determined that we can create more long-term value by focusing on our regulated business and pursuing a sale of the renewables business. The regulated utility business is well positioned with diversified assets, multiple modalities, and attractive jurisdictions. We have a proven track record of providing reliable service for our customers and have achieved constructive regulated returns for our shareholders. The renewable business is a solid and over the past 30 years has grown into an attractive platform that remains poised to benefit from the acceleration of clean energy. In fact, both businesses are well positioned to benefit from the energy transition. That said, with the work the board and management has done, we believe our current integrated structure is holding us back from realizing the full value of our both businesses. We have a strong set of regulated assets to long-term growth. The regulated portfolio has upside potential that can be unlocked through more focused organic growth strategy, including a simpler business model and more disciplined approach to capital. A sale of the renewable business supports the realization of this value opportunity. We also believe a renewables business would be better positioned to accelerate its growth under a different ownership structure. We expect to use the proceeds of a renewables transaction to reduce our debt and fund share repurchases. Our objectives for the transaction are to support our current dividend, reduce our cost of capital, and maintain our investment grade BBB rating, always with the objective to build long-term value. The timing of the sale will be dependent on value. and we will update the market as appropriate. JP 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 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 one 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 a dollar of OpEx, this creates headroom for up to $8 of CapEx investment without increasing rates. Our plan is to continue to modernize our utility systems, supporting safe and reliable delivery of our services, help our customers transition towards net zero, and keep a close eye on customer affordability with average aggregate rate increases roughly in line with inflation. 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 6 provinces in North America. This provides diversity of geography and markets and is a business of scale. Our footprint spans 7 independent system operators, including PJM, MISO, and ERCOT. Our development pipeline is comprised of over 6 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 a sale of the renewables business will unlock the unrealized value and better position the renewables business for growth and a positive future for our team members that support it. In summary, we have four messages to communicate today. First, we have two strong growing businesses. Second, we're pursuing a sale of the renewables business. Third, The current dividend can be supported by the remaining regulated business combined with our intended sale. 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.
spk17: 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 CalPICO Electric System in California and St. Lawrence Gas Utility in New York. At CalPICO, the CPUC issued a final order on April 27, 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 1st, 2023. Looking now at recent pending rate proceedings, a 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 longstanding 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 Carver's Creek and Clearview solar projects. And our Sandy Ridge 2 wind project site preparations and turbine erection was completed during the quarter, and the project is on track to achieve full COD by the end of the year. In total, we currently have nearly 650 megawatts of wind and solar projects in various stages of construction and expect to bring approximately 450 megawatts in service in 2023. Turning now to our financial year-over-year performance. Quarterly results were negatively impacted by weather, higher interest, and lower HLBV from older project rollovers. Our second quarter revenue increased by 1% year over year to $627.9 million. Growth was primarily attributable to the implementation of new rates offset by unfavorable weather. Our second quarter consolidated adjusted EBITDA was $277.7 million, a decline of approximately 4% from the same period last year. Growth in our regulated operating profit was more than offset by decline in our renewables operating profit. The regulated 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 Calpico Electric System, with recruitment to the first quarter of 2022, as well as Empire, Belco, and Granite State Electric. Included in the regulatory results was weather-driven reduced customer demand, which drove a divisional operating profit headwind of $11 million, or approximately 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 two cent impact on the adjusted earnings per share. Additionally, lower HLBV income accounted for much of the remaining decrease as a result of the end of production tax credit eligibility on projects commissioned in 2012. This extends the year-over-year pattern first seen in late 2022 and is the last quarter of HLBV rollovers we expect to see for these projects. Our interest expense was $89.7 million in the quarter, a $25.1 million increase year-over-year, with approximately two-thirds of the increase attributable to 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 8 cents, both representing a year-over-year decline of approximately 50%. As we look to the balance of the year, we are tracking to the lower half of our previously disclosed 2023 guidance, driven by the unfavorable impact of weather in the second quarter. Please note, our guidance assumes continuing operations accounting treatment for the renewables business. We look forward to updating you as the year progresses. With that, I will now turn the call over to the operator to open the lines up for questions. Operator?
spk05: Thank you, if you have a question, please press star followed by one on your telephone keypad to withdraw your question simply press star one again one moment, please for your first question. Your first question comes from Darius Lonzi from Bank of America.
