AltaGas Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 14 speakers on the call.

Operator

Morning, ladies and gentlemen. Thank you for standing by. Welcome to the AltaGas Second Quarter 2023 Financial Results Conference Call. My name is Sergio, and I will be your operator for today's call. All lines have been placed on mute to prevent any background noise.

Operator

Zarzio for operator assistance at any time. After the speakers' remarks, there will be a question and answer session. As a reminder, I would now like to turn the conference over to Alan McKnight, Director, Investor Relations. Please go ahead, Mr. McKnight.

Speaker 1

Thanks, and good morning, everyone. Thank you for joining us today for AltaGas' 2nd Quarter 2023 Financial Results Conference Call. Speaking on the call this morning will be Vern Yu, President and Chief Executive Officer And James Harbilas, Executive Vice President and Chief Financial Officer. We're also joined here this morning by Randy Toon, Executive Vice President and President of our Midstream Business Blue Jenkins, Executive Vice President and President of our Utilities Business and John Morrison, Senior Vice President, Corporate Development and Investor Relations. We'll proceed on the basis that everyone is taking the opportunity to review the press release and our 2nd quarter results.

Speaker 1

Similar to previous quarters, we've published an earnings summary presentation that you can find on our website. The presentation walks through the quarter and highlight some of the key year over year variances and non recurring items that we thought would be helpful for the market to understand. As always, today's prepared remarks will be followed by an analyst question and answer period. I'll remind everyone that we will be available after the call for any follow-up or detailed modeling

Speaker 2

As for the structure of

Speaker 1

the call, we'll start with Vern Yu providing some comments on our financial performance Progress on our strategic priorities, followed by James Harbilas providing a more detailed walk through of our 2nd quarter financial results, Near term outlook and 2023 guidance, and then we'll provide lots of opportunity at the end for Q and A. Before we begin, I'll remind everyone that we will refer to forward looking information on today's call. This information is subject to certain risks and uncertainties As outlined in the forward looking information disclosure on Slide 2 of our investor presentation, which can be found on our website and more fully within our public disclosure filings on SEDAR. And with that, I'll now turn the call over to Vern.

Speaker 3

Thanks, Adam, and good morning, everyone. It's great to be here today to discuss our Q2 results and update you on our operations and other corporate developments. But before we do that, let's spend a few minutes on why I think AltaGas' future is very bright. I've already had the opportunity to take a deep dive into the business, visiting our offices and operations and have connected with our employees, customers, partners and shareholders. This has enhanced my already bullish view of AltaGas And I'm excited to leverage the company's exceptional assets in the months years ahead.

Speaker 3

I came to Alphagas because I saw an opportunity to create a highly sustainable and growing infrastructure platform With a robust investment proposition, we are positioned to deliver industry leading dividend growth through stable and growing cash And we will be able to improve our risk profile as we recontract commercial agreements in midstream, file timely rate cases, Continue to optimize our capital spend while managing our cost in our Utilities segment. In Utilities, we're modernizing the network with our accelerated pipe replacement program and adding new customers across the DMV. In Midstream, we continue to see growth in volumes for global exports and value chain optimization opportunities. I believe the long term fundamentals for AltaGas' businesses are strong. Western Canada will deliver Significant growth in both natural gas and NGL production as industry ramps up production to feed LNG Canada And other export facilities.

Speaker 3

These growing NGL volumes will need additional West Coast egress To maximize value for our customers, the good news is RIPET and Ferndale can deliver this today And our REEF project will provide even more egress when it's up and running in late 2026. The future of our Utilities segment is also very bright. Natural gas remains the largest energy source for homes in the DMV And the electrical substitution costs for this energy are more than 3 times that of natural gas. As we continue our conversation on the energy transition, we need to be mindful and balance the critical needs Of Energy Affordability and Energy Reliability with our regional and national climate goals. All of this cements the fact that natural gas is a key part of today's energy mix and will be part of that energy mix for decades to come.

Speaker 3

Q2 was impacted both financially and operationally by the devastating wildfires across Alberta and BC. Our thoughts are with the people and the communities affected by these fires. I want to thank our dedicated employees We are involved in wildfire relief and helped with the recovery efforts across the communities where we operate. Their actions reflect the values of our company. So let's talk about the quarter.

Speaker 3

AltaGas continued to execute on its long term strategy during Q2. The wildfire and the timing of some of our hedges Had a negative impact financially in Q2. Despite these results, the first half of twenty twenty three was in line with our expectations And today, going to reiterate our 2023 full year guidance. With normalized EPS in the range Of $1.85 to $2.05 and normalized EBITDA in the range of $1,500,000,000 to 1,600,000,000 The company continues to show steady progress in our long term deleveraging plan. We're now approaching our near term target Being less than 5 times on a debt to EBITDA basis and we have line of sight to get to 4.5.

