Q3 2021 AltaGas Ltd Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by.
And to the altar gas third quarter 2021 financial results Conference call.
My name is Kathy and I'll be your operator for today's call.
All lines have been placed on mute to prevent any background noise. If you have any difficulties hearing the conference. Please press Star then zero for operator assistance 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 Internet and recorded.
I would now like to turn the conference call over to Adam Mcknight Director of Investor Relations. Please go ahead Mr. Mcknight.
Thank you Kathy and good morning, everyone.
For joining us today for Alta Gas's third quarter 2021 financial results Conference call.
Speaking on the call. This morning will be Randy Crawford, President and Chief Executive Officer, James <unk> Executive Vice President and Chief Financial Officer. We're also joined here. This morning by Randy Toone Executive Vice President and President of our midstream business Blue Jenkins Executive Vice President and President of our utilities business John Morrison.
Senior Vice President Investor Relations and corporate development.
In addition to the <unk> third quarter press release financial statements and MD&A that were released earlier today. We've also published a third quarter earnings summary presentation. This presentation walks through the quarter and highlight some of the key variances and nonrecurring items that we would assume it will be helpful for the market to understand.
And it can be found on our web site under the events and presentations section.
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 questions that you might have.
We will proceed on the basis that everyone has taken the opportunity to review the press release and our third quarter results.
As for the structure of the call will start with Randy Crawford, providing some comments on our third quarter financial performance and progress on our strategic priorities followed.
Well by James Herbalists, providing some more detailed walkthrough of our financial results near term outlook and guidance and then we'll leave plenty of time at the end for questions.
Before we begin we'll also remind everyone that we will refer to forward looking information in 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 Edgar and SEDAR systems and.
And with that I'll now turn the call over to Randy.
Thank you Adam and good morning, everyone.
All the gas delivered strong third quarter results with normalized EBITDA growth of 15% year over year.
<unk> growth of over 50% year over year, which reflects the durability of our diversified platform.
Both the principal businesses executed well on major initiatives and we continue to advance our opportunity set for our global export and utility businesses.
They'll be gone progress made in the first half of the year, we are well positioned to meet our overall objectives for 2021 and beyond.
Heading into the fourth quarter, we are well positioned to achieve the high end of our guidance range and we remain on target to reduce our net debt to normalized EBITDA ratio by up to five five times over the course of the year.
At our midstream business EBITDA increased approximately 60% versus the prior year comparable period.
Reflecting contributions from continued investment in our global export platform.
Most notably during this quarter, we achieved record liquefied petroleum gas export volumes that averaged approximately 105000 barrels a day to Asia.
The scaling of our platform also benefited our integrated network.
Resulting in an 11% year over year increase in gathering and processing volumes.
And a 15% year over year increase in fractionation and liquids handling.
Our expanded midstream business continues to match our strong expectation as we remained steadfast in building a world class platform that resolves revolves around global exports.
We continue to leverage our industry, leading LPG export capabilities to realize significant operational and commercial synergies and benefit from implementing best practices across the combined platforms.
In the third quarter, we shipped a record 18, vlccs of North American propane and butane into markets in Asia.
On average rip it shipped over 58000 barrels a day of propane in the third quarter sitting.
Setting a record for that terminal.
Our Ferndale, we export it over 42000 barrels a day of combined butane and propane across nine shifts.
This performance is a testament to the experience and hard work of our combined midstream teams and their ability to improve upon logistics to optimize the supply chain between the two facilities.
In mid October we filed an application with the candidate energy regular regulator for a 25 year butane export license for up to 40000 barrels a day of additional exports.
This is a proactive step to ensure ultra gaps and our partners are well positioned to meet the needs of our customers on a long term basis by continuing to connect their drilling LPG production from Western Canada to global markets.
Our well positioned gas processing and fractionation business as I mentioned continues to realize high single digit to double digit volume growth.
Inlet gas processing volumes were up 11% year over year, and fractionation and liquids handling volume increased 15% year over year in the third quarter.
This strong growth highlights the strategic positioning of our Montney focused midstream platforms.
Linemen with leading well capitalized producers will continue to execute long term development plans in the basin.
Utility segment, excluding the onetime pension accounting adjustment in the third quarter of 2020, and the unfavorable impact of the Canadian U S. Dollar exchange rate achieved normalized EBITDA increase of $5 million in U S dollar terms.
The results in a seasonally low throughput quarter reflect the strong execution of our strategic plan and leave us in a position to close the under earning GAAP and achieve our allowed return in 2022.
During the quarter, we continued to execute on the Companys various accelerated pipeline replacement program with an ongoing focus on replacing aging infrastructure to improve the safety and reliability of the system investment during the quarter, but the year to date 2021 capital spend on accelerated investment to Canadian 242.