spk28: Hey, guys. Good morning. Thank you for taking the question. Maybe just at the outset on the planned renewable 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 coming in your plan transaction and then also related could you potentially back or somehow rank the priorities for proceeds paying down parents debt and buying back shares if you could put any specifics around that that'd be very appreciated yeah so good morning thank you it's Chris
spk11: So 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 Our advisor, JP 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, you know, clearly one of the things that will be an opportunity for the business is that the FFO to debt will be able to 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, you know, we're hopeful that we'll be able to buy back a significant number of shares to help support our growing business.
spk17: And Darius, as Chris mentioned, I mean, the first priority in that equation is the, you know, triple B credit rating. So, you know, the first priority is in the order is the pay down the debt and then with the balance for the buybacks.
spk28: Okay. Thank you guys for that color. One more, if I could, just as a quick follow-up. 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?
spk11: 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, you know, that's the way we're looking at it right now when we believe that that will 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.
spk29: Okay. Appreciate the color. Thank you, Darius. Thank you.
spk05: Your next question comes from the line of Sean Stewart of PD Securities. Your line is live.
spk20: Thanks. Good morning, everyone. Um, follow on question with respect to the, um, the process, any incremental thoughts on, I suppose what the target FFO to debt ratio is, is that changed at all, um, with respect to keeping the triple B credit rating. And then, 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 as the company takes on its new structure.
spk10: Darren, do you want to go ahead and take that?
spk17: Yeah, sure. Good morning, Sean. Yeah, I think the way to think about it, 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 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, you know, we see an opportunity to invest, you know, approximately a billion dollars 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 a billion dollars to spend a year will be the key goal.
spk20: Okay. 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 benefits of potentially streamlining the regulated portfolio, one around a tighter group of modalities or a tighter regional platform as well?
spk11: Well, I mean, I'd say, first of all, we're focused on the separation. And so, you know, 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 that we are going to bring a focus to the regulated business. And, you know, I think that that's going to be a renewed focus. That's going to allow us to look very hard at the 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, you know, we are uniquely a regulated company of scale that actually has water attached. And we think that that's also a unique opportunity for the business as a whole. 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.
spk20: Okay. Thanks very much for the detail. That's all I have. Thanks, Sean.
spk05: Your next question comes from the line of Robert Hope from Deutsche Bank.
spk19: Good morning, everyone, and good to hear from you, Chris. It's been a little while. Nice to hear your voice. I did actually want to go back to one of your comments in the prepared remarks. It said that the timing of the sale was going to be dependent on value. Can we just dive a little bit deeper into this? Like, have you already got some inbounds in terms of valuation that kind of give you comfort, as well as will this be you know, a 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?
spk11: 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 scale. It has a tremendous development pipeline, and we think it's going to be very attractive to the marketplace.
spk23: I appreciate the color there.
spk19: And then just moving over to the dividend, I appreciate the commentary on scanning 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?
spk11: 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 how this is going to evolve. And with the evolution we see of this business, we're very comfortable with where we are today.
spk04: Thank you.
spk05: Your next question comes from the line of Rupert Murrer from National Bank.
spk09: 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, maybe perhaps what percentage of the value of the sale price you think could come from the development platform?
spk11: 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, we've already got 650 megawatts under construction. That by itself is a nice starting point, and the fact that half of the 6 gigawatts that we have under development are already in interconnection queues and have locations. 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?
spk15: No, I'd say, Chris, that the pipeline, given where we are with the energy transition and the amount of excitement within the U.S. market, that I think the pipeline is certainly 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.
spk09: 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?
spk11: Yeah, well, we certainly will need to keep some of that capability because the regulated business will continue to develop clean assets. And so, you know, 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 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.
spk08: All right, thank you. I'll get back in the queue.
spk11: Thank you.
spk05: Your next question comes from the line of Nelson Ng from RBC Capital Markets.
spk21: 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, they have their own strategic review that's ongoing. So any color you have there would be great.
spk17: Yeah, Nelson, Darren, good morning. Yeah, no, in terms of the Atlantic, I mean, I think the first point that we want to leave you with is we are moving to a peer-play regulated business. We are continuing with regards to Atlantic, and 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.
spk21: Okay, 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 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?
spk11: Well, Again, when we look at the portfolio, we see that it does have value to the market, and the development pipeline itself, we think, is uniquely valuable. So we're not expecting to be in a position that you're describing. And so 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.
