Q2 2020 AltaGas Ltd Earnings Call
Welcome to be altogether second quarter, 2020, <unk> financial results conference call.
My name is Chris and I'll be your operator for today's call.
Ones have been placed on mute to prevent any background noise.
You have any difficulties hearing the conference. Please press Star and then zero four operator assistance at any time.
After the speaker's remarks, there will be a question and answer session.
As a reminder, this conference call is being broadcast live on the Internet and recorded.
I would now like to turn the conference call over to Adam Mcknight Director of Investor Relations. Please go ahead Mr. Mike.
Thanks, Chris.
Good morning, everyone.
Thank you for joining us today for the Ulta gas second quarter 2020 financial results Conference call.
Speaking on the call. This morning, we'll be Randy Crawford.
<unk>, Chief Executive Officer, James or below.
Executive Vice President and Chief Financial Officer.
We're also joined here this morning by Randy tune Executive Vice President and President of our midstream business.
Lou Jenkins Executive Vice President and President of our utilities business and Washington gas.
A new to the team John Morrison, Senior Vice President Investor Relations and corporate development.
As always today's prepared remarks will be followed by an analyst question. After a period or remind everyone that the investor relations team will be available after the call for any follow up or detailed modeling questions.
What proceeding the basis that everyone is taking the opportunity to view the press release.
That we issued earlier today.
And also remind everyone that we will refer to forward looking information on today's call.
This information is subject to the risks and uncertainties as outlined in the forward looking information disclosure on slide two of our presentation, which can be found on our website and more fully within our public disclosure filings on the EYEGUARD or to CDR systems.
As for the structure the call, we'll start with Randy Crawford to review some strategic another focus point, followed by James Horribilis on the financial results and outlook.
And we'll turn it over for help acuity session.
With that I'll now turn the call over to Randy Crawford.
Thank you Adam and good morning, everyone.
Oh, the gas delivered strong second quarter results and continued to perform well, both financially and operationally or managing the ongoing impacts the called it 19 pandemic.
Despite the challenges created by the pandemic.
Second quarter normalized EBITDA adjusted for prior year sale asset sales increased by more than 13% versus the prior year comparable quarter, and we are well positioned to meet our overall objective for the year.
We continue to be pleased with the resilience and durability at our midstream and utility businesses have exhibited.
We believe this is a testament to our diversified platform and our purposeful actions we've taken over the past 18 months to focus the company.
The platform and we do see financial leverage.
I'm proud of the fact that our dedicated workforce has been able to maintain safe and reliable operations.
Continued to deliver critical energy to our customers and honor, our social and moral contract with the communities we serve.
The street was only possible to their tireless efforts adaptability and our valued vendor partners.
Our people at the heart of this company and their spirit and resilience insurers my confidence that we will continue to execute our strategy and maintain our commitment to safety and operational excellence.
At Ulta gas, we haven't unwavering commitment to our core values.
It's our approach to governance and oversight combined with how we invest in and support our people our customers our communities and the environment will allow us to bill Baltic sustainable and financial successful future.
We are committed to diversity and inclusion.
Diverse and inclusive teams are better position deliver more positive business results for the communities that we serve.
Our commitment to having a diverse workforce and inclusive culture is not new and our diversity metrics reflect the communities we serve.
We remain committed to continue our efforts to build more diverse and inclusive teens going forward.
Our utility businesses continued its strong execution during the quarter.
Our focus on operational excellence WGCL continues to progress well the year to date operating income up nearly 10% versus the prior year comparable period.
Our transmission and distribution systems continue to operate in line with our high reliability standards.
Strong execution as a result of the capital investments, we have made and can over the past few years driver accelerated pipeline replacement program.
<unk> focus on operational excellence to enhance our customer value proposition.
Provide outstanding customer service and clean energy solutions.
We remain committed to continue our history of proven energy innovation and focus on environmental social and governance issues early S.G.
Football to gas in Washington gas has excelled and bringing new clean energy sources to customers of note.
W.G. I was filed with the Washington, D.C. Commission, our plan to deliver our commitment to help Washington, D.C. in our world to meet future climate goals.
The plan builds on the foundation of key E.S.G. Allen and we had been focused on for more than 25 years.
Two collaboration with the district to implement the steps toward de Carbonization. It provides us the opportunity to continue to leverage our resilient fast and established energy the liver in storage system to reduce emissions, what providing affordable and reliable energy.
Our plan promotes customer energy innovation efficiency and savings.
Builds and maintains a modern infrastructure for today and the future.
And introduces carbon free fuels, such as renewable natural gas and hydrogen.
This includes investing in and piloting some of these emerging emerging technologies, and we'll maintain and enhance the regions position as responsible climate leaders.
Our midstream segment continues to leverage our unique structural advantage to export cleaner energy, the Asia and expand our footprint in northeast BC.
Rip it celebrated its first year anniversary of the an operational and in the quarter and had another strong performance with the terminal contributing 30 million a normalized EBITDA.
In Q2, we reported nearly 42000 barrels a day of Canadian propane to Asia.
Spread across seven ships.
We were also very close to loading and H. ship at the end of June but that was pushed to July 1st in July 2nd and will now be captured in the third quarter.
Strong execution can the midstream team and the work, we're doing with our strategic partners to bring operations and logistics together.
I remain confident that we will be able to hit our 50000 barrels a day export target before yearend.
This business is well positioned to continue to deliver ongoing financial performance, but approximately 70% of our midstream normalized EBITDA being underpinned by take or pay and fee for service agreement.