A million dollars.
Overtime. These.
Investments should reduce operating cost and emissions through risk reduction and drive better customer environmental and societal outcomes.
Turning to headlines of natural gas shortages in Europe, and the increased demand coming from Asia, we have.
Seen a significant run up both globally and domestically of natural gas prices.
As a result heading into 2021 and 2022 heating season natural gas prices are meaningfully ahead of recent years.
Fortunately for this upcoming winter at the gas utilities winter season supply plan is designed to sort of slightly more than 50% of normal winter natural gas throughput volumes from contracted storage services.
Given that the bulk of the company storage was sold at much lower non heating season prices. We expect that this position will partially shelter customers than some of the significant price moves that we are seeing an unexpected in the market in the next few months.
The energy transition is upon us.
And we will have impacts across the energy value chain.
However, as evidenced by the current global energy shortage and cascading negative pricing effects that are taking place across the world. We continue to believe in the role benefits and the liability that responsibly sourced natural gas will provide to our customers as we embrace the energy transition.
Our view on the transition is that natural gas and LPG will remain critical pieces of our long term global energy picture.
We view ultra gas role to be focused on reducing emissions across our operations and investing in energy evolution opportunities that leverage our unique asset base and further reduce the environmental footprint of our operations and those around us.
We will also continue to advance initiatives around renewable natural gas and hydrogen.
On the latter we are pleased that the Maryland Public Service Commission approved our first LNG project, a partnership between WCS and Washington Suburban Sanitary Commission.
To transform sewage waste into renewable energy.
This is our first foray into projects of this type and it will able enable ultra gas to refine and learn more about this promising technology.
We can identify other potential projects to expand the use of R&D in the years ahead.
So with this evolution, we will advocate for our customers long term interest with a focus on safety reliability and affordability.
And with that I will turn the call over to James to review the financial results in more detail.
Thank you Randy and good morning, everyone. As Randy mentioned, we are pleased with the results that we delivered in the third quarter. We continued execution of ultra gas as long term strategic plan positioning the company to drive further long term stakeholder value creation.
Normalized EPS of <unk> <unk> in the third quarter of 2021 compared to <unk> for the third quarter of 2020 positions altogether well to deliver on 2021 financial guidance.
Normalized <unk> per share of <unk> 61 in the third quarter of 'twenty, one compared to <unk> 40 in the third quarter of 2020, representing 53% year over year growth and continues to provide the foundation for increased returns of capital to shareholders and to fund ongoing organic expansion.
Normalized EBITDA of 244 million in the third quarter of 2021 compared to $213 million in the third quarter 2020, representing 15% year over year growth.
Results reflected strong execution across the entire platform, particularly within the midstream segment, which demonstrated robust growth across the business.
Normalized midstream EBITDA was $186 million in the third quarter of 2021 compared to $114 million in the third quarter 2020, representing a 63% year over year increase.
Midstream results were positively impacted by approximately $20 million this quarter as a result of revenue recognized for LPG export cargo that was loaded at the end of the third quarter at spot prices, but the offsetting hedge loss will not be realized until delivery at the destination points in the fourth quarter.
As a result of this timing related hedging loss, our EBITDA for Q3, 2021 is roughly $20 million higher than we anticipated and we would therefore expect a commensurate offset to the normalized EBITDA reported for the fourth quarter is it effectively had the impact of pulling revenue forward one quarter.
Normalized EBITDA from our global excellence business of 106 million increased $78 million year over year, driven by the petrol gas acquisition and record global export volumes from our two export facilities.
Due to the previously mentioned timing related hedging loss global exports EBITDA was approximately $20 million higher in the quarter.
Our processing and fractionation business continues to be supported by strong fundamentals.
Fundamentals for natural gas and long term Montney development plans as gas processing volumes were up 11% year over year.
Fractionation liquids handling was up 15% year over year.
Other factors impacting midstream normalized EBITDA in the third quarter included higher revenue associated with her matan cogeneration facility due to favorable Alberta power prices offset by no a F E. D C recognized for MVP as well as a lower contribution from Gordon deal due to the blend and extend contracts taking effect in 2021.
We continue to actively derisk, the midstream platform and reduce commodity price exposure and volatility where appropriate.
In the third quarter, approximately 94% of our Frac exposed volumes were hedged.
We also remain well hedged through the balance of the year with approximately 66% for the fourth quarter global export volumes told where collectively hedged.
This includes an average FTE I did north American financial hedge price of approximately $12 64 U S per barrel for both propane and butane.
We also have 95% of our expected frac exposed volumes hedged in the fourth quarter at $25 70.