Speaker 3

We are pleased with the progress shown on removing the milestones remaining to complete the Mountain Valley project, including the receipt of all remaining permits to finish construction and start operation of the pipeline. This was reinforced by the U. S. Supreme Court ruling yesterday to vacate the stays that were placed on the pipeline by the 4th Circuit. The partners now have a clear path to the pipeline being completed by the end of the year.

Speaker 3

In the second quarter, we've delivered normalized EBITDA of $239,000,000 and EPS of $0.06 per share compared to 276,000,000 Of normalized EBITDA and $0.14 per share of EPS in the Q2 of 2022. Midstream results were inclusive of $7,000,000 from negative wildfire impacts And another $12,000,000 due to hedge and ship timing impacts, which will reverse the next couple of quarters. This should increase second half EBITDA by $12,000,000 normalized EPS by $0.03 per share And normalized FFO by $0.04 per share in the second half of twenty twenty three. In the Utilities Segment operating performance was relatively in line with expectations, but did include another $4,000,000 of negative weather impacts Stemming from warmer than normal weather in Michigan and DC. Midstream delivered strong volume performance in the quarter.

Speaker 3

Total gas inlet volumes grew by 11%, fractionation volumes increased by 32% And global experts were 4% higher all on a year over year basis. Some of these volumes were impacted by the wildfires where we saw a backup in global exports and outages at our North Pine fractionator. We're very excited about the long term opportunity associated with growing our global exports business And providing Canada with more global connectivity for LPGs as we increase throughput at RIPET and Ferndale. Brief will add to that. It's a very exciting project for us.

Speaker 3

It will further bolster our leading LPG export business by adding even more ERS for the basin. We continue to refine the engineering and construction plans for the projects And we're hoping to have a positive FID for the project either at the end of this year or early next year. And with that, I'll turn the call over to James.

Speaker 4

Thank you, Vern, and good morning, everyone. I'm pleased to provide a more detailed overview of the quarter. As Vern mentioned, we obviously had some headwinds and timing issues that impacted financial results during the Q2, We did show operational strength across a number of areas, while we continue to remain positive on the long term outlook for the platform. We achieved normalized EPS of $0.06 normalized EBITDA of $239,000,000 and normalized FFO per share of $0.53 Results were slightly below our expectations and were inclusive of approximately $7,000,000 of wildfire impacts Approximately $12,000,000 of hedge and ship timing impacts. Despite the Q2 being modestly behind our expectations, We are pleased with where we sit on a year to date basis through the 1st two quarters and we are reiterating our 2023 guidance.

Speaker 4

Together, the wildfire, hedge and ship timing impacts reduced normalized EPS by an approximately $0.05 in the quarter, With the hedge and ship timing impacts representing approximately $0.03 of this impact, which we expect to reverse in the second half of twenty twenty three. Turning to the operating segments. The Utilities segment reported normalized EBITDA of $102,000,000 in the Q2 of 2023 As compared to $116,000,000 in the Q2 of 2022. The largest driver of the year over year variance Was the divestiture of the Alaska Utilities, which closed in the Q1 of 2023. The Alaskan Utilities had contributed $15,000,000 In the Q2 of 2022.

Speaker 4

Washington Gas delivered normalized EBITDA of $69,000,000 in the quarter, An increase of 6% on a year over year basis. This growth was driven by the combination of interim rates at Virginia, Ongoing capital asset modernization investments into ARP programs that are focused on upgrading our system and favorable foreign exchange. This was partially offset by warmer weather in the District of Columbia, which had a $2,000,000 negative year over year impact in the quarter And unfavorable O and M expenses driven by employee benefits and incentive costs. SEMCO delivered normalized EBITDA of $19,000,000 in the quarter, Which is down $2,000,000 year over year as continued customer growth was offset by warmer weather in Michigan, which had a $2,000,000 negative year over year impact in the quarter And slightly higher O and M costs related to pension benefits. The retail platform was down year over year, which was principally driven by the timing of swaps And higher cost gas in inventory.

Speaker 4

During the Q2, we deployed $198,000,000 of invested capital At the utilities on behalf of our customers, including $125,000,000 through our various ARP modernization programs. These investments are focused on upgrading the network to improve safety and reliability of our system, while also bringing ancillary benefits of long term productivity improvements. As such, we will continue to make these upgrades on behalf of our customers, while balancing ongoing customer affordability needs during this environment of high interest rates And inflation. Turning to the Midstream segment, normalized EBITDA came in at $134,000,000 compared to $163,000,000 in the Q2 of 2022. The quarter included strong operations and year over year volume growth across the platform, including global exports, The financial performance was impacted by a number of factors.