In addition, 86% of Rip its 2020 expected export volumes are underpinned by tolling agreements are hedged price contracts.
We were also pleased to see the transaction announced last week, where <unk> exploration one of our high quality customers in northeastern B C sold is into assets Conoco Phillips for more than 500 million.
We look forward to working with clinical Philips is the company expands its present in the region.
Transaction validates our thesis behind building, a leading mid screen presence in northeastern DC and further positions us to lean on leasing capex deployments, including the north pine and towns and expansions that came online in the quarter as well as rip it to deliver stable resolved.
We're excited about the opportunity to expand or LPG export footprint in midstream peasant presents to the our acquisition of an increased ownership of petrel get.
Confidence that this transaction will create value for shareholders and customers.
It will expand our midstream value proposition.
To the increase in additional assets it Ferndale imports the Scotch when we will continue to advance our strategic goal towards operating a fully integrated logistics network that underpins our position as a leading it screen company.
We continue to focus on operational excellence business model.
Improving our financial returns and driving value within our existing core assets.
We are building a resilient business that is focused on creating durable and expanding earnings.
There were simply no better way to generate value for our shareholders in improving the return on capital has already been deployed and ensuring a return above our cost of capital on all new organic investment.
We are meant to be proud of what we have accomplished in the past 18 months.
There was more good work left to be done and we look forward to continuing network.
We believe there's a unique this in a diversified model.
We have the opportunity for industry, leading rate base growth at our utilities.
We are positioned to be able to internally fund the growth of our utilities rate base and reduce debt to the significant excess free cash flow coming from our strong and growing midstream business and redeploy pushing those funds into our profitable investment in our rate based growth that our utility operations.
Having the ability to operate a self funding model.
With the opportunity to profitably execute on one of the highest b piece close in the industry as a rarity and we're excited for the opportunity.
We remain committed to continue adding shareholder value.
Our actions will follow the well defined strategy that we've laid out.
The journey to achieving operationally excellent operational excellence is continuous.
And we are resent relentlessly evaluating what other levers, we may pool, where they driven and creative team is focused on continuous improvement.
Overall, we're pleased with the progress we made so far in 2020.
Heading into the second half of the year. We believe we are well positioned to achieve the previously disclosed for your expectations and are well positioned for profitable earnings growth into the future.
In summary, we are pleased with the second quarter operating and financial results and the ongoing resiliency of the platform.
We firmly believe already to leasing in our utilities infrastructure investment program.
Continues our commitment to improve safety and provide reliable value to our customers and positions us to create a more carbon neutral environment.
We have unique opportunity to grow our midstream business through our strategic footprint northeast BC and our ability to increase the export of Canadian produced propane to Asia.
A recent investments in towns in north Pine and Rip it positions us to capture significant free cash flow.
That will provide us the opportunity to grow to these rate base reduce debt and increased dividends.
And with that I will turn the discussion over to James.
Thank you Randy and good morning, everyone.
Looking at the financial highlights of the second quarter or there are diversified platform continue to provide predictable and reliable performance within the midstream segment. We realized can realize continued strong operations at rip it including record export volumes in the quarter, which was aided by contributions from the towns and to be in north find expansions.
Within our utility segment results reflected the normal seasonal slowdown in energy demand that is associated with this spring and summer months.
Positively we realize growth across each of our regulated utilities driven by 2019 rate cases and continued spending in our accelerated replacement.
Programs.
The most significant headwind in the quarter was lower margins within our retail business, which was underpinned by covert 19 impacts and pressures on some of our commercial and industrial customers.
The business unit is a small component of our platform representing approximately 3% of 2020 estimated EBITDA.
Normalized EBITDA came in at 206 million for the quarter slightly below Q2, 2019 levels of 211 billion.
Excluding lost EBITDA of approximately 29 million associated with the noncore asset sales are remaining businesses grew by approximately 13% year over year.
Normalized net income for the second quarter was $17 million or six cents per share up considerably from $1 million in Q2 2019.
Overall, lower interest and depreciation and amortization expenses were partially offset by higher income taxes.
Interest expense was down approximately 12 million year over year on lower debt balances as a result of the deleveraging work, we completed over the past year combined with lower interest rates on refinances.
Depreciation and amortization expense was lower by approximately 14 million year over year, primarily due to asset sales and a onetime adjustment related to the termination of the natural gas contract for purchase commitments in the U.S. midstream business.
Finally income taxes were higher by 10 million largely due to higher earnings in the quarter.
Normalized funds from operation were up approximately 18% year over year to $141 billion or 51 cents per share due to lower current interest expense and lower current income tax expense.
During the quarter, we successfully refinanced all our remaining 2020 maturities through two debt financings.
Included Semco, completing a private placement of $450 million U.S. The first mortgage bonds on April 20, Onest and altogether posing a 500 million dollar issue of senior unsecured notes on June 10th.
These tuition says combined with lower interest rates are expected to result in interest expense savings of approximately $9 million in 2020, and roughly $14 million on an annualized basis.
We also continue to make progress on our strategy to focus the business.
In June we entered into a stock purchase agreement with varying energy to sell the Ripon facility.
The transaction is expected to close in the third quarter.
Subsequent to the quarter end on July Twentyth, we closed the sale of the Pomona battery storage facility for gross proceeds of $47 million U.S. less closing working capital adjustments.
