Q1 2021 AltaGas Ltd Earnings Call
[music].
Good morning, ladies and gentlemen, thank you for standing by and welcome to the Altra gas first quarter, two 2021 financial results conference call of <unk>.
Ms Valerie and I will be the operator for today's call all lines have been placed on mute to prevent any background noise. If you have any difficulties here and the conference. Please press Star then zero for operator assistance or at any time after the Speakers' remarks, there will be a question.
And answer session. As a reminder, this conference call is being broadcast live on the answer net and recorded I would now like to turn the conference call over to Adam Mcknight Director Investor Relations. Please go ahead Mr. Mcknight.
Thanks, Valerie and.
And good morning, everyone. Thank you for joining us today for all of the gases first quarter 2021 and financial results Conference call.
Speaking on the call. This morning will be Randy Crawford, President and Chief Executive Officer, and James Herbalists, Executive Vice President and Chief Financial Officer.
Also joining us here this morning.
As Randy Toone 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 Investor Relations and corporate development.
In addition to the first quarter press release financial statements and MD&A that were released earlier today. We've also published the first quarter earnings summary presentation. This presentation walks through the quarter and highlight some of the key variances and nonrecurring items that we would assume will be helpful for the market to understand and it is available on our website under events and presentations.
As always today's prepared remarks will be followed by an analyst question and answer period, and I'll remind everyone that we will be available after the call for any follow up our detailed modeling questions that you might have.
We'll proceed on the basis that everyone is taking the opportunity to review the press release and our first quarter results.
As for the structure of the call will start with Randy Crawford, providing some comments on our first quarter financial performance recent progress on our strategic priorities and what you can expect on the road ahead for all of the gas followed.
And while by James Herbalists, providing a more detailed walkthrough of our financial results near term outlook in 2020 one guidance and then we'll leave plenty of time at the end of the call for Q&A.
Before we begin we'll also 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 two of our investor presentation, which can be found on our website and more fully within our public disclosure filings on both the SEDAR and Edgar systems.
And with that I'll now turn the call over to Randy.
Thank you Adam and good morning, everyone.
As an organization, we have undergone significant changes over the past two years in terms of focus process and business optimization and.
And we believe the fruits of that labor were demonstrated in our operating range operating results this quarter.
Despite the ongoing effects of COVID-19, and the headwinds associated with the U S. Dollar exchange rate, we delivered a record quarter with strength across the platform and are well positioned to execute upon our durable 2021 and be on growth prospects.
Our global exports and midstream platform achieved record throughput and profit.
Our utilities platform continued to profitably deploy capital and control costs and improve returns and.
Our finance team continued to lower our debt cost and we are well positioned to continue to reduce our leverage ratios over 2020 one.
As the result of these factors, we grew normalized EPS by 63% year over year and the quarter.
Excluding the profit from the U S transportation and storage business run rate normalized EPS increased 35 per cent year over year and aligns with all of the guest focus on delivering durable and growing EPS and net that Boe per share that support steady dividend growth and provides the opportunity for ongoing capital appreciation.
Our utility segment continues to demonstrate ongoing resiliency and improved financial performance, while we continue the prioritized the health and safety of our employees customers and stakeholders.
Excluding one time items, our U S utility business delivered 11% year over year, EBITDA growth and U S dollar terms.
So the combination of our judicious management of our cost.
The acute capital discipline and profitable investments, we're making the upgrade our infrastructure, we are driving both improved financial results and customer outcomes.
The performance seen in the quarter continues to align with the strong long term growth trajectory projections that we've shared with you on the path.
Through the recently approved Maryland, and D. C rate cases that came into effect March 26th and April one we continue to improve upon our ability to earn our allowed returns on invested capital the.
The advancement of our network upgrade plans through the utilization of ERP programs continues across our jurisdictions.
The investment of this incremental capital remains focused on reducing leaks.
Our operating cost and ensuring that we are well positioned to the kindu continued to deliver affordable reliable and lower carbon natural gas for a $1 7 million customers.
While preserving the optionality of carbon free solutions and the future.
Based on the progress we have made this quarter I remain confident that we will close the remaining 150 basis points of ROE gap through 2021, which will allow our shareholders to realize the appropriate rates of return on their invested capital across our utilities and 2022 and beyond.
We also realized robust performance across our recently expanded midstream operations.
Excluding the larger than expected profit from the U S transportation and storage business and the quarter Ultra gas midstream platform continued to show strong growth.
Including a full quarter of consolidation of Petro gas to deliver more than 85% year over year EBITDA growth.
The midstream business is currently firing on all cylinders with.
With solid volume growth realized across our integrated platform.
We continue to see strong demand for Canadian L. P. G as in Asia and activity and production volumes continue to increase around our montney focused platform and northeast B C.
We are also witnessing a strong rebound and production volumes and our non montney footprint.
It's only been for months of combined operations since the acquisition and consolidation of petrol gas.
But the strength and efficiency of the assets.
And with the increased scale and reach of the expanded platform and the bolstered expertise of the combined work for us it's exceeding our expectations.
Given the headwinds of building new fossil fuel related export assets and the U S.