Speaker 4

This included the wildfires and evacuation of the North Pine facility for a little more than 12 days, We had an approximately $7,000,000 impact across the platform. Most importantly, we did not have any safety incidents associated with the wildfires And there was no damage to the facility. We were able to return to normal operations once the evacuation orders were lifted, thanks to the dedication and hard work of all of our employees. During a period like this, we were also reminded of the great customers and partners we have across our operations as everyone came together And had open and regular communication to ensure the safety of our employees and all our stakeholders in the communities surrounding the facility. We also had a $7,000,000 impact due to ship timing in the quarter, which will positively impact the 3rd quarter and a $5,000,000 impact due to hedge timing, which is expected to positively impact the 4th quarter results.

Speaker 4

The quarter was impacted by lower marketing contribution, lower Asian to North American butane margins As a result of higher cost butane in inventory from the previous contracting season and lower realized pricing on fractionation volumes. In the Q2, we exported approximately 116,000 barrels per day of propane and butane to Asia Spread across 19 VLGCs as well as 1 partially loaded ship. This included over 70,000 barrels of propane exported from RIPET And 45,000 barrels per day of combined propane and butane from Ferndale. The quarter included 36% of global exported volumes tolled. Gold volumes do generate lower EBITDA per barrel of LPG exported, but continue to advance our lower risk business model.

Speaker 4

We continue to be well hedged in our global exports business for the remainder of 2023 with approximately 77% through a combination of toll And financial hedges, with the financial volumes hedged at an average FEI to North American spread of US15.32 dollars per barrel. As a result, we expect a strong contribution from the global export business in the second half of the year and particularly in the Q4 Once we move through the remaining impact of higher cost butane inventory from the last NGL contract year. As a reminder, We expect to take delivery of 1 new VLGC time charter at the end of 2023, a new time charter in early 2024 as well as a third In the first half of twenty twenty six, each of these time charters are expected to reduce our ocean freight costs by approximately 25% Relative to normal Baltic freight pricing and lock in pricing on a long term basis. In the Corporate and Other segment, We reported normalized EBITDA of $3,000,000 compared to a loss of $3,000,000 in the Q2 of 2022. The $6,000,000 year over year improvement It was mainly driven by lower operating expenses associated with employee incentive plans.

Speaker 4

In terms of other developments, While there was 2 stays placed on the Mountain Valley Pipeline by the Virginia 4th Circuit of Appeals, those have now been vacated by the Supreme Court of the United States yesterday. The project can now move ahead with a targeted completion date of 2023 year end. We've always believed in the fundamentals of MPP And the benefit of being able to bring Marcellus Utica Gas down into East Coast Utilities and Consumption Markets. The pipeline's initial 2 Bcf per day capacity is fully subscribed, principally with investment grade counterparties and strong demand pull shippers, And it is further expandable through incremental compression, including firm and interruptible service. We have always been transparent with regards to MVP being a non core asset to our strategy and once the project is de risked, it would be considered for monetization To reduce leverage and bring us closer to our long term leverage goals.

Speaker 4

We have made significant progress towards lowering our leverage ratios And increasing the margins of safety within the business over time, including lower risk commercial constructs as we continue to focus On delivering durable and growing EPS and FFO per share growth. Within the utilities, there were a number of regulatory events during the quarter. In April, Washington Gas, SEC of Virginia staff and the Office of the Attorney General filed a proposed stipulation for a settlement It includes a revenue increase of $73,000,000 and return on equity of 9.65%. Washington Gas also filed a rate application in Maryland to increase rates by $28,000,000 during the quarter, net of costs currently collected Through the STRIDE ARP program. We expect the Maryland PSC to make a decision on that application in mid December.

Speaker 4

We also filed an application in Maryland for the 3rd phase of the Stride ARP program for approximately $495,000,000 of spending Between 2024 through 2028, which will continue to provide runway to modernize the system and drive better long term outcomes For our customers in the jurisdiction. And finally, in the District of Columbia, the PSC amended the schedule on our active rate case in that jurisdiction And a hearing is tentatively scheduled for mid September with the final decision on that case now expected in early 2024. At the halfway point of the year, we are sitting in line with where we expected to be when we issued our 2023 guidance back in December, And our overall outlook for the year hasn't changed, including our expectations of normalized EPS guidance of $1.85 to $2.05 per share And normalized EBITDA guidance of $1,500,000,000 to $1,600,000,000 And with that, I will turn it over to the operator for the Q and A session.

Operator

Thank you. Ladies and gentlemen, we'll now begin the question and answer Sergio. Your first question comes from Rob Hope from Scotiabank. Please go ahead.