Although the transaction was smaller in scale compared to past divestitures. It demonstrates our continued efforts on focusing the business and will be slightly credit positive.
Normalized EBITDA within the utility segment was $80 million for the quarter slightly below Q2 2019.
As I previously mentioned growth at a regulated utilities was driven by our 2019 settle rate cases, ERP spending and strong operational execution, which was partially overshadowed by co mid ninetys related impacts, including lower margins in our retail business.
As a reminder, approximately 70% of a regulated utilities earnings are protected through decoupling and fix building charges.
And all the jurisdictions, where we operate of approved the creation of regulatory assets to allow for the recovery of incremental costs related to cover 19.
We are tracking these costs and our large and our lost revenue due to the pandemic and we will continue to work with our regulators on the definitions and treatment of recoverable impacts within those regulatory assets.
We anticipate that a portion of our covert 19 related impacts within our regulated utilities will be recoverable down. The road. However, there will be a timing lag associated with these recaptures.
At the regulated utilities WGS normalized EBITDA was approximately $44 million for the second quarter up $3 million year over year on higher revenue from the Maryland, and Virginia rate cases, and higher accelerated pipe replacement program spending.
This growth was partially offset by the cancellation of late fees and service charges revenue due to regulatory orders that suspended this activity in our jurisdictions as a result of covert 19.
We also experienced less usage for see an eye customers concerns certain jurisdictions, but don't benefit from decoupling.
In Michigan, Semco contributed $21 million normalized EBITDA in the second quarter of $3 million year over year.
Higher rates associated with the 2019 rate case, and colder weather were partially offset by lower customer usage.
And started seeing so contributed $17 million of normalized EBITDA for the quarter, which was in line with last year and our expectations.
Lastly in the utility segment normalized EBITDA from the retail business was lower by $7 million year over year, primarily due to lower margins associated with Golden 19.
This is where we saw.
Some of the largest impact to the pandemic, but we do not expect this to result in a long term or lasting impacts on the platform.
All in all we're pleased with the performance of utilities business and the stability of the continues to demonstrate.
Looking ahead to the remainder of the year, we believe the largest of the coated 19 related impacts within our regulated utilities platform are behind us.
So we caveat that by acknowledging that we're living in uncertain times as a result of the pandemic that change from week to week.
Within the retail business things have started to improve in the third and fourth quarters are expected to exhibit performance, that's pushing back towards more traditional operating patterns.
Within the midstream segment second quarter normalized EBITDA was $111 million up approximately 9% over Q2 2019.
Factoring in lost EBITDA of approximately $14 million associated with the 2019 sale of Stonewall and Central Penn remaining midstream business grew by approximately 20, 26% year over year.
Rip it generated approximately $30 million of normalized EBITDA in the second quarter on exports of nearly 42000 barrels per day spread across seven ships.
This equates to a blended EBITDA margin of approximately $8 per barrel.
Approximately 30000 barrels of Refits second quarter export volumes were hedged at an average FDIC to Mount Belvieu spread of approximately $9 us per barrel.
Fractionation liquid liquids handling volumes increase in the second quarter due to the north fine expansion and the Townsend deep cut facility that were brought into service earlier this year.
Growth was partially offset by lower volumes that her mountain due to reduced upstream activities and shut ins that were so associated with low commodity prices.
Positively we've seen much of those volumes come back in recent weeks as shut ins have been brought back online.
Gas processing volumes were modestly lower in the second quarter versus the same quarter last year, new volumes at the New Creek, and downs and deep cut facilities and higher winter reputable volumes of Gordondale were more than offset by lower volumes at Blair Creek and the towns in shallow cut facilities as well as lower volumes at the extraction facility.
Due to reduced upstream activity.
We have so we have seen volumes improve at our facilities to start Q3.
During the second quarter, we recorded equity earnings of $7 million from federal guess compared to $11 million in the same quarter of 2019.
The decrease was due to the slowdown in interest industry activity related to covert 19, lower export volumes and lower commodity prices and realized margins.
Positively demand for North American propane in Asia remains strong and they should drive improvements Petro gas in the second half the year.
Overall, our midstream business continues to deliver strong results. Despite the economic challenges at the entire industry is facing.
We continue to see healthy throughput volumes at our facilities, which we believe is a function of the quality and location of our assets as well as altogether being partnered with high quality clients and operating an integrated value chain that links our customers to premium export markets in Asia.
We remain on track to hit our 50000 barrels per day export target by year end with over 85% of Rip it's expected to 2020 export volumes, either operating under tolling agreements or hedged.
As such we continue to expect strong and predictable results from rip it through the second half of the year.
Volumes have been constructive through the first half of 2020, and we're optimistic that the recent momentum in crude and NGL pricing will help mitigate what could have been more pronounced upstream upstream spending declines over the next 12 to 18 months.
The second half of the year, we anticipate that processing volumes will improve towards the levels that we were expecting earlier in the year, which we have seen play out in recent weeks with much of this production linked to our recent facility expansions and the associated ramp up in customer throughput at these facilities.
We have hedges in place for approximately 100% of effect Frac exposed NGL volumes at a blended rate of $29 per barrel.
Our 900 million dollar 2020 capital program remains unchanged with approximately 75% to 80% directed towards the utility business.
Roughly 80% of that utilities, capex is being targeted to accelerated replacement programs well maintenance spending is largely been calibrated to match depreciation.
Most of our 2020 midstream Capex spending has already been deployed on the towns in North plant expansions, which are both now in service and contributing to stable operations and earnings.