We believe that our Ferndale facility is not only strategic but extremely valuable.
Ferndale of highly efficient operation and dual product optionality located on the Western U S coast is difficult to replicate and creates a competitive advantage related to the delivery of cleaning of burning LPG for Asia.
We are realizing the benefits of operating both export facilities through greater Optionality and flexibility in terms of the supply and logistics and the allocation of propane and butane between the two terminals.
As well as the benefits associated with integrating Petro gas other transportation and storage related assets.
During the quarter, we exported a record average of 85000 barrels a day of propane and butane to premium markets in Asia.
Improving Canadian and realized pricing as we continue to connect more Canadian production the global market.
But the export terminals of performing very well and in line with our strong expectations.
Overall, our expanded midstream and energy platform provides us with great operational scale and commercial optionality, allowing us to provide better service and improved outcomes for our customers.
Last Friday, we took another step forward and advancing our strategy to refocus the company on our two core businesses, while continuing to strengthen and de lever of the platform and reduce the volatility of cash flow through the monetization of our U S transportation and storage business.
We were excited about closing this transaction as it accelerates our timeline of getting to our target of being five.
Ex net debt to normalized EBITDA and it brings us closer to contemplate and the journey that we have been on and the past two years.
We're also fortunate and our timing.
To be able to sell the business after a strong financial contribution of the fourth quarter related to the weather driven gas pricing volatility.
To recognize and incremental source of funds that augment this deleveraging event.
We are now positioned to reduce our net debt to normalized EBITDA ratio by up to five point buybacks over the course of 2020, one relative to the approximate five six run rate level and we exited 2020.
And we remain focused on further derisking of the platform over the long term.
We are proud of the fact that for two years running we have delivered normalized EPS growth that is materially eclipsed all of our U S gas utility and Canadian midstream peers.
Our stock performance has followed suit and eclipse all of our U S utilities and Canadian midstream peers over this period the <unk>.
Strong performance, we achieved and the first quarter provided the confidence to increase guidance that now when using the midpoint for 2020, one represent 22% year over year earnings per share growth the <unk>.
Progress made during the first quarter positions all of the gas to drive strong stakeholder outcomes and the year ahead.
And continue to build the platform and is focused on long term sustainability.
We believe this is a testament to the perseverance and steady progress that we've made towards executing our strategy and delivering on our priorities and it's a true reflection of the significant potential that lies within our diversified platform as.
As we continue to move towards the more decarbonize the ecosystem.
We believe natural gas to be a critical part as the transition fuel of the future are you.
Utilities network is comprised of critical infrastructure.
And that enables us to deliver low carbon natural gas today and provides the foundation for the delivery of carbon free solutions and the years ahead, including renewable natural gas and hydrogen.
We remain focused on executing upon our climate business plan.
And are confident that we will be very well positioned for the energy transition that is upon us.
We are committed to exploring and defining the next steps to introduce renewable natural gas and hydrogen into our natural gas distribution system.
More information to come and the quarters ahead, as we explore and position ourselves to execute on this promising opportunity.
In summary, we've achieved record EBITDA growth, which allowed us to increase our earnings guidance for 2020 one.
Successfully integrated the petrol gas acquisition to achieve outstanding year over year growth and the midstream business.
Significant progress towards earning our allowed rate of return of the utility.
And positioned ourselves to further reduce our debt and improve our leverage metrics.
And with that I will turn the call over to James to dig into the operational and financial results of the quarter and more detail.
Yeah.
Thank you Randy and good morning, everyone.
We are pleased to be here today to discuss our strong first quarter results, our increased 2000, and 'twenty, one guidance and the monetization of our U S transportation and storage business that we announced last Friday.
The latter of which should drive an estimated $485 million of near term deleveraging and accelerate ultra gas towards our target of being below five times net debt to normalized EBITDA.
Specific to the first quarter, we were very pleased with the record financial performance that we produced which builds on the financial and operational improvements we have demonstrated over the past two years as we reposition of platform and sharpen our focus on delivering durable and growing EPS and <unk> per share, which support steady dividend growth and provides the opportunity.
<unk> for ongoing capital appreciation.
During the first quarter 2021, and this included normalized EPS of $1 29, compared to <unk> 79, and the first quarter of 2020, representing a 63% year over year increase.
Normalized <unk> per share of $2 <unk> compared to $1 51, and the first quarter of 2020, representing a 38% year over year increase and north.
Normalized EBITDA of $674 million compared to 499 million and the first quarter 2020, representing a 35% year over year increase.
All of which was underpinned by solid performance across the entire platform.
As we highlighted and the earnings release, the U S transportation and storage business generated $80 million and normalized EBITDA over and above what we had originally forecast as we position the business to realize strong profitability from strong pricing moves and the U S natural gas market, while meeting the demand arising from the February winter storm.
The grip parts of the continent.
Overall core performance and the quarter aligns with ulti gasses, corporate focus of delivering durable and growing EPS and <unk> per share and support steady dividend growth and provides the opportunity for ongoing capital appreciation.
Specific to the business units the utility segment reported normalized EBITDA of $371 million compared to 369 million and Q1 and 2020.