Speaker 5

Good morning, everyone. Thanks for taking my question. Question for Vern. With being in the seat a couple of weeks now, can you add some initial impressions of kind of What do you think as the key strengths of the AltaGas story? Where the key opportunities are?

Speaker 5

And then longer term, how do you envision A company with Northeast BC Midstream and kind of Northeast Do you think on a longer term basis those 2 make sense together?

Speaker 3

Hi, Rob. Thanks for the question. I think that's probably the top of mind question I get from everyone I talk to, whether it's employees, the Board of Directors or investors. And really what attracted me to coming over to AltaGas is, number 1, I think the fundamentals Both businesses are quite strong. If we start with WGL, gas for sure remains the lowest cost EnergySource to provide space heating in the DNB, and that's a pretty substantive margin.

Speaker 3

I think it's like by 300% or something in that range. Also, if space heating in the DNB By gas, it's actually more GHG friendly than electrifying that part of the energy value chain. I think it's a pretty substantive GHG benefit as well. But there will be opportunities for us to Lower that gas footprint and I think you've seen things that my prior company did and I think we can bring those experiences over here. With Midstream, obviously, there's very strong tailwinds for liquids growth in the WCSB On the back of natural gas development for LNG exports out of Western Canada, so that is One of the key factors that there's strong energy fundamentals, there's great embedded growth opportunities here in the business.

Speaker 3

You're seeing Visible capital that's available to be deployed for modernization of the utility. The utility continues to add meters and grow its Customer base each and every year. So the demand for natural gas is actually on the rise in our Franchise areas. Within midstream, I think the export story is really unique for Canadian midstream companies. There's more opportunities to expand exports.

Speaker 3

There's more opportunities to grow the value chain in Midstream To take advantage of our unique value proposition and we've got a great growth project underway right now with Reef And its initial incremental capacity will be in the range of 50,000 barrels a day, but that only uses up a very small portion Of the dock that we're going to build there. And as you mentioned, the company is not without challenges. I think it's fair to Say that we're not quite firing on all cylinders at this time. And if we can make progress in optimizing both businesses, I think we're going to Makes create some shareholder value. So obviously, at the utility, we've got to narrow the ROE gap.

Speaker 3

We've got to improve Some of our regulatory relationships with regulators, particularly in DC, we need to create better alignment on the Energy dialogue where energy affordability, energy reliability and climate are all taken into account And the various regulatory frameworks we have. We're going to make efforts to improve the risk profile in midstream. We know we need to do more tolling. We know we need longer duration contracts, and we need Make sure we're very tightly managing any residual commodity risk that we have. We're on our journey on deleveraging the balance sheet And you can see that we've made good progress after the last couple of years and we have line of sight now on how we get to our target debt to EBITDA metrics, so that still remains to be done.

Speaker 3

So at the outset, I think my focus with the team is to Maximize all of these priorities where we take advantage of our opportunities, work on our challenges, And then that will create optionality for us on what the company looks like in the future. So that's job 1. And as you know, we're always keenly focused on maximizing shareholder value And that's what we're going to that's what we'll be doing.

Speaker 5

All right. I appreciate that color. And then maybe just as a follow-up, just in terms of the Risk profile in the business as well as increasing the attractiveness. When you take a look at the global export business overall, how do you balance Additional growth opportunities versus just terming up the existing base business in a longer term manner. Is it First, fully contract and extend the contract at the base business before any additional capital could get Sanctioned.

Speaker 5

And then I guess, could you look at any capital B fully backed off by contracts?

Speaker 3

I think there's going to be some timing lags in making that happen, Rob. I think we understand long term once the capital is fully deployed that the Total is fully deployed that the cash flows need to be highly, highly contracted. It's probably debatable to what percentage at this So I think the team here has talked about getting this at least 60% tolled Over time on all of the volumes that we have and if we're able to go higher than that, I think that is an opportunity To decrease the volatility in that business, which should be positive for us overall.

Speaker 5

All right. That's great. Good to hear from you and congratulations on the new role. Thank you.

Speaker 3

Thanks Rob.

Operator

Thank you. Your next question comes from Jeremy Tonet from JPMorgan. Please go ahead.

Speaker 6

Hi, good morning.

Speaker 3

Hi, Jeremy.

Speaker 5

Hi. Just want to follow-up

Speaker 6

a bit more with the LPG export If we could, and just I guess vision for how much risk can be taken off the table? How much tolling hedging? How far out do you see Going at this point or strategic views on where that stands? And also, I guess, On the back of that, as Roy said 2023 open exposure, how do you feel that we've AltaGas positioned within the guide? Is there a bias towards Low end or the high end of the guidance at this

Speaker 3

point? Maybe I'll take the first part and then I'll turn it over To James to get into some of the details. And if I think what we're aiming for is More tolling. And what we've seen is over time that tolling that we're able to get from the customer base It's gradually going up. I think when the facility came on stream, there were strong customer interest.