We ended the second quarter with $6.8 billion and net debt down from $7.2 billion at the end of 2019.
Our self funded 2020 capital plan remains unchanged with the only item that could materially alter that spend profile being the petro gas transaction, where we continue to work through evaluation process.
As we've said in the past, although our funding plan is not dependent on any further asset sales. We will continue to look at noncore divestitures opportunistically as the market moves back to a more normal state in an effort to continue to strengthen the balance sheet.
The largest remaining noncore assets in our portfolio.
Includes our 10% interest in the Mountain Valley pipeline.
In our approximately 5000 megawatt place natural gas fired power generation assets in southern California.
And while the total cost estimates on the mountain Valley pipeline have seen cost escalation in recent years, we remind investors that are capital commitment for 10% state has been cap to 352 million U.S. with no more cash to be deployed on our part which makes our ownership stake the unique asset.
Project is currently 92% complete it's only the Appalachian Trail crossing is remaining.
Well two recent favorable Supreme Court rulings have significantly de risked the project leading to revise in service date of early 2021.
As we've said in the past, we continue to maintain significant financial flexibility with altogether as excess.
Liquidity expected to exceed $4 billion at 2020 year end.
In summary, we're happy with how our midstream and utilities businesses have performed through the first half a year with only marginal impacts associated with the global pandemic.
And while the macro said is naturally opaque and we continue to monitor Colby closely we're pleased with the resilience and durability of the platform experienced city.
We also believe similar high level trends should be exhibited in the back half of the year and as such we are reiterating 2020 guidance and expect to land in the range of normalized EBITDA of 1.275 to 1.3 to 5 billion and normalized EPS of 120 to 130 per share.
With that we'd like to turn it over to the operator for the Kuni session.
Thank you, ladies and gentlemen, we will now conduct to be analysis question answer session.
I'd like to ask a question press Star then the number one on your telephone keypad.
If you'd like to withdraw your question press the pound Keith there will be a brief pause while we composite given a roster.
Our first question comes from Rob Hope with Scotiabank. Your line is open.
Afternoon, everyone or morning, a fair on the West Ah. Thanks for taking the questions first ones on Rick So we saw ship.
Slip into July but your July volumes have been quite strong.
Look into August and September and I guess, the balance of the year.
[music].
Are you targeting kind of that.
To get to re a month to get to that 50000 barrels a day for the rest of the year and if so what are your key constraints right now there.
Thank you Rob Thanks, a question.
Good morning, and afternoon do you as well I think good morning.
We've experienced an increasing Canadian demand and access.
Our unique capability and the team's doing an excellent job and de bottlenecking. So you know I'm very optimistic.
We were headed but I'm going let Randy I'll go through and answer.
In detail about some of the actions were taken to drive increased throughput and meet the demand for customers.
Thanks Randy.
So we believe the each ship did go into Q3 and if that ship was noted in the into Q2, we would have been closer to that 50000 barrel that level. So the goal is to do eight ships a quarter and now with this ship going into Q3, the goal would be to do nine ships in Q3, but.
We do have the supply and now it's just.
Optimizing logistics.
Make it work.
All right that's helpful and then turning.
Over to the utilities, how are you balancing your cost containment initiatives in a co good world and I guess secondly, there as you know do you think you could get resolution on on cost recovery on some of these code caused by the end of there.
Well, Rob I think that I think it seems that said with particularly these costs were coming into our kind of off peak periods and we think most of this is behind us. So a you know again, we've got to a filing in August to update Marilyn on the cost structures and some of the question. So I think you there hasn't been a formal way.
Of proceeding to recover these constantly but pretty clean orders on a deferral and we're working through the timing of the recovery mechanisms but.
But overall not not.
Overly material clearly.
We are now under second question in terms of how we.
I would say about the our operational effectiveness journey you little bit.
We have created because it really creative team that's focused on the continuous improvement.
I think they've done an excellent job and but it does require the ability to identify new technologies and take cost out over time and.
We don't I don't want estimate that requires in terms of culture and focused implement these technologies and take cost out over time, but so there's there's work to do but blue is pulled together a team that is coming up with so many creating great ideas, so our disciplines their creativity or innovation commitment.
We are going to improve those costs improve service and create value to our customers.
I think that working with our customers the commissions I think.
We're going to be able to meet our targets of teaching are allowed return into 2021.
All right appreciate the color. Thank you.
Our next question is from Germany with JP Morgan Your line is open.
Hi, This is Joe on for Jeremy.
Wanting to start out with the Conoco Phillips Kelk acquisition, and what that means for you guys.
Sorry, if have you had any discussions with with conoco, yet and if you are you just thinking died increases volumes to your gas plants or allows for sort of potential expansion longer term.
Well I think obviously that the transaction hasn't been closed and so we have not had a great deal a detailed discussions, but clearly conoco Phillips is.
Joining acreage in the region, we've have had discussions with them and.
We're excited about them coming in I think as I said in my prepared remarks, Joe and thank you for the question that it really validates the economics around our northeast BC.
Position and yeah, we think that we've got firm commitments that we had previously had from killed in clinical study shoes. So we're excited about that it's difficult to predict how quickly volumes will come on with the environment or increased volumes at its best but over time, we're very excited about.
Thanks, that's helpful.
And then maybe could you also just update us on if you've had any recent discussions on on selling the NBP station and the HCP cancellation that if you think that could potentially gone or any interest there either.