Strong operating performance across the segment was largely offset by a $20 million unfavorable moves in the U S to Canadian dollar exchange rate and.
And $16 million and negative headwinds associated with the sale of Ulta guest Canada, Inc, and the Virginia adjustment that were present in Q1 and 2020.
Excluding these one time headwinds utilities' EBITDA was up 11% and U S dollar terms.
Our growth continues to be underpinned by ongoing system upgrades that are focused on improving the safety and reliability of the network, reducing leak rates and driving better environmental outcomes all of which are focused on serving our customers.
During the first quarter of the utility segment experienced slightly colder weather across all of our utilities with the exception of Alaska compared to the first quarter of 2020.
And I'd also remind everyone that we have weather normalization mechanism in place at Virginia, and Maryland, our two largest operating jurisdictions, which protects our customers and ultra gas from large weather driven volatility in any given quarter.
WGN had a solid quarter with normalized EBITDA of $276 million compared to 278 million and Q1 and 2020.
Excluding of $15 million negative impact of foreign exchange and the onetime impact of Virginia rate case adjustment of $8 million and the first quarter 2020, Wgla run rate normalized EBITDA increased approximately $21 million or 8% year over year.
Notable drivers include higher revenue from ongoing system improvements and ERP spending lower operating expense and continued customer growth, which were partially offset by ongoing impacts related to COVID-19.
We continue to make solid progress towards earning our allowed returns at WGN and through a combination of capital regulatory and cost discipline.
Samsung and startup combined normalized EBITDA was $82 million and the first quarter down 4 million for the same period last year.
Removing the negative impact of foreign exchange fluctuations, which totaled $5 million simple and and stars run rate normalized EBITDA increased by approximately $1 million as the colder weather and Michigan was largely offset by warmer weather and Alaska compared to the first quarter of 2020.
And finally normalized EBITDA from retail energy marketing business was $13 million and the quarter.
And increase of $17 million year over year, driven by favorable gas margins and pricing and the absence of widespread shutdowns experienced by C&I customers. As a result of COVID-19 that occurred last March.
Within our midstream segment, we reported a record $304 million of normalized EBITDA and the first quarter of 2021 compared to $120 million and the first quarter 2020, which represented a 153% year over year increase.
This included robust profit from the U S transportation and storage business as well as strong performance across the Canadian midstream operations.
If we adjust for the larger than expected performance from the U S transportation and storage business midstream run rate EBITDA was still up approximately 87% year over year, including a full quarter of consolidating petro guests.
EBITDA from global exports increased to approximately $7 million during the first quarter of 2021, reflecting petrol gas consolidation and combined shipments at reported and Ferndale of approximately 85000 barrels per day of LPG is the Asia across 14 Vlccs.
On processing and fractionation business realized strong volume.
Volume increases across the midstream platform with a 10% year over year increase and total inlet volumes due to increased producer activity as the result of improving fundamentals and commodity prices.
As has been the case and the past few years, we continue to benefit from our industry, leading footprint and the Montney as producers continue to complete drilling programs and increased production at our recently expanded Townsend and north pine facilities of trend, we expect to continue in the coming period.
We remain focused on managing risks and the midstream business and reducing commodity price exposure and volatility we had approximately 95% of our frac exposed volumes hedged of $26, a barrel and realized an average frac frac spread of approximately $15 a barrel after transportation costs.
Approximately 60% of global exports projected volumes are collectively hedged, including our long term tolling agreements.
The balance of volumes are de risked through FBI to North American financial hedges, the average approximately $11 U S per barrel for propane and butane.
Depreciation and amortization expense for the first quarter 2021 was $99 million compared to 109 $105 million for the same quarter in 2020.
The decrease was primarily due to lower U S midstream amortization and lower foreign exchange rates, which were partially offset by new assets placed into service and the amortization on the consolidated Petro gas assets.
Interest expense was $70 million was in line with last year overall higher debt balances and lower capitalized interest was offset by lower average interest rates.
Turning now to our 2000 and 'twenty, one guidance and capital plan, we have increased our 2021 financial guidance ranges to reflect a robust start to the year and the confluence of tailwind and headwinds that have unfolded since our initial guidance back in December of 2020.
This includes increasing our 2021 normalized EPS guidance range to 65 to $1 80 per share from $1 45 to $1 55 previously.
This represents 22% year over year growth using the new midpoint.
We also increased our 2021 normalized EBITDA guidance range to one for 75 billion to $1 $5 5 billion from one four to $1 5 billion. Previously this represents 15% year over year growth and normalized EBITDA using the new midpoint.
Our 2021 Capex outlook remains unchanged at approximately $910 million. The majority of that capital budget is being allocated to the utility segment, which is focused on system upgrades to drive better customer outcomes.
We were also pleased to announce the sale and closing of the transaction to monetize the U S transportation and storage business last Friday for total proceeds of $344 million.
This non core asset sale represents another important step and advancing ultra gas the strategy of refocusing the company on its two core businesses, while continuing to reduce leverage and reduce the volatility of cash flows.
This is a continuation of what has been a multiyear journey as we reposition Alta guests and we are pleased to be nearing our goal of getting to five times net debt to normalized EBITDA.