spk21: Okay. And then just finally, you talked about the value of your development pipeline. How large is the development team currently?
spk15: 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, the origination team for wind and solar, and our international team, which is relatively small, but the international team is in that 100 to 110 number. Great. Thanks, Jeff. I'll leave it there.
spk05: Your next question comes from the line of Mark Jarvie from TIBC Capital Market.
spk14: Yeah, thanks. Good morning, everyone. I'm wondering 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, their thing would be any implications around tax and the associated debt that have to be repaid if you sell the renewables assets.
spk11: 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 expertise in that area, and we feel comfortable with where we are. It's a competitive process. If we started putting numbers out there, that might that might flavor that competitive process, and we'd like to maximize value. So we're not prepared to do that today. Adam, did you want to speak to the second half?
spk17: 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've looked at and made the decision that we've announced today.
spk14: And then anything on the APCO notes in terms of them having to be repaid, I guess, if you sell the business?
spk17: Nothing that we would talk about today. Obviously, we're looking at all aspects, including the notes as part of the sales process.
spk14: Okay. And then in the slide deck, you talked about ramping up, I guess, the capex or moving to a billion dollars 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 and getting to a billion dollars of spending on the utility business here on the other side of the sales process.
spk24: Yeah, no, this is Johnny here, Mark. We feel very confident that we'll be able to ramp up to 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 with minimal lag and just to clarify the four to seven percent growth rate is that essentially underlying rate-based growth with assuming that you're just staying around your authorized ROEs when you put those numbers out there
spk11: 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.
spk13: Great. Thanks, everyone, for the time today. Thank you.
spk05: Your next question comes from the line of Ben Pham from BMO.
spk18: Hi. Thanks for morning. I wanted to clarify, I think you mentioned in response to the question that EPS payout could – could be going up on pro forma net or share buybacks. I just wanted to make sure that you mentioned that, and if so, is really the value creation exercise ultimately expansion and utility multiple?
spk11: Well, I think when you think about this business, the way it sits today, it's not optimized for either of the businesses. The FFO to debt is higher than it would be if we were pure play regulated. And the credit rating is probably higher than the renewables business needs. 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 about 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 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.
spk18: Okay, thanks, Chris. And I'm also wondering, too, because you did, you're running in the era when just trading at a premium valuation, and Guam, before the recent dividend cut and whatnot, did trade at a premium valuation. even though they have renewables in their business. And you may talk about really the conditions that was driving that pre-Glonk and Dibbon cuts, and, boy, I don't think those conditions are going to continue going forward and supporting maybe pre-evaluation, even if you state together the renewables and utility business.
spk11: 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 at that point, the scale actually made it unsustainable. When the company was a lot smaller, then it was a lot easier for that to happen because But now at the scale that the business is, the math just doesn't work anymore.
spk17: 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 market.
spk18: Exactly. Okay, I got you. So, I mean, that pre-evaluation was predicated on our perceptions of high growth rate and regardless of This is next, and it sounds like the split makes more sense because both companies will grow much higher going forward.
spk11: Ben, just remember, though, in order to maintain our credit rating, we had to keep the regulated at above 70%. It was a very tight set of criteria and a knife edge that the company was on at the time.
spk12: All right, got it. Okay, thank you.
spk05: Again, if you'd like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from Andrew Tuskey from Credit Suisse.
spk03: 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. If that business group was unconstrained, which obviously it wasn't on your balance sheet, how much growth per annum in, say, megawatts do you think you could pull off each year?
spk11: Well, Jeff may want to speak to that, but certainly more than we were doing, that's for sure. Go ahead.
spk15: 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, you know, we've done 1600 megawatts in a year in construction between the reg and the non-reg, which was overseen by that team. And we can certainly ramp up to a material number that's north of 500 and potentially a gigawatt.
spk03: Okay, I appreciate that. Thank you. And I guess as the financials go in transition from being maybe more complicated to being streamlined, you know, X 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 a 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?
spk11: 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.
spk02: Okay, great. Thank you very much.
spk04: Thank you.
spk05: Your next question comes from the line of Najee Baydown from IA Capital Markets.