For someone to acquire the stake or getting additional commitments.
Yes. Good question I mean look I've been consistently said that we believe strongly in the mountain Valley pipeline project.
That there is absolutely essential need for that project.
James mentioned in his prepared remarks that we're pleased with the Supreme Court's ruling regarding the Appalachian Trail authorization.
And we expect a issuances revised biological opinion shortly.
So again, it's assuming the timing resolution of this outstanding permits I think.
Targeted to be a full in service during 2021, so from our perspective, the asset is clearly being de risk.
I find it as non core.
And we will work through the year.
To see if at the end of the day, we'll get full value for that I mean, I've said previously that we positioned our company.
If we are going to monetize our non core assets, we are not going to be taking below market value for those assets. So we're well positioned to do that but clearly as you point out.
The recent order in the importance of MDP.
The marketplace has certainly increased and just underscores the value quite frankly pipelines that are in the ground.
As we look at it that's I think that clearly demonstrates even if you think about it.
All of our export facilities, it's very hard to replicate those assets.
We feel the same way with the completion.
Thank you that's good to hear.
Our next question comes from Robert Catellier with RBC capital markets. Your line is open.
Primer, primarily follow up questions here, but I think I heard you say effectively you don't expect any significant impact on your earnings.
At the utility is strong.
So like growing you're going to do for cost related to pull that.
But there and then there's no question over the recovery period, and so the impact on cash flow.
Can you just give a comment on what impact it ticket might have on cash flow or credit metrics.
Sounds like it wasn't material from your previous comments now since we got out of the first quarter right, which is our seasonally high quarter from a revenue perspective and were in our off peak season solid James talked for that but relatively minor, but I think he laid out the specific numbers you want to go over those quickly.
Yeah, Rob it's a exchange I mean with respect to Colgate impact I guess, it's important for us to break it out into two categories right. I mean, we did touch on the fact that there were certain regulatory orders that.
Suspended the charging of late fees and service charges and that was about $7 million to $8 million of revenue impact and we're tracking those it'll bring those forward for consideration by the regulators in the future and then we had.
Obviously, some some bad debts that and other direct cost in operations totaled about $5 million that we've put into a regulatory asset account that we're going to bring forward for future collection.
In consideration some from the regulators in terms of your broader question on on the impact to.
Hey, our or a slowdown in collections, perhaps you know we've seen a working capital unwind in Q1 in Q2.
We havent seen considerable deterioration and aging at this point, although thats something that we'll continue to monitor.
So we haven't seen other other than the usual build of some working capital to build the storage at are at or utilities, we haven't seen.
Suitable deterioration in in the aging available at this point.
Okay.
Hey, some pretty good color on your your hedging position no I wondered if you could talk little bit.
More and more.
More about what happens beyond 2020.
On an all chicken addressed how much.
Oh, the capacity will be tolling next year.
How much you've hedged or.
So how much.
You might have merchant risk.
Sure Let me let me go ahead and the dresses.
I can't hear so right now.
How about 30% of arc 2021 volumes hedged or tolling agreements that.
You know when we've had to recent improvement in the forward curve around count 21, So it's pretty north of $8 in 80 cents a barrel that's the FBI to Mount Belvieu spread and so we've begun to layer in hedges.
Expected 2021 merchant volumes, and we would expect to be 60% to 80% hedged as we entered into 2021 now with respect to your broader question about totaling in the de risking the asset over the long term. It's a major driver for US we've experienced in as I said increased demand to access this unique capability.
I feel good about it because we're consistently being approached by launch Aggregators want access to this unique capability. So we're not prepared to go beyond our where we are today, but in terms of that guidance, but I think you can tell but my tone that we're optimistic that we'll continue to move toward a tolling arrangements that over the next year.
Yeah, and maybe just a little bit more color on my beyond the tolling just the structure of the of the market the spreads have come in a bit so.
Any update you can give us on the fundamentals and your expectations as to how they might wait has been impacted a year to date and how they might improve.
Going into 2021 for the Asian far east spread.
Sure we though.
We've we've continued to see some.
Improvement in the spreads and in them.
In the volumes in the basin are constructive begins it'd be constructed here in the second half and so we're expecting processing volume to improve.
We're seeing strong demand rip it we're seeing volumes come back the don't.
Yeah that really at the end of the Dan have talked about this a great deal, but the benefits of our structural shipping advantage in so shipping cost as margins you can track.
Go down right. So overall margins.
Uh huh.
Necessarily improved and so we've got some.
Shipping hedges as well, but but overall I think you've got the best marketing candidate for propane you're going to continue to see an overwhelming the local market has a lot of the demand based projects are pushed out and so we're you know in a long runway we continue to.
Pretty bullish and expanding and de risking these volumes and we continue to see robust and long term fundamentals of supply and demand imbalance for North America. So we continue to lock in the spreads, but we see that continuing in the long term.
Okay. That's very helpful. Thank you.
Next question is from Patrick Kennedy with National Bank Financial Your line is open.
Yeah, Good morning, guys.
Clearly the energy patches, you know entering a phase of consolidation here and you guys appear to be in a unique situation to offer customers for.
New customers like Conoco.
Some new market access opportunities. So just curious how that might play into discussion surrounding potential tuck in opportunities for additional processing capacity.
And I guess boosting your proprietary access to propane closer to rip its full capacity.
Appreciating that balance sheet strength is priority, but again.
To the extent that there is a unique window of opportunity here to consolidate just how you're thinking about [noise].