This concludes our prepared remarks, and we would be happy to turn it over to Q&A operator.
Thank you, ladies and gentlemen, we will now conduct the analyst.
Analyst question and answer session. If you will.
The two asking the question.
The Star then one on your telephone keypad, if you would like to withdraw your question press the pound.
The key now.
It will be a brief pause while we compile the Q&A roster.
And your first question will come from the line of Patrick Kenney of.
National Bank.
Yeah. Good morning, just on the propane export business. It looks like the tolling arrangements are still at just 15% of the the 90000 combined capacity.
I thought it was closer to 20% previously, but I just wanted to confirm that there have been no incremental long term commitments made after the April 1st NGL supply of re contracting season.
And I guess, if not maybe an update on how your discussions are progressing with some of your larger gas processing customers that.
And that might be interested in locking in their export capacity and on a long term basis.
Hey, good morning, Patrick Thank you for the question.
First of all of you.
Alright, we are currently at 35% total.
And we are targeting higher percentages post the April and conversations have been constructive and we speak with them regularly.
The cure of additional claim volumes.
Just to give you a more back up on that.
Longer term and you look at this and you said.
The capabilities and efficiencies that we've created and of having these two west coast export facilities and have really put us in a position that producers.
And certainly I can't ignore the value of proposition that we're proving to them and and the recent strengthening of the fundamentals and improving commodity prices, it's really starting the conversation and we're seeing increased interest by producers and Aggregators, who who want to be participating the upside and.
And quite frankly of some of the consolidation.
Kurt as well with larger balance sheets and.
Customers and able to make lot of time commitments and then.
It makes us optimistic that we'll continue to strengthen our position there, but thank you Patrick.
And that's great Randy and I know, it's still early days and the.
Nearby Watson Island.
Terminal being online but.
Any comments on having to compete for volumes or contracts or are you servicing completely different markets and we should not expect any near term pressure on volumes and margins at rip it or Ferndale.
Yeah, we don't see that the start up of Watson Island is going to have any significant impact on on our business and.
And we believe that the Canadian propane market as is going to continue to be oversupplied and the montney continues to see strong drilling activity.
And and remains a top player in North America.
And overall, though when you think about our assets and intrinsically the assets of great and gives us the return on the investment that is outstanding and the.
And the intrinsic value of the dislocation and values the.
Propane and the ability of our propane and butane what that does is it provides us an incredible value of that no one, including Watson and can can replicate and and so we're not a one for Tony We've acquired these assets and we can move far more propane and prior to the acquisition.
And we also have the ability and he said when prices lineup differently between the two products to ship more butane and.
And and propane or vice versa, so our position and the industry's leading the team.
Facilities of the Optionality of access the Asian markets and and.
When we look at the we don't see others that have that ability. So the overall Watson island and smaller boats different markets.
And <unk>.
Essentially has some commercial challenges.
Okay. That's great. Thanks for confirming that and then just for.
For James maybe.
With the improved visibility here towards reaching your sub five times leverage target any update on your discussions with S&P regarding <unk>.
Moving to the triple.
Tripled the mid.
Rating or is that still dependent on executing a sale of N V P.
Hey, Patrick now it's a good question I mean at the end of the day it would be fair to say that the sale of the U S transportation and storage business is moving us a little faster than.
We had originally anticipated towards that five times net debt to EBITDA goal, we've just come through a ratings update and the confirmation process with S&P late in 2020, and so far and other rating agencies and so far we're exceeding some of the forecast that we've put in front of them. So I think that this is something we will discuss with.
As we enter the ratings review cycle later this year, but if you look at the reported would be a couple of years of us hitting <unk> and debt targets that and the 14% to 15% range that would trigger and upgrade.
Okay. That's perfect. Thanks, guys I'll leave it there.
And the next question will come from the line of being the Pam of BMO.
Hi, Thanks, good morning.
Questions on the U S storage sale and.
And I'm curious you mentioned SRA strength of.
Debt reduction is just curious about what you meant by the six months, one month and Andy.
Any sense of when you think you can get to there for five times targeted next year and and you afterwards.
Our simple more medium term.
James you and I won't take that.
Yeah for sure. So I mean, you know when we released the press release on the U S. Midstream sale, we've clearly identified debt. If you look at our run rate EBITDA at the end of 2020 and out of full year contribution from natural gas, we would've been at about five six times net debt to EBITDA. This sale will take about zero.
One five turns of leverage off of that so we're starting to get close to that five times net debt to EBITDA looking out into 2022, obviously, if you layer in.
Some growth that we forecasted being contributed by <unk>.
Rate base investments and.
And then we will move closer to that five times for us to get below it.
Obviously have additional dry powder at our disposal and levers to pull with some additional non core assets that we haven't moved on at this point, we continue to identify MVP as a non core asset, but we're going to continue to be patient with that asset. So that we fully derisk it and increase the value and move forward and the process at that point, which should take us below five times net debt to EBITDA.
Okay, that's great and.
It's an interesting transaction.
And at a time, where.
The volatility and increasing.