Normalized utilities EBITDA of $62 million in the third quarter of 2021 compared to $80 million in the third quarter of 2020.
There was a $17 million pension accounting change that was realized in the third quarter of 2020 that was not present this quarter, while the unfavorable move in the Canadian to U S. Dollar foreign exchange rate drove a further $4 million year over year decrease compared to the performance in the third quarter of 2020.
WGN reported normalized EBITDA of $13 million compared to $32 million in Q3 2020.
In addition to the previously mentioned pension accounting impacts the quarter included warmer weather in DC, a $4 million negative impact from foreign exchange, which was partially offset by the positive impact of Maryland, and DC rate cases, and continued ERP investments.
Chemical and <unk> combined normalized EBITDA was $25 million in the third quarter down $3 million from the same period last year due to warmer weather in Michigan, partially offset by colder weather in Alaska and slightly higher one time costs and foreign exchange.
And finally normalized EBITDA from the retail energy marketing business was $23 million in the quarter, an increase of $3 million year over year, driven by higher gas margins due to favorable pricing and the timing of certain in the money hedge settlements in Q3, partially offset by lower power margins.
The corporate and other segment reported a normalized EBITDA loss of $4 million compared to $19 million earned in the same quarter of 2020.
The $23 million year over year decrease was driven by a combination of higher expenses related to employee incentive plans as a result of Ulta gasses rising share price over the course of 2021.
The monetization of Pomona energy storage.
And ultra gas Rip and energy Inc. In the third quarter of 2020 in the absence of recoveries related to the Canadian Canada emergency wage subsidy that were present in the third quarter of 2020.
Depreciation and amortization expense for the third quarter of 2021 was $111 million compared to $108 million for the same quarter in 2020.
The increase was mainly due to new assets placed in service and the consolidation of the Petro gas assets.
Interest expense was 69 million was up slightly over last year's comparable period, a $65 million as a result of modestly higher average debt balances, partially offset by lower average interest rates and a lower U S dollar to Canadian dollar exchange rate.
Looking ahead at the gas continues to be focused on many of the same priorities. The company has over the past two and a half years. This includes executing on our long term corporate strategy of building a diversified platform that operates long life energy infrastructure assets that are positioned to provide resilient and durable value for the company stakeholders.
Ultra gas continues to focus on delivering durable and growing EPS and <unk> per share, while targeting lower leverage ratios and increasing margins of safety within the business over time.
This strategy should support steady dividend growth and provide the opportunity for ongoing capital appreciation for its long term shareholders.
Altogether is reiterating its 2021 increased guidance ranges that we provided in April 2021, which include.
Normalized EPS guidance is $1 65 to $1 80 per share.
2021 normalized EBITDA guidance is $1 75 billion to $1 55 billion.
And altogether. This 2021 capital expenditure plan is being reduced from 910 million to $850 million.
The largest drivers for the reduction or a lower forecasted utility spend which was partly driven by a stronger Canadian U S. Dollar exchange rate, which reduces the cost of capital expenditures in Canadian dollar terms and select midstream spending is now expected to roll over into early 2022 instead of 2021.
The capital expenditures program remains heavily weighted towards the low risk utilities business and it's comprised primarily of AARP and system betterment projects that aren't anticipated to deliver stable rate base growth and strong risk adjusted returns.
These investments are directed at delivering improved long term customer safety and environmental outcomes.
Finally, we are looking forward to hosting our first investor day over the past five years, which will be held virtually on December 15th.
More details on this event will follow in the next few days.
That concludes our prepared remarks, and we would be happy to turn it over to the operator for Q&A.
Operator.
Thank you, ladies and gentlemen, we will now conduct the analyst question and answer session. If you'd like to ask a question press. The Star then with the one on your telephone keypad.
If you would like to withdraw your question press the pound key.
It'll be a brief pause while we compile the Q&A roster.
Your first question comes from Rob Hope from Scotiabank. Please go ahead.
Good morning, everyone.
First question is just on the 'twenty 'twenty. One guidance. Then you are reiterating kind of the upper end of the band are just taking a look at Q4 are there anything specifically, we should watch out for just given the strong results year to date and I guess aside from that $20 million of LPG headwind in Q4. It seems that the top end of the range is relatively conservative.
Unless there's some other things that are settling out in Q4.
Robert It's James here, Yeah look I think when you look at Q4 of 2020 and you try to extrapolate that into Q4 2021, Theres a few things that.
Contributed to 2020 results that are not going to repeat in Q4 of 2021. So you touched on obviously the hedge loss, which has already been telegraphed, but we had a P. D. C that we were recording on MVP in Q4 of 2020, that's not contributing anything in 'twenty one.