Potential upstream infrastructure opportunities.
Yeah, you know that's a.
Good question I you know we've.
We've continued to put a fundamental focus on on improving our leverage metrics, but we.
We see opportunities to invest in both of our business isn't we think this is an opportunistic time to capture more volumes. We were in an excellent position in our midstream business. We are unique and the fact that we can offer our customers access to both domestic and international markets and the growing demand in the pet kittens in Asia, So from that standpoint.
My experience connecting producers to markets and improving their net back.
A key driver increasing volumes to your facilities obviously.
And so we can offer our customers at this point a significant a low cost expansion capacity at all of our facilities and so we certainly work to help the producers in a variety of different ways.
I have been worked to expand their volume so again, where we're focusing right now on on harvesting those cash flows.
In through the year, but we can vary won't be often opportunistic and we will be as we have further discussions in fill up the existing capacity and and really had a lot of value to our customers.
So.
Well look we'll be looking for those opportunities as we go forward.
[noise] and I guess ready at a high level from a business mix perspective, as you look to grow your midstream cash flows.
Especially once you close the Petra gas auction just in the context of how the market is currently evaluating midstream versus utility assets.
Is there any internal limits on what percentage of total EBITDA comes from midstream.
Or or said differently like is there an appetite to shift you're waiting more towards utilities, just given the current macro backdrop.
Yeah, I think that clearly with our capital spending this year in the next year with an 8% to 10% rate base growth you're going to continue to see our utility EBITDA in rate base growth over the next and you know my plus years. So utility is going to grow as a percentage of our mix.
At the same time, you know, we're expecting similar type of profile growth out of our midstream company and so we we take a position of a capital disciplined approach and it earning a return in excess of our cost of capital and both businesses have excellent opportunities and that's why we've focused our efforts on improving our balance sheet. So.
We can profitably pursue these opportunities so.
I think you'll see us continued to become more and more of the utility mix over the next year or two.
But we also continue to see opportunities for growth at the midstream so those percentages.
I think we'll we'll tilt a bit more the utility post you again after petro gas what will change the percentage it more from that Ford point, I think you'll continue to see utility be a larger percentage. When you. When you talk about business mix no look weve I'm going to make a comment that we've done a lot of work to focus but on the businesses, where we see the greatest opportunity now and.
We've got a unique investment I'll accept position combining on midstream utility businesses. So I continue to believe that's the right strategy.
And as the quality and diversification assets provide us that opportunity to deliver that sustainable real so well the mix you know Wilson, who will fluctuate we have opportunities or prospectively to keep.
The utility <unk> significantly large portion of that as we grow them.
And scream too.
Okay, that's great all I'll leave it there thanks Randy.
Our next question is from Robert Kwan with RBC capital markets. Your line is open.
Hey, good morning.
And just maybe continue on that.
Can I get your thoughts on Dominion transaction.
And if you're able to provide some thoughts to compare and contrast.
Their decision.
Your situation.
Yeah, well look I mean, you Dominion made a strategic decision you know to focus into it it's a electric side of its business and had significant capital requirements in that business you know so there's.
Clearly I don't think we have a $5 billion pipeline that we're writing off so we're not exactly the same there, but I understand your point, Robert and and I think that you know when we look at a you know as a management team you know we're always looking at ways to the surface that the full value of our assets and you know that potentially you know one day could be separating those two.
Platform similar to what Dominion did.
But we also need to stack that up against the fact that we are still in the early days of executing our strategy that we laid out last year.
And we want to continue to focus at the task at hand, and so we see significant opportunity in both businesses and so I think that where that contrast to argue I think maybe from what dominion saw and its pipelines in terms of the opportunities for expansion.
Does that when you think about your midstream business and does that.
Maybe just think differently.
With respect how you.
Pursue that.
Sanchez.
If you're thinking about the potential for a full break.
Does that change your appetite to take on partnerships or a partial sell down.
Just standalone Andy less attractive.
<unk> medium to long term sure look I think look now is our time to execute you know and we've done. The you know the work we believe that's the best way to maintain that and we're always looking at opportunities to its said this before on the calls if theres a opportunity that partner or do jvs that one plus one equals three <unk> apps.
Moving on to do that and we will not be constrained. What we are focused on is growing profitable both are profitable business in a capital disciplined manner.
Consistently growing our business platform to continue <unk> earnings and the resiliency of our modeling I think we're going to great job and no I don't think it it affects our decision, making but we take all those factors into account as we make a you know managements, it's down it looks at every lever that we have available to us Robert.
I'm anxious to finish.
Question on.
Actions and specifically.
The tax cuts and jobs.
Place guidance was that he would be about a 5% reduction.
EBITDA and so I'm just in the negative impact on utilities from the lower tax rates. Just wondering if you have you taken a look at what actually got realized as part of that you have some thoughts as to.
Yes, yes tax rates were to go up.
In the future what that would mean kind of for your business as it stands now and the ability to actually recover some of that in a timely fashion.
Yes. Thank you for that question I would my perspective is that when when tax law and rates were reduced.
From a utility perspective, we had excess deferred taxes on the balance sheet hitting that future liabilities that would not be at the same tax rates. So with utilities began to flow those back and those are over periods of time and different jurisdictions. So I would expect that from utility perspective, if its tax rates were increased then we would adjust.
Those deferred taxes or I guess in that we're in a position you maybe that's somewhat enviable then maybe other businesses, where we would actually have excess deferred taxes that could absorb it.