And on a trailing basis it looks like you got it on multiple and on a forward basis, maybe not so much on how you think you day care crisis transactions more credit to your balance sheet and versus the accretion to EPS per year.
EBITDA.
Well.
And I think when you think about this transaction and the asset itself.
Pretty much of a <unk>.
Non core asset and the business is really if you think about the business and the contractual business the storage and transmission. It really has the what you're doing that business as it has the intrinsic value that you hope to cover your cost and then you.
And you set yourself up with the opportunity with the transit value of that May happen, one out of five or we believe and years.
And so for us very much of a non core asset very small impact overall to earnings and it presented us with an opportunity to take.
The levers and significantly and we made a strategic and important decision to hold those assets through the end of the quarter for that opportunity and I think the team did an excellent job.
Okay and then.
I wouldn't mind just adding.
Sorry, I just wanted to add on from an earnings standpoint, it's actually going to be somewhat and it's going to be neutral from an EPS standpoint, and just if you look at the contribution. It has had on average over the last five years of about $16 million and you basically take interest expense out from proceeds that we're going to use to repay.
The debt and the depreciation and amortization that will avoid because of the day recognition of that asset on sale and it would be neutral to earnings going forward.
Okay that makes sense.
Yes, and you're ignoring estimate when all of this year, which makes a lot of fans.
And looking at.
The historical average, Okay and then.
Maybe other thing.
MVP any and all.
Any change.
Upon and go through everything on anything on the non accounting like S E T and <unk>.
And.
And anything going on there and just thoughts on milk from D C.
Well I'll, let James talk about the P. D C, but more broadly speaking right I think we believe will continue to be confident from the pipeline will get built and then it's been very critical asset for reliability.
And the U S and.
The build out of the electric grid as well, so but specifically the AFC in the C. Do you want to address the 19.
And then we.
And we did record a of UTC through 2020 on on the construction of that project ourselves and the consortium partners on MVP, all six recognition of <unk> as it moves its way through the remaining milestones that it needs to achieve the to get the in service dates. So 2021, we will not have any AFDC and our EBITDA of <unk>.
Yes numbers.
Okay perfect. Okay. Thank you.
And the next question will come from the line of Robert Cadillac.
CIBC markets.
Capital markets.
Yes, Thank you and good luck.
Congratulations on the sale of the U S transfer business.
But just the follow up there.
How do you look at the how that impacts.
And future asset sales for example.
Just picking on at random boy.
And so these are solid and the clean up the story or do you now have the financial flexibility of the holdup for top dollar.
And.
And some of our van we're seeing some very strong valuation on the utility sales and the market.
So is there any incentives to maybe look at non core.
Utilities of deleveraging candidates.
Thank you Robert Thanks for the question on the last half of sure. We're always looking at opportunities to to look at our portfolio and to the extent that we can't leverage and grow those assets, we would look at that but.
More broadly and more broadly the the deleveraging that we have done has been I think significant and it's put us in a position where we can use our dry powder.
On some of these other non core assets.
So that's where it will be certainly as we did with our noncore transportation and storage assets that we'll be opportunistic, but we are and I think and excellent position to the forefront.
To fund our growth plans and to continue to create shareholder value.
So it hasn't really changed it's just put us in the even a better position going forward.
Okay and so.
And I Wonder if you could comment on the the outcome of the recent Maryland case.
Okay.
Would you characterize on income and it looks like it was.
Quite a bit short of the.
Location and so at the same time.
And you're still holding to your view of being able to achieve authorized returns. So can you just square that up for us.
Yes, sure I mean, the order was it was ultimately of settlement on our.
In terms of the you know the return on equity and the capital structure of consistent to what we had previously been earning on and and so when we look at our business going forward, our strong rate base growth.
The earning our allowed return and we're looking on the.
Overall operational excellence model.
The blue and his team have done a tremendous job in terms of the capital discipline.
Judicious cost management and improving the customer value proposition. So yeah, we are.
And we're very bullish and and we continue to remain on target to earn our allowed return.
Okay and last question for me I know, it's quite early but has the.
The.
No.
The change and the carbon tax or the expectation of since the U S tax credit opened up any opportunities for all of the gas.
We know it's early right and then.
So lots of unpack and a variety of these items and then.
The proposals around infrastructure and area of it.
But really I think overall and some of this will be looking at and really benefiting and the utility and our existing kind of relationship from the infrastructure that connects were $1 7 million customers. So as we look forward.
And on projects such as hydrogen and it appears to have some options that can leverage our asset and customer base and provides significant environmental benefits will.
We'd be looking at those opportunities and in particular and it's the early there's a hydrogen production tax credits and some of the other proposals so.
And we'll be looking at that but again, it's a it's really early that's gonna be think months down the road.
Yeah, Okay. Thank you.
And the next question will come from the line of Andrew <unk> of Credit Suisse.
Thank you good morning may be the first question to start with Randy and it really revolves.
The revolves around the hedging program and I really appreciate the details and you have on a quarterly basis.
And if you could maybe just talk about just the philosophy of the hedging program.
On the midstream side of your business and how youre approaching us what's what's changed on the current market environment for what's remaining the same.
Hey, Andrew Thank you nice to talk to you.