We obviously sold the U S storage transportation business that contributed in 2020, there's FX headwinds just given a higher exchange rate on the U S. Dollar front that also helped.
Q4 of 2020, and then obviously on the retail side of the business, we do have higher PGM costs throughout 2021 relative to the comparative period in 2020 so.
Those are some of the items that would probably push us a little bit lower than where we were in Q4 of 2020, but we still feel comfortable that the top end of our range is.
Is achievable.
I appreciate the color and then just not going to take a look out to 2022.
Propane pricing has been strong, but we've seen a real catch up and in kind of North American propane benchmarks. How are you looking at that exposure and maybe speak to kind of have the potential to kind of move more butane over Q over propane and in that year.
Yeah, I mean, I can I can provide some comments and then maybe Randy toone to jump in there too, but I mean, if you look at propane spreads throughout 2021, you know, we've really started to see them strengthen heading into Q4 and then when we look at the forward curve into 2022, Theres the FBI to Mt Belvieu spreads.
Almost $10 so.
So we do we do expect some strength there and we will start to actively hedge some of that position heading into into 2022 as well and for 'twenty. One we're already highly hedge but we continue to layer in hedges.
Our hedging program above the 65% that we exited Q3 at just given the strengthening in the curve.
Yeah. This is Randy toone.
No North American.
Prices are high, especially heading into the into the winter. So it all depends on what kind of winter in North America.
As always there are also going into winter and we feel that the FBI will strengthen as well.
Okay.
Margin will be there.
I mean from September 30th two probably yesterday when I got the last report we have seen.
The spread on propane expand by about $1 from an equity item Mount Belvieu stuff.
Golar barrel I appreciate that.
Excellent. Thank you.
Your next question comes from David <unk>.
<unk> from Raymond James Please go ahead.
Yeah. Thanks, good morning, everyone.
A question on on the utility side of things.
Could you discuss the commentary I guess in the MD&A about just the natural gas quality service standards and.
Will there be any costs associated with them with the efforts there.
Hi, David This is Randy I'll, let blue or just make some comments on that but with respect to the ER with service levels.
We've been working with our regulators and very proactive in our approach to addressing.
Some of the shortcomings of our former service provider and so it's a very strong proactive actions.
Trending to our service levels that are at pre pandemic levels. So we're certainly.
And that directly Blue I'll, let you go ahead Amit.
Yeah, Thanks, Randy and thanks, David for your question as Randy mentioned, we have been in regular communication with our.
With our commissions all the way through as we were aggressively transitioning from our original service provider to the new one. So you know it's always tough to predict that we don't expect it will be anything that looks like in the read through on the request, but it's always hard to say, but we feel very good about where we are and where we're headed and good converse.
<unk>, along the way and we have weekly conversations with them and they can see the progress. So we're quite optimistic on where that where that lands.
Great. Thank you for that that's it that's helpful. And then maybe just one more for me the R&D project the year.
Just curious if there's any.
Any color you can provide on like the capacity or the cost the capital cost of that project and maybe some thoughts on what you think that orange could represent on the utility side of your business longer term.
Uh huh.
This is Randy I'm left Blue Mic has come up but we're still in the early days of executing the ESG strategy, but we are preparing for the lower carbon energy system of the future and this is just the first step in that direction.
Announcement today, and theres going to be more.
And we're going to continue to invest in reducing our carbon emissions intensity, which includes products to help our customers to do the same.
The politics comment specifically on the project.
Yeah. Thanks, Randy the scale of this one is not big what it does provide is that first working relationship as we build out all of the material. So transfer stations the meters gas quality and a lighter analyzers pressure regulation skater systems authorization equipment all of those things that come through.
That RMG process working with a.
Very.
Very strong partner here all of that gas state and region. In fact will be used for generation on site for that particular facility. So its really a win win for the region and for us and for our Ws F C.
Randy mentioned lots of other things going on in the Hopper. So more to come. This one is really are dipping our toe in the water as we you know design build those facilities and get comfortable on how to handle those type of opportunities.
Excellent. Thank you for that I'll get back in the queue.
Your next question comes from Patrick Kenny from National Bank. Please go ahead.
Okay.
Export license would you be looking to expand capacity of rip it and or Ferndale to accommodate that incremental 40000 barrels a day.
What would that capital costs look like do you expect to build multiple.
And then from a timing perspective.
When do you think you might receive regulatory approval and be in a position to.
Have that incremental capacity in service.
Well this is Randy Crawford.
A lot of exciting things happening in our midstream business and leveraging our export network.
Threatened as I've mentioned in the past, there's significant opportunities for low cost expansion opportunities. Since we continue to grow scale I couldn't be more proud of the team that they'd use operations research digitization to really optimize the system to move record volumes through this quarter.