spk27: Hi, good morning. I just want to go back to the topic of Atlantica yield or Atlantica infrastructure. So it's very clear that from the renewable portfolio sale, you can allocate a portion to be leveraging and a portion to buybacks. But I assume the potential sale of Atlantica would be incremental to that. So if that process does happen, work its way through, what would be the use of proceeds potentially for that type of deal?
spk11: 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, you know, a competitively structured balance sheet for this REG business, which will make us, which will create the most value for us.
spk27: So you don't necessarily have a target for incremental buybacks or just putting more capital to work on the utility side?
spk17: Yeah, Najee, it really comes down to the same equation. It's the 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 what we've announced today, it goes to that first. And then, as we've mentioned, buybacks, And 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 the equation, it's going to be the same thing with both processes.
spk27: Okay, got it. And just going back to the topic of sort of constrained and slow 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 company. Now it's 47 with the regulated group. 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 this separation. Is that how you kind of view the standalone growth profile of the renewables business?
spk17: Yeah, Najee, what we had talked about before in that five to eight was kind of a baseline for regulated of the four to six and then, you know, a sweetener from renewables of one, you know, one to two. And so that got you the math, the five to eight. And, you know, obviously, you know, 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 five to eight percent. 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%. I appreciate that.
spk27: And just one final quick question. I know it's been asked already in terms of other corporate simplification projects. processes, just maybe a question on the one that sticks out, which is the Chilean utility business and any updated thoughts on where that fits within the portfolio going forward.
spk11: Again, our focus at this time is on the renewable sale and on focus on operational aspects of the regulatory business. So that's where we are right now, and we'll get that done.
spk22: Understood. Thank you.
spk05: There are no further questions at this time. I'll turn the call back over to Chris Kilsen.
spk11: Okay. 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.
spk16: 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 CEDAR Plus and EDGAR, and also including an assumption that the Renewable Energy Group remains in continued operations for accounting purposes for the remainder of 2023. In addition, this forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. Forward-looking information provided during this call speaks only as of the date of this call and is based on the plan's 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 for operations, and divisional operating profits. 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 CEDAR Plus in Canada and EDGAR in the United States and available on our website. And with that, operator, we'll conclude this call. Thank you.
spk05: This concludes today's conference call. You may now disconnect. you Thank you. Thank you. Thank you. 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 speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by one on your telephone keypad. I will now turn the conference over to Brian Chin, Vice President of Investor Relations. Please go ahead.
spk16: 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 Huskelson, 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 CEEDARplus 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 CEEDARplus 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 re-queue if you have any additional questions to allow others the opportunity to participate. With that, I'll turn it over to Chris.
spk11: Okay, 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 Benskada 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 the nationally recognized search firm to identify a permanent chief executive officer. During this period, however, I am committed to working towards a successful execution of the strategic separation and ensuring a smooth transition. The Board's decision to establish new leadership is directly related to the outcome of the strategic review process. After a thorough strategic review, We announced earlier today that the company will pursue a sale of our renewable energy group. With the support of our independent financial advisor, the strategic review committee of the board carefully evaluated both of our strong businesses and determined that we can create more long-term value by focusing on our regulated business and pursuing a sale of the renewables business. The regulated utility business is well positioned with diversified assets, multiple modalities, and attractive jurisdictions. We have a proven track record of providing reliable service for our customers and have achieved constructive regulated returns for our shareholders. The renewable business is a solid and over the past 30 years has grown into an attractive platform that remains poised to benefit from the acceleration of clean energy. In fact, both businesses are well positioned to benefit from the energy transition. That said, with the work the board and management has done, we believe our current integrated structure is holding us back from realizing the full value of our both businesses. We have a strong set of regulated assets to long-term growth. The regulated portfolio has upside potential that can be unlocked through more focused organic growth strategy, including a simpler business model and more disciplined approach to capital. A sale of the renewable business supports the realization of this value opportunity. We also believe a renewables business would be better positioned to accelerate its growth under a different ownership structure. We expect to use the proceeds of a renewables transaction to reduce our debt and fund share repurchases. Our objectives for the transaction are to support our current dividend, reduce our cost of capital, and maintain our investment grade BBB rating, always with the objective to build long-term value. The timing of the sale will be dependent on value. and we will update the market as appropriate. JP 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 strategy needs to adapt and evolve from our early regulated years. More specifically, We see our strategy focusing more intently on 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 a dollar of OpEx, this creates headroom for up to $8 of CapEx investment without increasing rates. Our plan is to continue to modernize our utility systems, supporting safe and reliable delivery of our services, help our customers transition towards net zero, and keep a close eye on customer affordability with average aggregate rate increases roughly in line with inflation. 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 6 provinces in North America. This provides diversity of geography and markets and is a business of scale. Our footprint spans 7 independent system operators, including PJM, MISO, and ERCOT. Our development pipeline is comprised of over 6 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 a sale of the renewables business will unlock the unrealized value and better position the renewables business for growth and a positive future for our team members that support it. In summary, we have four messages to communicate today. First, we have two strong growing businesses. Second, we're pursuing a sale of the renewables business. Third, The current dividend can be supported by the remaining regulated business combined with our intended sale. 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.