<unk> federal tax increase.
Just in terms of that 5%.
Originally was put out it's just that.
Similar to what actually got realized in the business.
Sure I'm I'm gonna have to defer that went to James I'm excited to have those numbers if James has them in front of them or not yeah don't rubber I think that's a that's very much in the range of of the impact obviously it.
It was a bit different in terms of how certain regulators treated the refund of that and the timing of it.
To some customers.
The most aggressive refund was was in Virginia, and we reflected that impact in.
In 2019, but that's very much in the range of of the impact that.
It occurred on AFFO to debt.
Thanks very much.
Our next question is from a Julien Dumoulin Smith with Bank of America. Your line is open.
[noise] good afternoon. Good morning, Thanks, guys and thanks, everyone for the time so.
Follow up on some of these questions here you talked about focusing on the utility want to focus now on utility Capex.
Obviously, you've got a number.
Programs underway in terms of accelerated weep replacement programs I'm can you talk with the DC program. What your ability is to shift capital around what you didn't fully approved at your ask or or otherwise.
Hang like as in the consistency and planning around so to ensure sort of a smooth trajectory on capital.
Yeah, Great question, too and we absolutely managed that as we move capital round and look at its specific projects, it's sort of a project based approach, but I'm going let blue go ahead and answer that question for in Blue.
Sure Yeah. Thanks, Randy Julien it's great question as you know those are regulatory processes and proceedings. So we are on the process of working through what is called DC project types too and so to your point, what we look for is an ongoing project mix that maximizes the positive impact to the system.
For safety reliability.
But also allows us to.
To smooth the cash flow or the Capex. If you will spend which then follow through on the cash flow, we do that across all of our jurisdiction. So we're very thoughtful about that we're in constant conversations with the oversight bodies on on how that works and whats next there we do look to maximize all of those programs as we move forward So does that.
To answer your question.
Yeah, all right you've got you've got contingencies and Mike maybe that that's the critical correct right. We can go dollars to other jurisdictions and crews around.
Line, so that we can still smoothed out and meet you know our plans up to the best extent possible our accelerated pipeline replacement program. It's a big focus area. So yep, that's a pretty consistency in Virginia, Maryland that give us flexibility Julien.
Excellent.
All right if I can turn back quickly to the midstream side would rip. It can you talk a little bit more about the depth. The market me, obviously things have.
Turned around here should we say how do you think about the ability to hedge forward, especially on the tolling basis I heard your comments earlier on 21.
The last questioner, but can you elaborate little bit.
More on the depth of multiyear contracting and then just also the ability to sustain overtime that 60% how how high can you got as long as the tender.
Yeah, you know what I mean, clearly when it comes to liquidity in hedging or we can get there over the next few months as we do what you are talking longer term and when we go to de risk. These assets longer term, we're really looking at.
Our totaling strategy and we as we do that right and I've said that we're experiencing a pretty.
Demand for accessing this this capability so I feel pretty good and those are longer term right does go into the 10 year plus agreements and you know the team's done an excellent job today and why am I bullish that we're going to do this over the long term and de risk these assets, including Ferndale, that's because were as we have continued discussions.
With large aggregators.
And and others in the basin that that gives us the competence that we're going to the told those now now we could do multi your hedges as well and we could look at that but I think a real driver is is to is that we are at the company in a in a midstream to me that connects producers to markets and we are not in the commodity business and so we'll continue to de risk that.
Uh huh.
Our customers be able to realize those.
Margins in Asia, if that answers your question what sorry.
Just quick clarification, because you said it this way over the long term.
Oh, what time period, you think you get to a point in which you're you're hedged at that that 60%, whether it's only basis.
Oh.
Working amounts.
Got you know I think so were about 30% right now I'd be disappointed if we're not there by the end of next year I mean, I'm turns on the lower end of that right as we go through 2021.
We don't get to that part that double that.
It's going to be our objective into it but again, we'll see how the market works, but that's where we're going to try to target as we go through 2021.
Excellent thanks to the added clarity sure.
Our next question is from Linda Ezergailis with TD Securities. Your line is open.
Thank you appreciate the a comprehensive update today and presentation I'm looking at slide 30 Fives I appreciate.
The sources and uses of cash and that you're at S. self funded model, but I'm I'm wondering what what what might cause I'm also gas to either be opportunistic and maybe accelerate some de leveraging or.
Prefunding of future opportunities.
Or Conversely might cause you to shift your plans for a sources. For example, this asset sale don't materialize and can you just got kind of what other LIBOR as you might consider pulling including potentially in an ATM or a discrete equity issuance and what factors with the in place for you to consider that seriously.
Right I can let James get a bit more specific and your question London. Thank you for the questions I you know from our perspective, we talked pretty strong track record of executing on our noncore asset sales. So we're very confident that we'll be able to do that but clearly.
This is not the best environment tend to be moving forward. So we've continued to de leverage and we feel confident that will be there.
We will not Miss if we had opportunities for <unk>.
Financially rewarding capital projects that we can access the capital to do that going forward, but I think clearly our plan is pretty conservative but change when she I'll let you.
Werent.
So I wouldn't I agree it really comes down to.
The current macro environment, we're in and with.
The timing of moving forward with some of these asset monetization of some of these continue to to de risk. So if we like some of the values that we're seeing for these assets because they've been de risked and that's something that we can move ahead with in the latter part of this year and potentially raise raise some funding for for next year's Capex program.