We're being proactive in terms of.
Our licensing and move more products into both of those facilities. So I think we'd be optimistic about approval and I'll, let Randy add some.
Commentary.
Yes, so the beauty places like Randy says is this.
Kind of secures our future and to be.
We're able to export butane and right now we're exporting butane out of Ferndale around 20 to 25000 barrels a day.
We do think that we can develop an expansion.
Ridley Island with our partner.
And the timing of that is still yet.
To be determined, but we think we'll have regulatory approval here soon with our partners and we can probably talk more about that in.
In the coming future.
Okay, and you used the term proactive here to describe the application.
Perhaps you could just share some insights into the level of customer demand for this additional.
Butane export capability.
Both from existing and prospective customers.
And perhaps you know which customers might be more inclined to support any.
Any capital investment needed.
Extreme versus downstream.
Yeah, Hi, Patrick Great question.
We're seeing robust demand for our services in Asia.
On both the butane and propane.
So that clearly is a big opportunity as we continue that to <unk>.
Demonstrating our ability to consistently deliver clean burning energy to Asia. So I think what you're seeing as we look toward these expansion opportunities as to is that the direct market reaching back in.
Locking in longer term agreements and so we're certainly moving forward with producer push and some firm long term agreements with some of the larger producers in the basin.
Get them access to <unk> pricing and global markets.
We're really seeing robust demand.
On the market side and it goes to our strategy of reaching further with our ships further upstream with our customers.
A quick follow up on the supply push comment there what would you need to expand any of your fractionation and liquids handling capabilities to support.
The higher butane export volume.
Hi.
We continue to work towards.
Touching the molecule throughout our integrated network and we look at opportunities to do that.
But clearly the basin is oversupplied and that we can be able to move products from a variety of.
Our customer locations. So yes, we would see expansion opportunities and we think that we will talk a little bit more about that on the investor day, but we source product.
Clearly from the Montney, but also into the Balkan and such into our customers. So.
There's opportunities to be able to give access to our customers to premium global markets. It really is a differentiating factor for us.
Got it thanks for that I'll jump back in the queue.
Your next question comes from Darius Lindsay from Bank of America. Please go ahead.
Yeah.
Hey, good morning. Thank you for taking my question and congratulations on the quarter just wanted to follow up on the capital shift that you announced I'm just curious as we look ahead into next year, how should we think about the mix between utilities and midstream it sounds like perhaps it could be even more weighted towards utilities.
It is in 'twenty, one and related to that.
Around your 8% utility rate base growth target.
Should we be thinking about as we look out ahead over the next couple of years should we be thinking that that would be a sequential 8% or there'd be some variability in there perhaps from year to year.
Hey, Gary it's James here, so with respect to your first question.
Capital shift that we talked about or the reduction obviously that we discussed on the call was primarily driven the lion's share of it was driven just by the foreign exchange rate.
Being lower relative to what we had set for the budget. So of the $60 million reduction I'd say about $40 million of that was FX related the balance was obviously, yes, just shifting some midstream capital for turnarounds into early 2022 versus 2021.
That being said I don't anticipate that that would materially shift the proportion of capital that we're that we have earmarked in 2022 for utilities versus midstream I still think that that percentage is going to stay relatively stable as we head into 2022.
With respect to your your comments around growth rate I mean, obviously December 15th we're gonna be sharing a lot more information in terms of our rate base growth over over the next little while but we would expect the 8% that we've cited in the past as a CAGR. So you might see a little bit of variability, but that's what we would average in terms of rate base growth over the next four to five years.
Excellent. Thank you that's very helpful and if I can stick with utilities for one more question I think I heard at the opening remarks, and maybe just a point of clarification that you are on track to.
Exit 'twenty, one at a run rate of achieving your authorized Roe.
At the W. G L utilities, specifically, but just maybe if you can clarify that and maybe just talk about some of the efforts there on.
I know you discussed ERP, but also maybe on the Opex side as well if you could.
Sure no.
This is Randy.
As I've said in the prepared remarks, we are on track.
Independent earn our allowed returns and I'll just give you some color on the opportunities ahead, and we think that there is continuing.
On optimization across our utility business and that's what that's really what we do as a company is to look for those opportunities to bring efficiencies to the business and of course invest capital to take out costs and lower cost over time and one of the great ways that the utility is doing it is the continued execution of our <unk> program because as you.
Well now that not only does that happen.
Clean energy benefits from reduced emission, but it lowers operating costs, which will be offset to some of the inflationary pressures.
And keeping costs low for our customers. So our teams are committed to that the digitization improvement of process reduction of activities and the renovation and reinvention that's going on at our utility the blue and his team are leading is very exciting and less jameson.
Got it.