As James mentioned of approximately <unk> 60 per cent of the volume is locked in this year.
Really when we look at it we are managing in terms of our <unk>.
Cash flow and earnings, but we leave that certain amount of those positions on because it provides us the flexibility for opportunistic pricing and supply and moving so we tend to go into the year with the target around those levels and then we charge the commercial team to optimize that going forward and then we'll be continuing to look forward into 2022 and in addition to that we have.
Calculate our forecast on on ultimate tolling volumes as well and incorporate that into our hedging strategy. So that hasn't changed and we continue to be focused on increasing the <unk>.
Total percentages as well.
And we appreciate the commentary and then and then maybe just looking for like the top of the house lines. Obviously, the dollar Canada has moved a lot.
How do you think about just the FX hedging approach or lack thereof.
From a philosophical standpoint from the organization.
Well the James has done a great job of that I'm going to let him address it and I'll address it and high level. We have two aspects of the co here right. We of our U S denominated debt. So if that changes and as opposed to some of the cash flows and EBITDA of that come back and so there's a.
And inherent hedge there, but James I'll, let you address it more specifically.
Yes, Andrew I mean, we've we said in the past that we don't undertake translational hedging. So we do look at transactional hedging to try to lock in margins on some of our exports, but on the on the translational side, we don't and even though there is a reduction to EBITDA I mean, when you drop down to the ratios like EPS and.
And our debt metrics and just given the fact that we've got U S dollar denominated debt.
And.
And U S. Dollar EBITDA there is no real material impact to our earnings per share of debt ratios as a result.
I appreciate that and then one final one if I may I know, it's still early days.
Do you foresee any impacts from.
The commentary on the came out of the Canadian budget and relation to the interest deductibility.
Yes, I mean, we've looked at this on a preliminary review of we don't anticipate any any issues with the debt that we've got it.
And the profit that we're generating within our Canadian business units I don't think we're going to be captured by those those rules at this point.
And we continue to reduce leverage so I think we're in good shape there.
That's correct. Thank you very much.
Thank you.
And the next question will come from the line of the lender.
As the Dallas from TD Securities.
Thank you and some.
All of my questions have already been answered, but I'm I'm wondering maybe you can just.
Give us a bit more context around.
Hitting your run rate of operational efficiencies and synergies with the Petro gas and Ferndale.
How would you characterize and in terms of.
And the extent to which you think you realize what the possible person how much more of a range in the first quarter.
Birthday.
You might continue to the key.
The <unk> ramp that up and when you might hit your full run rate of that.
The question team.
And our team.
Good morning, Linda.
Thank you for the question.
Look we're in the early days and the integration and so I'm.
I think that we are just beginning to scratch the surface of what we can do them.
We align these two businesses going forward.
You know broadly and it gives us the ability to load more ships.
On a far more tools and our toolbox on logistics and optimization.
And so again.
Again, I think that we'll be working through this year to to continue to optimize and I think the two teams have come together very well. So we'll continue to look at.
Railcars are.
A lot of the logistics and I've said before we're and energy export and logistics company and the team continues to drive value. So the early.
Early stages of what we.
And ultimately can achieve and my judgment.
Okay and.
Clearly the outlook for the whole industry has improved and western Canada and I'm wondering if you can give us the sense of.
How we might think of the volume continuing to ramp up and your midstream business and.
What sort of that incremental commercial of great agreements or commitments that you might.
Realized from producers over the next.
Nine months, I guess into U S and.
And we'll continue on the year.
Well clearly, we don't want to get into some of our specific negotiations, but I think of the trend has been a friendly mobility around the world is continuing to pick up and energy demand is following suit.
And that's good for the upstream producers, we're fortunate and the extent of the investments that we've made on our assets.
Have available capacity, particularly in the at Townsend.
And north Pine and so we continue to see ramp on there.
And over the longer term continue to.
Provide what I believe to be the best market and Canada.
For LPG and Youll see the.
And to increase volumes, there and make longer term commitments with producers going forward. So we're in a really good position as volumes continue and how producers have said, they're going to be disciplined and although we will continue to improve our efficiencies and cost structures and I expect the.
And we'll continue to have on volume growth trends.
Wrapping up over the next year.
Thank you.
On a final follow up in the past all of the App has expressed.
And a willingness to consider petrochemical investment opportunities and Western Canada.
With your expanded NGL capability and Optionality.
And you consider any sort of petrochemical investments, whether it's the partial interest and the joint venture.
Or.
The other other initiatives.
So Linda we think.
Look I'll say this that we're primarily focused on our integration and optimization.
Assets.
And that we continue to see opportunistically and ability to deploy capital there organically.
But as we look forward and similar to what we did the petrol gas to continue to leverage and.
Distinctive.
Capability around our export capacity.
We would really be looking more on organic growth, but overall I think we're unique and providing both access to domestic markets as well as.
Our export volume, so again I don't see us.
At this point moving in that direction, but clearly I think our focus and we believe to be the best market.
And Asia.
Thank you I'll turn it back on the queue.
And our next question will come from the line of Julien Dumoulin Smith of.
Bank of America.
Hi, Good morning, it's the Darius laws and the on for Julian here.