But obviously the other than the other thing that we're tracking closely as Justin just this current your Capex program at the end of Q2 were tracking a bit.
Behind our spend in terms of what our expectations were so so that could take a that could take some some money and move that into 2021, as well potentially especially given the fact that our midstream Capex program is a capital light approach that we're using right now.
Okay, and what might cause you to a shift your funding plans and revisit it.
In any situation, if you see more opportunities potentially or.
Other factors.
Yeah, I would tell you more strategically and then it would have to be some other opportunities that we see out there that would require us to access capital beyond what we have in our plan inclusive of Petro gas obviously, it would have to be something along those lines, but right now we have a pretty focused plan as I've said in my comments.
Executing very well the team is in terms of our EBITDA guidance and look we're focused laser focused on achieving net debt to EBITDA and it's less than five X and getting a ratings notched you know.
One or two above the triple B minus and that's a priority and you know so what that's we were focuses but certainly if there are opportunities that that come up to the new and that are in or create shareholder value, we could revisit them.
And maybe as a follow up to the coming presidential election, I guess beyond potential changes in tax rates I'm wondering if there are any of their policy changes potentially as it relates to perhaps renewable energy or other infrastructure build a that.
Might open up opportunities for your franchise in the U.S.
Yeah, I think that a really it's hard to predict a elections clearly, especially in the times that we're in today, but you know we try to position our company to be successful.
Or.
Whomever might be an office 'cause is oftentimes it really about economics, and what makes sense for customers at the end of the day, so but it renewables occasionally have been pushed I think they'll continue to be because the economics supports them.
And we'll look for funding on infrastructure to look at new technologies around or as I've said in my prepared remarks hydrogen and other fuels that may be able to blend into our system that can reduce a in decarbonize and that's why I'm very excited.
In it but we're early in the process and what we're doing working with the Washington D.C. Commission is to further enhance you know really our ability to innovate and deliver you know clean energy solution. So I think as the election or you know plays out yeah, we'd like to position our company to be successful Im confident that we will either way.
But this might be some ideas about the clean energy and Incenting infrastructure, and we think we did well positioned in the U.S. and really we've been at along strong history as I mentioned around developing innovative clean energy solutions.
Thank you.
Sure.
Before I move onto our last question I would like to remind participants that if you have any further questions simply press star and then one on your telephone keypad. Your next question comes from Andrew Kuske with Credit Suisse. Your line is open.
Thanks, It's just on the Frac spreads it your realized and I'm aware of your hedging program as you disclosed that so it looks like ballpark.
On the unhedged portion of the Frac, you actually outperformed the average spot price through the quarter, you, maybe give a little bit of detail as to what went on there in the quarter on the unhedged portion.
James you want to address that Randy.
Sorry, Andrew can can you repeat the question.
Yeah, if I if I look at your your Frac spreads what you realize the 16 61, and then I deconstruct your hedging program, a little bit which is about half the barrels that you had in the quarter.
It seems like you outperformed on the out versus the average spot price on your unhedged portion.
If you could maybe just give a better color as to what happened. There is that just the value of hopping your physical footprint positioning any other color would be great. Yeah, well I think it's really the fact that we were hedged at a much higher rate than than 50%. We've been we've been hedged at north of 90% for most of the year. So we we were able to realize the higher frac spread relative.
The spot because of our are active hedging program, but at the end of last year and the beginning of this year, that's really what it came down to.
You know, but but to your broader question, that's that's spot on but Randy and his team have always leverage the physical assets to optimize value for both our customers as well as ourselves so.
Doesn't surprise me that they get a little bit better on some of that spot.
Okay, that's great and one maybe follow up that little bit different end just on the balance sheet and Randy you mentioned about all the work you've done on the balance sheets I guess, how do you think about your metrics.
Where do you want to land and this is really at the WG how level and also the top of the house and then the positive benefit of let's just say the regime changes on the U.S. from a tax regime and we see attach rates go up again.
How does that play into your thought process.
Yeah, I think that you know with utility they tend to want to be financed more from up to 55% equity thickness and in the resin debt you know from our leverage from a corporate perspective, and I just I mentioned to just a bit earlier and then a question that might have been from lender, but I'm talking about our target of a net debt to EBITDA less than five acts.
And an entre to about triple B minus so that continues to be a priority from a corporate perspective, and we think when our business mix that it gives us a him because this is quite well both.
From ability to fund growth and but also a strong balance sheet with dry powder and so I don't think to the tax rates are changes with impact that how we want to finance the business teams did you want to comment on anymore.
I think you covered I think you've covered the ceiling surrounding I mean, we do have additional levers to pull that we've we've highlighted a few times on this call with respect to additional asset Monetizations and we continue to invest in the utility Capex program with heavily weighted they are piece. So that gives us a immediate recovery and reduces regulatory lag. So that's a that's another.
Way for us to continue to move those leverage metrics down, especially with the midstream business being being capital light and having the ability to grow into some of our existing investments that we've made in prior years through increased volumes, which will then turn drive increased EBITDA.
Okay. That's great. Thank you.
This concludes the Q and a portion of today's call I'll now turn the call back over to Mr. Mcknight.
Thanks, again, Chris and thank you everyone. Once again for joining our call today and for your interest in Alta gas just as a reminder, the investor relations team will be available. After the call. If you have any follow up questions.
And that concludes our call. This morning, I hope everyone enjoy the rest of their day and you may now disconnect your phone lines.
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[noise] Oh.
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