Get into some more detail in our Investor day, and we're looking forward to it but I think you'll see that.
They are well positioned to continue the growth going forward.
Excellent. Thank you I'll leave it there and congrats again on the quarter.
Thank you I appreciate it.
Your next question comes from Linda <unk> from TD. Please go ahead.
Thank you.
Just wanted to get some more understanding of how you're thinking about.
Locking in some of the positive pricing that you're seeing in the forward markets as it relates not just to FDI spreads, but also your frac spreads can you talk about.
How your.
Hedging approach might change if at all going into 2022 and the actual.
Levels that you might have already locked in for 2022.
Yeah.
Yeah, I mean, that's it's James here, obviously, I think you touched on an important factor, which is a significantly.
Significantly higher frac spread heading into 2022 than what we've seen in 2021. So we've already been out there hedging part of that and locking in that cash flow I think we already addressed how we are approaching if you add in Mont Belvieu, given where we see Cal 'twenty two right now and obviously on the freight side as well and we've already started to lock in.
<unk> in terms of our approach to it as we get visibility and certainty around supply volumes.
As a as we get closer to 2022, that's where we start to layer in those hedges and protect those those cash flows. So we will update obviously the markets as we move through our reporting cycle with year end, but we would also probably have a little bit of an update at our investor day in terms of how we're going to approach that going forward, but typically what we want to wait and do is get some certainty.
Around supply and then we'll go into the markets. If we like where those spreads are to lock in those cash flows.
Okay. That's helpful and just in terms of tooling understanding that we'll probably get a more fulsome update at your Investor day, but also can you just help us understand what the sticking points might be for.
For producers to commit to either your base capacity or potential expansion at Rupert and when you might see some.
Traction on that front.
Linda This is Randy. Thank you for the question. It's a good question, but we're in constant discussions has been kind of consolidation that's gone on in the basin with our larger lots of producer customers and clearly I think.
As far as the pricing and some of the environment has improved I think that's actually looking toward longer term commitments. There are producers is that something that that were having pretty extensive discussions on and as you alluded to where we'll get into a bit more detail in our investor day about that but I think that that's a.
The continued execution by our team which has been tremendous.
As encouraging as well to do our producer community and so in terms of term and consistency.
I think those are the types of things that are.
Driving increased tolling and it's a big driver for Us and I also alluded to remember that we're also seeing demand from the market as well for longer term.
These leach back so I think as you look at our us going forward as we continue to grow this business and Derisk the platform Youre going to see a combination of both producers and locking in longer term as well as the market.
Thank you and maybe well just as a follow up while we're on the topic of tolling and contracts.
Can you provide us with an update on the lies and what the thoughts are at what point and at what levels.
That facility it might be re contracted and how about the attributes around any sort of commercial arrangement might differ from what is in place currently.
Well Linda as you.
Whereas it's under a current tolling agreement.
I believe that two more years and that we're in discussions.
To extend that arrangement.
With the California Commission as well as in Southern California.
And so I think that again the key drivers there that's a very critical asset into the grid in California. So you know I don't want to front run those negotiations, but overall I think you'll see a similar aspect of.
A tolling for.
I can extended term.
Thank you I'll jump back in the queue.
Your next question comes from Robert Kwan from RBC. Please go ahead.
Good morning.
If I can just go back to guidance and James you listed a number of things that you saw as headwinds year over year.
Just wondering what are you seeing in terms of all of those things were already baked into the Q3 results other than.
But the $20 million hedge timing outside of that one piece what are you seeing anything to be concerned or headwinds why just kind of rolling Q3, four minus that hedge adjustment.
So when you say and I just want to clarify Robert when you say rolling Q3 forward in terms of basically.
Reducing the positive contribution from the hedge in and.
Having the same kind of results on the midstream platform or just yeah, sorry, Yeah, just yeah on the midstream platform you've listed a bunch of other things that I think you were just trying to frame for Q4, and I think almost all of those things, where we're already baked into the Q3, yes.
Yeah. So just so great question, if you're just focusing on the midstream platform and obviously the midstream platform moved 18 ships in Q3 and part of that was a bit of a spillover from ships that were.
Q2, that's kind of slipped into Q3, I think the capacity of the export facilities also increases in the summer months, because we're able to move more product via pipeline out of the refineries into the Ferndale facility, which gives us the ability to move.
Export volume. So Q4, we don't expect to do 18 shifts as a result of that we're now relying again on rail we don't have pipeline capacity because the refineries are using that.
We would be looking to do.
13% to 14 ships in the quarter, which would put us on track for the expected ships that we had for the entire year. So that that is another factor that you can't just extrapolate Q3 into Q4 on the midstream side.
Okay. That's fair and then just on the utilities.