spk17: 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 CalPICO Electric System in California and St. Lawrence Gas Utility in New York. At CalPICO, the CPUC issued a final order on April 27, 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 1st, 2023. Looking now at recent pending rate proceedings, a 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 longstanding 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 Carver's Creek and Clearview solar projects. And our Sandy Ridge 2 wind project site preparations and turbine erection was completed during the quarter, and the project is on track to achieve full COD by the end of the year. In total, we currently have nearly 650 megawatts of wind and solar projects in various stages of construction and expect to bring approximately 450 megawatts in service in 2023. Turning now to our financial year-over-year performance. Quarterly results were negatively impacted by weather, higher interest, and lower HLBV from older project rollovers. Our second quarter revenue increased by 1% year over year to $627.9 million. Growth was primarily attributable to the implementation of new rates offset by unfavorable weather. Our second quarter consolidated adjusted EBITDA was $277.7 million, a decline of approximately 4% from the same period last year. Growth in our regulated operating profit was more than offset by decline in our renewables operating profit. The regulated 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 Calpico Electric System with recruitment to the first quarter of 2022, as well as Empire, Belco, and Granite State Electric. Included in the regulatory results was weather-driven reduced customer demand, which drove a divisional operating profit headwind of $11 million, or approximately 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 two cent 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 and projects commissioned in 2012. This extends the year-over-year pattern first seen in late 2022 and is the last quarter of HLBV rollovers we expect to see for these projects. Our interest expense was $89.7 million in the quarter, a $25.1 million increase year-over-year, with approximately two-thirds of the increase attributable to 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 8 cents, both representing a year-over-year decline of approximately 50%. As we look to the balance of the year, we are tracking to the lower half of our previously disclosed 2023 guidance, driven by the unfavorable impact of weather in the second quarter. Please note, our guidance assumes continuing operations accounting treatment for the renewables business. We look forward to updating you as the year progresses. With that, I will now turn the call over to the operator to open the lines up for questions. Operator?
spk05: Thank you. If you have a question, please press star followed by one on your telephone keypad. To withdraw your question, simply press star one again. One moment, please, for your first question. Your first question comes from Darius Lonzi from Bank of America.
spk28: Hey, guys. Good morning. Thank you for taking the question. Maybe just at the outset on the planned renewable 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 coming in your plan transaction? And then also related, could you potentially back 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.
spk11: Yeah, so good morning. Thank you. It's Chris. So 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 Our advisor, JP 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, you know, clearly one of the things that will be an opportunity for the business is that the FFO to debt will be able to 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, you know, we're hopeful that we'll be able to buy back a significant number of shares to help support our growing business.
spk17: And Darius, as Chris mentioned, I mean, the first priority in that equation is the, you know, triple B credit rating. So, you know, the first priority in the order is the pay down the debt and then with the balance for the buybacks.
spk28: Okay. Thank you guys for that color. One more, if I could, just as a quick follow-up. 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?
spk11: 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, you know, that's the way we're looking at it right now when we believe that that will 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.
spk29: Okay. Appreciate the color. Thank you, Darius. Thank you.
spk05: Your next question comes from the line of Sean Stewart of PD Securities. Your line is live.
spk20: Thanks. Good morning everyone. Um, follow on question with respect to the, um, the process, any incremental thoughts on, I suppose what the target FFO to debt ratio is, is that changed at all, um, with respect to keeping the triple B credit rating and then, 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 as the company takes on its new structure.
spk10: Aaron, do you want to go ahead and take that?