And just wanted to briefly.
You walk through some of the moving parts of your higher EBITDA guidance for 'twenty, one and obviously it seems like it's higher due to the strong performance and the U S. Midstream segment that you discussed, but maybe talk through some of the other moving pieces that you could such as potentially synergies from Petro gas the FX outlook and.
And I assume the range and narrower because you're you have a better sense of your hedging program, but if you could talk to some of those moving pieces. Please that'd be that'd be great.
Good question and I'm going to let James get into some of the I'll just make a broad comment that we feel that we could be.
And then above the mid point of the Cal 'twenty, one stays strong and that it moves beyond that but there's a cause of a variety of the give and takes and that and I'll, let James walk you through some of those particular team.
Yeah, and so when obviously when we look back to where some of some of the factors were that we put into our guidance in December of 2020, some of the tailwind that we're seeing right now that could.
Contributed to US moving up is obviously the contribution from the U S storage and midstream business, but we've also seen stronger frac spreads and we've been able to lock in the majority of those were 95% hedged on frac spreads we've seen higher volumes at our extraction facilities as well and then what we had factored in and obviously higher export volumes and our global export.
<unk> and Randy touched on it's stronger NGL pricing on on <unk> for US is something that we've factored into some of our upside as well and then on the headwind side you touched on the one that's the most material it's FX.
If you look at a full year impact of FX is about $45 million, just given where the FX rate is right now relative to where it was when we set that guidance. So those are some of the the factors the puts and takes of went into us tightening the range and moving the midpoint up by $50 million.
Okay excellent. Thank you one more if I could on the.
Sales of the U S transport and storage asset can you maybe just talk about was that it.
Was that of segments of our business that <unk> been actively marketing or did you just realize that the time was right for a sale of given the conditions during Q1.
Yes.
We identified that as a non core asset and we've been working towards that and as I've said and in the past.
We continue to look at the deleveraging, we made a business decision to to hold the assets through the winter heating season, because of the nature of these assets and.
And then we went forward to monetize it and so we've been that's been in the works.
Okay. Thank you very much and congratulations on a great quarter.
Thank you.
I appreciate it.
And the next question will come from the line of Rob Hope of Scotiabank.
Yes. Good morning, everyone. Just two follow up questions for me.
First off on the guidance just wanted to the was the cancellation of AC DC on MVP also contemplated there on and I guess when I take a look at the turn of the moving parts there.
The the FX headwind will be offset.
So lot of below the EBITDA line and ask UDC is non cash there as well so fair to say that on a cash impact basis.
And so quite ahead of plan.
Oh yeah.
Felipe you can say James and I don't do you want to comment on that.
No I think.
And I don't have anything to add to that range.
Yes.
Okay.
Sorry, Anthony Regency was contemplated and the dogs.
Originally originally it was yes, but obviously as we got to year end reporting and some of the impairments that took place and the consortium partners decided not to recognize anymore AFDC debt became a headwind to EBITDA.
Okay, and then just another follow up to Andrew's question. Previously. So you commented on on the interest deductibility of whatever the any cost cross border structures.
Any potential thought that you'd have to alter or anything there or any potential impact from the federal government debt structures of use across the border.
Sorry, I didn't follow your question Robert can you repeat that.
The federal budget and also talked about potential of the change any cross border of structures on the tax rate. So I'm just wondering if any of them.
And you're repatriating any of your U S income into Canada could be impacted by any of the changes no.
And the budget okay.
No it wouldn't it wouldn't be impacted by sorry, that's that's what I wanted to confirm so the Canadian.
Budget changes would not impact our ability to repatriate funds from the U S.
Alright, Thank you that's it.
Thanks for all of the next and the next question will come from the line of Robert Kwan of.
The RBC capital markets.
Great Good morning.
I would like to come back to asset monetization and.
And while a key goal to day.
Net of deleveraging.
And you're coming back.
Your answer earlier around the utilities.
Best of today's LDC transaction cards, and you just think more about the benefit of selling to drive value between what you think you can solve and al.
Net out versus what's embedded in your share price for.
And this deleveraging scale.
The main focus and really what drives.
Net.
Yes, I think you're more of.
On the deleveraging is how were really focusing on to continue the to drive down on those metrics and provide ourselves of dry powder for opportunities going forward to the fund the significant growth we see in both of our midstream business and our utilities on going forward.
Comment on the utility is that we want to continue on and the we'll continue to invest and grow those assets, but as we look at what the right mix. There is well always be looking at every asset that we have to drive value for our shareholders.
And just the difference between what you can sell it for versus the old value is not.
Clearly something that would.
And as you and and of itself the transaction.
Well I the way I look at these assets Robert is the to the extent that we can add value that we can continue to improve it leveraged of the asset and continue to grow earnings per share and that we.
We bring a competitive advantage and that's what we'll do with these assets and to the extent that we're not able to do that in the non core then we will look towards monetizing them at fair value, but we're not in a position where we have to do any transactions as we were maybe two years ago.
I understand.
And if I can just finish with the <unk>.
Growth that youre seeing in the western Canadian midstream business.
Do you see more of that being driven by the optimization.