New rates flash rate base.
Anything else, obviously weather can be a swing, but anything else for us to think about on the utility side for Q4 21.
Yeah, I mean, you touched on one it was it was weather.
<unk> a risk, but the other one that I touched on in my response to an earlier question was just PJM charges on the retail side. They were a lot lower in Q4 of 2020 versus what <unk> been averaging throughout 2021 and in Q4 is going to be a higher PGM charge on the retail business. So we will see some better.
Ability year over year as a result of that as well.
And can you quantify are you able to quantify what that year over year impact might look like.
Yeah, probably in the neighborhood of $15 million to $18 million.
Okay. That's great. Thanks, I guess just to finish.
The NGL setup into 2022 and you touched on.
Hedges I guess, just first are you able just to quantify.
What the realized losses.
On the Frac spread hedges, where this year I E. What should reverse out into 'twenty, two and then at.
The uncertainty on the volumes are there any early thoughts I know the NGL years, a little bit far out to talk about that.
What if anything just on the upcoming gas year, and what extraction premiums might look like for 'twenty two versus 21.
I want to comment on them.
Sorry, Robert it's Randy Toone here.
So.
I can't comment on the Frac hedge losses, but as far as volumes grow.
We're very confident we will have similar frac spread barrels as we did in in 'twenty. One is close to 10000 barrels a day and that would be similar for 'twenty two.
Are you or are you talking about export volumes.
Well you got comments about but that was largely looking about what you think you can secure on the frac spread side.
Side of things, but if you've got comments as to what you might be seeing on the export volumes are 22, that'd be great too.
So sorry, Robert It's James again. So are you are you looking for what we've already locked in in terms of hedges for 2020.
Well actually the hedging question was just trying to.
How much money have you lost on the Frac spread hedges.
Year to date.
Presumably.
Last year hedged again for 'twenty, two well below market, that's actually dropped just reverse itself out if.
If you've got similar volumes for next year.
So I mean, if I understand your question I think it was about five five to $6 is what we had in Q3.
And obviously the frac spread heading into 2022 is higher than where we were.
In hedged for pretty much the entire 2000.
'twenty one calendar year. So we are hedging right now.
Well above the $26 that we've been we've been enjoying throughout 2021, I mean, we've seen frac spreads go out to about as high as $40. So right now, we're probably averaging closer to the low <unk> in terms of some of the hedges that we've executed for 2022.
Okay, I can take that offline I guess, just Randy though on the extraction premiums is there anything that we should should we be expecting.
Jerry a lot less and extraction premiums in 'twenty, two just given where frac spreads are.
No.
We have our extraction facilities.
We won't be impacted by higher extraction premiums so I'm sure there will be but.
It's not going to be material for us.
Perfect. Thank you.
Your next question comes from Ben Pang from.
From BMO. Please go ahead.
Hi, Thanks, good morning on <unk> and your comments around sheltering the commodity price over next year.
So I'm wondering if you can maybe comment on what what percent of the commodity bellies.
Apprised as the consumer Bell.
And also curious around is is there.
A lagged impact between earnings and recovering that commodity pricing and cash flows and then also can you comment on historical sense.
The Tivoli consumers to these higher gas prices in the past.
I'll, let I'll, let <unk> address that.
Yeah, Hi, Ben So couple of comments.
One of the things about both our Washington gas and our Simcoe utilities is about half of our flooring supply in the winter comes out of storage on a normal winter and that of course that that storage cost. This year is materially lower than the winter strip. So that that's that's a built in protections for the customer.
Base right out of the get go in terms of what percentage is the commodity of the overall bill obviously that varies by jurisdiction remember for us the commodities just a pass through right. It's just a recovery. So obviously you have a little bit of you have a little bit of risk on.
On higher bills mean, a higher level of bad debt and collection and some of that but overall, we expect the bill to be up about 20% on an annualized basis due to commodity cost.
All in which is very consistent with what we're seeing nationwide in terms of sensitivity to a colder weather again, you know you always get a little bit of.
Energy efficiency that comes it would have to be materially colder across the jurisdiction than what we've seen we think they have a big input impact on throughput, but those are kind of the data points if that helps.
Yeah. It does and I was also curious more that the consumer sensitivity in the past.
I think low gas prices for some time, but it was a period of time, where gas prices are quite Alabama consumers pushing back a lot of it at that time.
And also it sounds like there's there's not really a.
He was like impact any recovery of commodity price quite quickly. It it's not a deferral mechanism where you recover over the next couple of years.
That's correct, Yeah, that's right on the commodity recovery that's right.
Okay, and then and maybe that the consumer.
Things I mean, maybe not combat commack in historical by you.
Hearing or expecting any push backs on this.