spk17: Yeah, sure. Good morning, Sean. Yeah, I think the way to think about it, 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 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, you know, we see an opportunity to invest, you know, approximately a billion dollars 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 a billion dollars to spend a year will be the key goal. Okay.
spk20: 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 benefits of potentially streamlining the regulated portfolio, one around a tighter group of modalities or a tighter regional platform as well?
spk11: Well, I mean, I'd say, first of all, we're focused on the separation. And so, you know, 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 that we are going to bring a focus to the regulated business. And, you know, I think that that's going to be a renewed focus. That's going to allow us to look very hard at the 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 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.
spk20: Okay. Thanks very much for the detail. That's all I have. Thanks, Sean.
spk05: Your next question comes from the line of Robert Hope from Deutsche Bank.
spk19: Good morning, everyone, and good to hear from you, Chris. It's been a little while. Nice to hear your voice. I did actually want to go back to one of your comments in the prepared remarks. It said that the timing of the sale was going to be dependent on value. Can we just dive a little bit deeper into this? Like, have you already got some inbounds in terms of valuation that kind of give you comfort, as well as will this be – you know, a 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?
spk11: 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 scale. It has a tremendous development pipeline, and we think it's going to be very attractive to the marketplace.
spk23: I appreciate the color there.
spk19: And then just moving over to the dividend, I appreciate the commentary on scanning 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?
spk11: 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 how this is going to evolve. And with the evolution we see of this business, we're very comfortable with where we are today.
spk04: Thank you.
spk05: Your next question comes from the line of Rupert Murrer from National Bank.
spk09: 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, maybe perhaps what percentage of the value of the sale price you think could come from the development platform?
spk11: 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, we've already got 650 megawatts under construction. That by itself is a nice starting point, and the fact that half of the 6 gigawatts that we have under development are already in interconnection queues and have locations. 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?
spk15: No, I'd say, Chris, that the pipeline, given where we are with the energy transition and the amount of excitement within the U.S. market, that I think the pipeline is certainly 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.
spk09: 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?
spk11: 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 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.
spk08: All right, thank you. I'll get back in the queue.
spk11: Thank you.
spk05: Your next question comes from the line of Nelson Ng from RBC Capital Markets.
spk21: 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, they have their own strategic review that's ongoing. So any color you have there would be great.
spk17: Go ahead. Yeah, Nelson, Darren, good morning. Yeah, no, in terms of the Atlantic, I mean, I think the first point that we want to leave you with is we are moving to a peer-play regulated business. We are continuing with regards to Atlantic as 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.
spk21: Okay, 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 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?
spk11: Well, Again, when we look at the portfolio, we see that it does have value to the market, and the development pipeline itself, we think, is uniquely valuable. So we're not expecting to be in a position that you're describing. And so 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.
spk21: Okay. And then just finally, you talked about the value of your development pipeline. How large is the development team currently?
spk15: So it's Jeff Nelson. And so the development team There's a little over 100 people at this point in time, which includes the construction team, the development team, the origination team for wind and solar, and our international team, which is relatively small, but the international team is in that 100 to 110 number. Great. Thanks, Jeff. I'll leave it there.
spk05: Your next question comes from the line of Mark Jarvie from TIBC Capital Market.
spk14: Yeah, thanks. Good morning, everyone. I'm wondering 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, there would be any implications around tax and the associated debt that have to be repaid if you sell the renewables assets.
spk11: 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 expertise in that area, and we feel comfortable with where we are. It's a competitive process. If we started putting numbers out there, that might that might flavor that competitive process, and we'd like to maximize value. So we're not prepared to do that today. Adam, did you want to speak to the second half?
spk17: 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've looked at and made the decision that we've announced today.
spk14: And then anything on the APCO notes in terms of them having to be repaid, I guess, if you sell the business?
spk17: Nothing that we would talk about today. Obviously, we're looking at all aspects, including the notes as part of the sales process.
spk14: Okay. And then in the slide deck, you talked about ramping up, I guess, the capex or moving to a billion dollars 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 and getting to a billion dollars of spending on the utility business here on the other side of a sales process.
spk24: Yeah, no, this is Johnny here, Mark. We feel very confident that we'll be able to ramp up to 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 with minimal lag and just to clarify the four to seven percent growth rate is that essentially underlying rate-based growth with assuming that you're just staying around your authorized ROEs when you put those numbers out there
spk11: 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.
spk13: Great. Thanks, everyone, for the time today. Thank you.