Speaker 3

Then during COVID, there was a decline in customer interest. And this year, we're starting to see some demand pull customers from Asia who've now seen that the barrels are there ratably, the barrels are there Consistently and that there is a price advantage for them to source their barrels from Western Canada. So we'll have a combination over time of demand pull volume and supply push volume, We should which should be beneficial to both sets of customers where producers are going to maximize their netbacks by going to Asia And buyers from Asian buyers are going to maximize their profitability by accessing cheaper Western Canadian barrels. So that's going to take some time to firm up longer term tolls. And I think it's very consistent with the answer that I provided Rob, we want to get that number up and we want to lengthen the duration.

Speaker 3

It's not something that's going to happen overnight, but the team is keenly focused on both of those objectives.

Speaker 4

Jeremy, it's James here. With respect to your question on forecast, obviously, we're reiterating The range of €1,500,000,000 to €1,600,000,000 and no different this year than any year. Halfway through the year, we've obviously experienced Both headwinds and tailwinds relative to the initial guidance when we rolled that out in late 2022. So in terms of some of the Headwinds that we can give you some color on, obviously weather has been a constant theme in terms of headwinds at the utilities and that continued into the 1st month of the second quarter as we entered shoulder season, so that's been a headwind all year. We've obviously had retail that's been impacted By milder weather and timing of some swaps.

Speaker 4

And then we've also had the timing of some of our rate cases slip potentially even into early 24 in the case of our rate case in front of the DC regulators right now that have been headwinds at the utilities. With respect to midstream, Obviously, the wildfires was something that impacted the quarter to the tune of $7,000,000 We expect a little bit of a residual impact Into the second half as we're still running on gensets at North Pine as BC Hydro works to get Highline Power back to facilities in the area. And then we touched on some of the continued drag on C4 margins as a result of Last contracting year and the fact that we were a little higher from a tolling percentage standpoint. So we're moving slightly less merchant barrels, which Hasn't dropped the weighted average cost of butane as quickly as we had anticipated when we rolled out our guidance. And then in terms of tailwinds, I mean, some of the positives Are going to be AFUDC as MVP is making forward progress.

Speaker 4

The consortium is now booking AFUDC on that project again and Q2 benefited slightly from that and we expect that the second half of the year will benefit from continued AFUDC and then another tailwind It's obviously stronger C3 margins as the curve starts to set up for the winter season in Q4.

Speaker 6

Got it. That's helpful. Thank you for that. And just I meant to ask as well on the LPG export, how much of the propane export at RIPET is sourced from AltaGas versus third parties. Are you guys able to share that?

Speaker 2

Hi, it's Randy Toon. Approximately 10,000 barrels a day are sourced from our AltaGas barrels and the remainder, let's say, another 60,000 are sourced from customers.

Speaker 6

That's helpful. Thank you. And Veron, I realized it's only been a month in the sea, but just curious, I guess, your thoughts on the WGL side Getting out and meeting the commissioners across your jurisdictions there. Thoughts on If you do that, when you do that, how you think about building those relationships to narrow the under earning As you said there and curious specifically on Maryland given shifts in the commission there, any thoughts that you're able to provide on that?

Speaker 3

Well, I'll start and I'll turn it over to Blue for some more color, Jeremy. Obviously, you hit the nail on the head. I think it's very important for us to file timely rate cases, but we also need to be To control the narrative and have others advocate on our behalf as well. Obviously, we're very committed that natural gas is the most affordable energy for our customers. It's the most reliable energy for our customers.

Speaker 3

And in the DMV, it's actually the lowest carbon Energy for our customers to heat their homes. We have to push that narrative hard with all of The regulators that we deal with in the DMV, my plan is to work with Blue to be there and be there regularly to actively Help with that engagement, but we also want to build a coalition of energy users to also provide that message The regulator because I think it's important to get the public more dialed in on this particular topic.

Speaker 7

Yes. So this is Blue, Jeremy. I agree with everything Vern said. The process as you know in our In particular jurisdictions, while we're active in rate cases, it limits our ability to be in active discussions, unless it's focused on the rate case, of course, With the regulators. So we have a good relationship.

Speaker 7

As you noted, the Maryland PSC is turning over. We're working our way Through those new relationships, I would say that our working relationship across all our jurisdictions are very good. As Vern points out, we Constantly have a discussion through our customers on what they need and what they want and how we're able to help them manage that affordability and reliability while progressing climate goals. And we want to ensure that those voices are heard. So we're pushing all of those forward collectively.