The asset footprint with the gas or do you still see it being Shirley.
The capital intensive.
With respect to building new infrastructure under contracts for sort of producers.
I think long term there'll be additional investments and assets on our integrated platforms and such but right. At this point. We are fortunate to have our network that provides the producers access to the very valuable markets and I've learned in this business connecting producers the valuable markets and increasing their net back will attract more volume to your <unk>.
That for them and that's what's happening here and certainly we expect with low prices and prices increasing debt.
And there will be of reaction in terms of volumes and that's what we're seeing and that will only be more helpful to filling up our <unk>.
And our facilities.
And just over that long term.
If you look at some of those more capital intensive projects what are the top two or three.
Opportunities that you see the out years.
Well look I think as we look organically first of all we're looking at our logistics platform right and that we can aggregate rail and put together and more efficiency and.
Round, our cost structure and rail structure over the long term.
<unk> and the fractionation side of the business and our northeast Montney.
Footprint and continuing to build out infrastructure, there and doing it and to the best extent possible in the modular.
Way, where the paybacks of our faster and then.
And there's not a lot of lag is a model that we would look for so to be able to take our assets and we're continuing to expand and leverage of that footprint and the cost effective and efficient manner of something that we would see capital into the future and I think we will see many opportunities.
Over the long term.
Okay, great. Thank you very much.
Before we move on to the last question and I would like to remind participants that if you have any further questions simply press star and then the number one on your telephone.
And the last question will come from the line of Jeremy Tonet of J P. Morgan.
Randy Good morning, how are you hey, there Jeremy I'm doing well thank you.
Good good.
A few questions for me if I could just round it out here and just wondering any thoughts you might be able to share with the buyer and infrastructure Bill and the.
Could be opportunities for infrastructure build out, but I guess I'm more curious on the tax side with taxes moving up how do you think that impact which could impact consumers what could that do to bill headroom. Just wondering any thoughts you might have on taxes there.
Great question, Jeremy and thank you for it I tell you on the on the utility side and you know this business quite well.
To the extent that you know the.
The bite and taxable.
<unk> becomes law and there'll be some time here right.
Probably in terms of the utility net.
Positive in terms of cash flow and EPS neutral on.
Going forward and <unk>.
And so those costs will be passed on to the consumer from that standpoint, and and given the most of our operations and the U S for utility based.
The impact would be small.
But clearly in terms of Petro gas and the U S. Other unregulated operations and there's some give and takes there there's there's opportunities for other projects within the infrastructure Bill that I alluded to the that we're working on in terms of other opportunities with consortiums, possibly again around renewable natural gas and hydrogen and some things as well.
In terms of carbon capture that we'd be looking at so there's some sort of.
Puts and takes the throughout the Bill and I think we've got a long way to go to see exactly how that.
The plays out.
Got it thanks for that.
Just wondering separately I guess.
Carbon capture and has been kind of gaining a bit more attention with regard to the 45 Qs there and.
Moving carbon tax and and.
And Canada is kind of.
Raising the profile of of Tcs as well just wondering any thoughts you might have as far as this technology.
Allergy, whether there could be some role for all of <unk> to two <unk>.
And use this utilize this at some point and the future.
Great question and I.
I think we're looking at that we're looking at all aspects of this and we've kind of and a very good strong long history of.
Of being <unk>.
A leader and social purpose delivering strong environmental stewardship. So as we go through this long and I believe the a long transition and the.
The energy ecosystem.
And one of the things that's really I think helpful is what we're doing with rip, it and and Ferndale and <unk>.
Lower carbon intensive fuels to Asia, and displacing some of the higher carbon footprints and thats, the real value and the long and then in terms of the.
Technologies and investments here well you of carbon capture.
Thank you look at where we are with Ferndale refineries you need scale you need.
The scale and more parties are necessary the increased scale. So once we have that I think that thats long term, that's viable and and we will look the participate where we can bring and advantage in terms of building pipes.
Around hydrogen or long term carbon capture so again long term transition our company will focus on what we have core capabilities to do and we will participate and leveraging our skills going forward of Jeremy I. Appreciate the broad question and I think.
Got it just the last one if I could with regards to R&D. If you see any opportunities across your footprint, there or just any thoughts in general yeah.
Yeah.
A few again and it's different and each one of our different jurisdictions I think that.
We see a couple of things.
And our territory I don't blues on the call of Blue did you want to add any comment on that respect.
Yes, I think from a macro perspective, Randy you're spot on so it varies across our jurisdictions. We of course, when we think about R&D. We're looking much more broadly than perhaps just the traditional dairy farms or chicken farms based on where we operate so we are active and dialogues and discussions and you should expect to see some activity from us and that space is when the Florida.
Got it and I'll leave it there thanks so much.
Thank you for you.
And this concludes the <unk>.
And day portion of today's conference call I will now turn the call back over to Mr. Mcknight.
Thanks, Valerie and.
Thank you everyone. Once again for joining our call today and for your interest and ultra gas as a reminder, we will be available after the call for any follow up questions that you might have.
That concludes our call. This morning, I hope you enjoy the rest of your day and you may now disconnect your phone lines. Thank you.