spk05: Your next question comes from the line of Ben Pham from BMO.
spk18: Hi. Thanks. Good morning. I wanted to clarify that you mentioned in response to the question that EPS payout could – could be going up on pro forma net or share buybacks. I just wanted to make sure that you mentioned that, and if so, is really the value creation exercise ultimately expansion and utility multiple?
spk11: 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 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 about 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 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.
spk18: Okay, thanks, Chris. And I'm also wondering, too, because you did, you're running in the era when you're trading at a premium valuation, and a long time before the recent given cut and whatnot did trade at a premium valuation. even though they had renewables in that business. And you may talk about really the conditions that was driving that pre-Guanca-Dibbon cut, and, boy, I don't think those conditions are going to continue going forward and supporting maybe pre-evaluation, even if you state together the renewables in the utility business.
spk11: 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 at that point, the scale actually made it unsustainable. 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, the math just doesn't work anymore.
spk17: 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 market.
spk18: Exactly. Okay, I got you. So, I mean, that premium valuation was predicated on or perceptions of high growth rate, regardless of business mix. And it sounds like the split makes more sense because both companies have grown much higher going forward.
spk11: 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.
spk12: All right, got it. Okay, thank you.
spk05: Again, if you'd like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from Andrew Tuskey from Credit Suisse.
spk03: 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. If that business group was unconstrained, which obviously it wasn't on your balance sheet, how much growth per annum in, say, megawatts do you think you could pull off each year?
spk11: Well, Jeff may want to speak to that, but certainly more than we were doing, that's for sure. Go ahead.
spk15: 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, you know, we've done 1600 megawatts in a year in construction between the reg and the non-reg, which was overseen by that team. And we can certainly ramp up to a material number that's north of 500, potentially a gigawatt.
spk03: Okay, I appreciate that. Thank you. And I guess as the financials go in transition from being maybe more complicated to being streamlined, you know, X 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 a 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?
spk11: 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.
spk02: Okay, great. Thank you very much.
spk11: Thank you.
spk05: Your next question comes from the line of Najee Baydown from IA Capital Markets.
spk27: Hi, good morning. I just want to go back to the topic of Atlantica yield or Atlantica infrastructure. So it's very clear that from the renewable portfolio sale, you're going to allocate a portion to be leveraging and a portion to buybacks. But I assume the potential sale of Atlantica would be incremental to that. So if that process does happen, work its way through, what would be the use of proceeds potentially for that type of deal?
spk11: 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 create the most value for us.
spk27: So you don't necessarily have a target for incremental buybacks or just putting more capital to work on the utility side?
spk17: Yeah, Najee, it really comes down to the same equation. It's the 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 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 the equation, it's going to be the same thing, you know, with both processes.
spk27: Okay, got it. And just going back to the topic of sort of constrained and slow 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 company. Now it's 47 with the regulated group. 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 this separation. Is that how you kind of view the standalone growth profile of the renewables business?
spk17: Yeah, Najee, what we had talked about before in that five to eight was kind of a baseline for regulated of the four to six and then, you know, a sweetener from renewables of one, you know, one to two. And so that got you the math, the five to eight. And, you know, obviously, you know, 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 five to eight percent. But then when we look at the 4% to 7% in 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%.
spk27: I appreciate that. And just one final quick question. I know it's been asked already in terms of other corporate simplification projects. processes, just maybe a question on the one that sticks out, which is the Chilean utility business and any updated thoughts on where that fits within the portfolio going forward.
spk11: Again, our focus at this time is on the renewable sale and on focus on operational aspects of the regulatory business. So that's where we are right now, and we'll get that done.
spk22: Understood. Thank you.
spk05: There are no further questions at this time. I'll turn the call back over to Chris Kilsen.
spk11: Okay. Well, thank you all for listening to our call today and our second quarter result. 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.
spk16: 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 CEDAR Plus and EDGAR, and also including an assumption that the Renewable Energy Group remains in continued operations for accounting purposes for the remainder of 2023. In addition, this forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. Forward-looking information provided during this call speaks only as of the date of this call and is based on the plan's 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 for operations, and divisional operating profits. 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 CEDAR Plus in Canada and EDGAR in the United States and available on our website. And with that, operator, we'll conclude this call. Thank you.
spk05: This concludes today's conference call. You may now disconnect.
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