Speaker 7

But I agree The outline that Vern said, and we'll continue to work that process.

Speaker 6

Got it. That's very helpful. I'll leave it there. Thanks.

Operator

Thank you. Your next question comes from Andrew Kuske from Credit Please go ahead.

Speaker 8

Good morning. Maybe if we just focus on your Western Canadian Midstream business and Just your customer conversations, and I guess it's sort of twofold. It's 1, their expectations on volumetric growth on a longer term basis, Given all the trends you talked about earlier on and then their desire to have an integrated service and in particular more integrated service from AltaGas.

Speaker 3

I think we'll let Randy tackle that one.

Speaker 2

Hi, Andrew. So for the discussions with our customers as far as tolling goes, From the producer side, the producers in Western Canada, they are looking at market diversification for their natural gas and also for their LPGs. And We're providing them with a new premium market. And so a lot of our sophisticated producers are looking at additional tolling and long term tolling For both propane and butane. And then our offtake customers, our Asian customers, they see us as a reliable, Secure source of LPG and we're seeing that accelerate.

Speaker 2

A lot of more customers are wanting to do Take the Western Canadian price and get that advantage. So we are seeing that a pull and push from both sides

Speaker 3

So Andrew, I think this is a great opportunity for us because having the premium market Allows you over time to extend your value chain reach all through the NGL Midstream Infrastructure Process where if you've got the best market to get to, you will then be able to offer more service This is on a more bundled basis, which ultimately will provide investment opportunities for us and just Enhance the returns on our existing midstream assets. So over time, that's What we think the benefit of having the docs are, and I think we're going to work very hard on extracting as much value as we can.

Speaker 8

I appreciate that. And then maybe just extending and then building upon that, what kind of return improvement do you think you can achieve, Especially on a risk adjusted basis, if you get the volume growth, greater stability with higher percentage of tolls and maybe locked in on duration and then Corporate wide, you're deleveraging, which should result in better financing costs also. So just collectively, how do you think about that opportunity On a bps basis and then the multiplier effect as you build out more infrastructure?

Speaker 3

Well, that's a great question, Andrew. It's going to be Very imperative for us to earn a premium above the hurdle rate on capital that we invest, Whether it's in midstream or whether it's in utility, we have a limited amount of capital that's available to us each and every year. We're obviously deleveraging. We're operating on an equity self financed model. So we're going to Invest the capital into the highest return businesses or highest return projects subject to making sure that Our systems are safe and reliable.

Speaker 3

I think maybe James can comment on the typical hurdle rates that we have in each of the businesses and obviously we're shooting for a premium over those hurdle rates.

Speaker 4

And the only thing I'll add Andrew to Verne's commentary is obviously when we're looking at final investment decisions, we are looking at it on a Risk adjusted return basis. So Verne talked about the fact that we want to get to as high degree a percentage of tolling as possible. So the higher The tolling percentage and the more stability in those cash flows and the longer duration of the contracts themselves, then hurdle rate would be lower. That's how we're basically looking at those risk adjusted returns. And in terms of Tariff, we've talked about it in the past.

Speaker 4

We feel that we can probably build that project at 6 to 8 times build multiple, which would generate some strong returns. And I've talked about some of Our hedging targets sorry, our tolling targets with respect to that facility that would underpin the type of return that we could potentially be looking at with

Operator

Thank you. Your next question comes from Robert Kwan from RBC Capital. Please go ahead.

Speaker 9

Great. Good morning. Vern, you talked earlier about some of the opportunities. And I'm just wondering, it's still early. So are there things though that you're thinking about For AltaGas to do differently, I guess specifically where do you see the business mix?

Speaker 9

How are you thinking about leverage, whether it's the targets themselves or at least the timing to get there? And then just the overall kind of structure of the company.

Speaker 3

I think, Robert, what you're getting to It is a commentary on the disciplined capital allocation. And as you know, from my past experience, that's something that's been very important to me. And I think in the long term that's how we optimize shareholder value. And you're right, the starting place for disciplined capital Allocation is a strong balance sheet. The team here has done a great job on deleveraging the company.

Speaker 3

We've got the target credit metric. We have line of sight to that now. I think With a combination of embedded EBITDA growth that's going to happen from the capital that the company has invested over the last couple of years And select asset sales of non core assets, we should make significant progress, Hopefully, sooner rather than later to get us to that 4.5 times medium term target. Once we're there, we'll reevaluate where we want to be. But at that time right now, The main goal is to get from 5.1 to 45, sorry, as quick as we can.

Speaker 3

And then when we're there, we're going to have $1,000,000,000 plus per year of annual investment capacity where we don't need To issue any equity and that investment capacity will then go to the best capital allocation investment that we can Make in which we'll grow EBITDA and then we'll be in kind of that virtuous circle of deploying capital, Growing our EBITDA, growing our dividend and then seeing having that cycle repeat. So hopefully that answers your question, Robert.

Speaker 9

Yes, that's great. You mentioned earlier in the call just optionality on what the Company looks like in the future. Can you just elaborate on what you were getting at there?

Speaker 3

Yes. I think there's lots of energy Five companies trade at premiums. We've seen them trade at discounts. We will continue to evaluate what is the best and most optimal structure for this company. But right now, We are what we are.

Speaker 3

As I mentioned earlier, we've got to get both of our businesses As close to optimal, as we can as job 1 because that creates optionality.

Speaker 9

So I don't know if I can put words in your mouth. Effectively, as you think about wherever decisions you're going to make here, Whether that's financial, operational, asset wise, are you looking to basically just continue to position the company, get it into a position where as many of these Options for value creation are on the table. Is that fair?

Speaker 3

For sure. That's management's job is to Continuously look at how do we maximize shareholder value for our shareholders.

Speaker 9

Okay. And specifically, you talked about just the interplay between pure plays and diversify. So that seems to be Kind of important to have the optionality to go either way.

Speaker 3

I think any Company always needs to be looking at that regardless of what space they're

Speaker 9

in. Okay. That's great. Thank you very much.

Operator

Thank you. Your next question comes from Robert Catellier from CIBC Capital Markets. Please go ahead.

Speaker 10

Hi. At this point, I just have a couple of follow ups. Maybe I'll follow-up Rob's question there on how you're looking at the business differently. You You have the existing debt targets that are in place that exclude the hybrids. Do you have a view on what the Leverage should be, if you were to include hybrids in that calculation, how does that change your outlook on the metrics?

Speaker 4

Rob, the metric that we've always cited did exclude press and hybrids from it and that's The relative progress we've made and it's been significant. When Vern touched on some of those targets in the context of our desired ratings as well, That's always factored in from a ratings calculation standpoint, right? So I don't think it changes the overall metric on a GAAP basis that we want to At 2 at 4.5. Obviously, hybrids and prefs are included in the rating agency calc. And for us to get to BBB with Fitch, we've got to get to a 5.5 times FFO to debt.

Speaker 4

And obviously, with respect to S and P to get to BBB, we need that 14% to 15% on a regular basis with respect to FFO to debt percentage. So it doesn't really change the overall 4.5, though, I think we're still pushing towards that and we've always consistently benchmarked ourselves against that excluding prefs and hybrids.

Speaker 10

Okay. And then just a clarification here on the impact of the wildfires extending into The Q3, is that really limited just to the impact on the power costs from having to run on the gensets? Or is there Anything else? I'm thinking accumulation of barrels or just logistics and things like that. It's

Speaker 4

the former

Speaker 10

and quantify it, is there is less than the Q2 impact?

Speaker 4

It's significantly less than the Q2 impact. So it's a couple of $1,000,000 and it is very much limited to The fact that we still got to run on gensets, operationally the facility started to run pretty much at nameplate capacity when When the evacuation order was lifted and people were able to get into the facility inspected and make sure that there was no damage and we were able to ramp up.

Speaker 10

Okay. Thanks everyone.

Operator

Thank you. Your next question comes from Darius Luszny from Bank of America. Please go ahead.

Speaker 9

Hey guys, good morning.

Speaker 11

Thank you for taking my questions. On the utilities business, just maybe more of a broad strategic type question. How do you think about how the retail Business factors into the overall risk profile, stabilitypredictability of earnings. Or asked another way, are the synergies that you get from that business and the incremental EBITDA, Do they make the slightly enhanced risk profile and less predictability in earnings worth it as you think about the trade off between the 2? Thank you.

Speaker 3

I think the retail business has historically generated Reasonable profitability for the company over time. There is obviously more Volatility that comes from that business because and particularly here because We the company hasn't been employing hedge accounting. That has changed. And going forward, you're going to see less volatility out of that business. So When there's a firm fixed price gas sale, obviously, the team locks in a fixed price gas purchase.

Speaker 3

There will be some volume variability due to weather, but that is actively tracked and tightly managed. So I think If we have the right systems, procedures and people in place, this is a profitable business for us. And as you will see starting next year, there'll be less volatility out of this segment.

Speaker 4

I just want to add something that Vern touched on, which I think is an important distinction. When it comes to the business itself, it's been very resilient and Performed well through COVID. It obviously performed well through Storm Yuri as well because the team does a great job at managing volatility from an economic basis. They were able to lock in profitability with a very active hedging program. So really the volatility that we're seeing here is more to what Vern touched on and that's The accounting or the lack of hedge accounting, and that's something that we implemented May of 2023.

Speaker 4

So 2024 will be the 1st year that we've got Full hedge accounting for the entire year and that accounting volatility or reporting volatility will go away. But the economic the underlying economics of the business are solid.

Speaker 11

Awesome. Thank you guys very much. Really appreciate that additional color. One more if I can and this is just more on the quarter. You guys called out positive contribution from AFUDC after the MVP restart in June.

Speaker 11

So I imagine that was Just a stub period. Is there any way you could quantify what that contribution was in Q2? What do you see it For the balance of the year and whether there's anything embedded in your current year guidance around that?

Speaker 4

Yes. So I'll start with the last part of your question. With respect to the guidance, it was one of the tailwinds that I touched on that's Help to offset some of the headwinds and that's why we feel very, very comfortable with the range. In terms of the overall contribution to the quarter, That is in our financial statements under the equity note. It's about $6,000,000 for June, and we expect it to average about $5,000,000 to $6,000,000 per month for the balance of the year as we make forward progress as a consortium on that pipeline and get closer to the in service date.

Speaker 4

So that's the overall contribution, Darius.

Speaker 11

Great. Thank you guys very much. Really appreciate it.

Operator

Thank you. Your next question comes from Patrick Kenny from National Bank Financial. Please go ahead.

Speaker 12

Hey, guys. Just wanted to confirm, assuming MVP gets done now and you're able to monetize your 10% stake by, say, early next year, Would those proceeds go towards debt repayment on a permanent basis, I. E. Take down the leverage by half a turn or so. Or would you view it more as say dry powder to Potentially accelerate organic growth or fund tuck in acquisition opportunities.

Speaker 4

Hey, Patrick, it's James here. We've always been pretty consistent that MVP was going to be an asset that when we were ready to monetize it Was going to go straight to permanent debt reduction and it was obviously the quickest path for us to get to 4.5 times. Vern touched On us being able to get there organically as well through EBITDA growth, but that was going to take some more time. MVP is definitely the lever That we want to pull to be able to permanently reduce our debt and get to that 4.5 times target that we set for ourselves, way back in 2019.

Speaker 12

Okay, perfect. Thanks for clarifying that. And then maybe just from a corporate priority perspective, Clearly firming up the cash flow quality profile of the midstream business and maximizing utility ROEs is top of the list. But Verne, given your experience looking at all kinds of opportunities in the power sector, How are you thinking about maybe positioning the company over the medium term to potentially get back to developing large scale renewables again Or potentially owning other Mid Merit Natural Gas Power Plants, maybe if you can comment on if there's any Regional power markets out there that might be of particular interest to you say over a 5 year horizon?

Speaker 3

Well, thanks for the question, Patrick. Right now, there's no plans to get into the Power business. It's not even on the radar. We do have some energy transition investment opportunities in front of us. Obviously, we're working on carbon capture and sequestration hub here in Alberta And associated CO2 pipeline network, I think we've got Clearance from the Alberta government to continue to work on that.

Speaker 3

We've got strong customer demand That's CO2 storage. So that's in front of us. We're working on a couple of hydrogen hubs, 1 in Washington State and 1 in the DMV. Both of those play well into what we do here at AltaGas, which is transport Liquid, gaseous and liquid energy. So right now, That's the focus because I think that's what we're good at.

Speaker 12

Got it. Okay. I appreciate that color. I'll leave it there guys. Thanks.

Operator

Your next question comes from Linda Esheralda from TD Securities. Please go ahead.

Speaker 13

Thank you. I don't want to belabor the point of the theory of a firm, but it is topical as you can appreciate. So Beyond the strategic and capital market access and cost considerations, are there any tax considerations when you're looking at and assessing the merits Of a diversified consolidated company versus pure play. And How do you factor in considerations around the scale of a pure play versus the potential dis synergies Of additional corporate costs, and have you discussed this at any point with the credit rating agencies?

Speaker 3

Those are great points, Linda. There's obviously some funding And tax synergies with the structure we have today and there are relatively minor cost synergies by having A corporate function here that provides services to both of the businesses. So those factors for sure will have to be looked at as part of any analysis that we do longer term of what do we look like. And you're right, if we would split up the company, both remaining entities would be relatively small.

Speaker 5

Thank you.

Operator

Thank you. There are no further questions at this time. You may proceed.

Speaker 1

Thanks. And thank you everyone once again for joining our call today and for your interest in AltaGas. That concludes our call this morning. I hope you enjoy the rest of your day. And you may now disconnect your phone lines.

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Earnings Conference Call
AltaGas Q2 2023
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