20% increase.
Yeah, well I mean, none of us like higher bills right. So.
The good news is I don't know that maybe that's the wrong term, but it's well covered in both the regional and National press in terms of energy prices across the country and so it's not a surprise we to of course put out information.
Information and press releases to our consumers. So they can plan. Accordingly, we also have energy efficiency programs and we offer you know help them winterize their home to do some of those things point them to energy assistance funds and those types of things. So we were very public about that opportunity as well.
Other thing that we that we talk about that I think is understood may not be understood at the individual consumer level, but it's certainly understood at the commission level is while natural gas prices are up. So is every other commodity and when you look at the cost of actually heating a home for the winter natural gas is still be lowest cost option compared to the other alt.
Some of it is which obviously include electric home heating oil propane et cetera, it's still materially cheaper against all of those so.
Those things are all those things are all balancing points when we have those conversations at both the commissions on the consumer level.
Oh, that's great that's very helpful.
Your next question comes from Andrew Kuske from Credit Suisse. Please go ahead.
Thanks, Good morning, I guess the question is for Randy and it's more of a strategic path and that's really looking at the big picture perspective.
The turnaround that you've already gone partway through maybe not fully there for restoring all the value in the company.
But when you look at the utility business, where you still have some ROE restoration, some capex catch up in some other stuff going on.
And then the Lumpiness on the midstream side, where you had some incremental capital got deployed big step ups in EBITDA contributions and then overall deleveraging of the company how do we how do you think about just pace of growth and strategic positioning for ultra gas overall with the business mix that you have and just some of those underlying issues.
Associated with the differences of the business.
Yeah no. Thank you for the question and I appreciate it as I've stated in the past.
We remain focused on operating our long life infrastructure asset that we're committed to our long term strategy.
Building, a diversified utility and midstream businesses.
When I came here in December of 2018, I talked about the restructuring as you pointed out an enviable opportunity for growth for our company and I would tell you that our diversified model and our strategy is working you can see it in our performance and our operational results as well as our performance in our stock price. So.
I think that.
As we sit here today, we are going to continue to remain focused on executing our strategy.
Derisking deleveraging and optimizing.
And then its upside that we have in both businesses.
So at this point, that's our primary focus and I think it's working.
I appreciate that and then I guess, if we sort of look back that Brexit in particular, and then what you've done with Ferndale, thus far.
Clearly rip that there were some questions on that in the beginning.
Very validated you can see that in your results.
Do you think about the capital going towards that export oriented business.
Let's say the next three to five years may be accelerating and being able to be done faster than the past because of the validation of the strategy and just the outlook.
Look for that.
As a commodity in western Canada.
No. Thank you for that.
I I completely concur.
Be more excited about the opportunities that we've done.
In front of us and what we've demonstrated.
Randy and his team were fast, becoming an energy logistics and excellent companies.
And the team has done an outstanding job.
Elevate that model going forward.
In terms of your question in the next few years.
Yes, I think youre going to see us continue to invest in increasing the scale of this business.
And locking in longer term contracts with customers both on in Asia and beyond.
I think that Youll see that continue to accelerate and we will talk a little bit more obviously in the upcoming Investor day.
Yes.
Credit to the team, but again I think the future is about moving this.
Cleaner energy and fuels.
Asia.
Out of this.
Smart in the basin and I think also there's tremendous option value as you look ahead toward alternative fuels.
And as we continue to move the cleaner LPG fuels into the future.
We are well positioned.
Through our ports and access to move the fuels of the future as well. So again, we're going to continue to invest increase that scale and I think we're going to drive real value I know, we're onto our customers into Canada as well.
Okay. Thanks, Randy.
Appreciate it thank you.
Your last question comes from Robert <unk> from CIBC. Please go ahead.
Yeah, well I can tell you.
CIBC.
Wondering if you could.
Elaborate on the comment in the MD&A, but the pace of activity recovery.
Specifically.
The impact of the interim resolution between the government of DC and the Blueberry River first nation.
And maybe you could also talk about the relatively modest stated drilling attention from the major producers.
And the Bcl royalty review as well.
Okay, great. Thanks for the call I'll, let Randy address here.
Specifically with the Blueberry River.
Hi, Robert.
So the.
We've always had a very collaborative and strong relationship with the TD eight first nation members in.
When we look at development, we've always took a.
Our balance between environmental and economic.
Needs.
And when you look at the Treaty eight.
What they've publicly talked about was that they're not they're not they don't want to stop development.
They want a say in development and I think I don't think gas is always worked collaboratively with them to give them a say in how we develop.
So we're encouraged by some of the discussions we're having with the BC government and we think that they're going to come up with a process going forward that will continue to have development because.
That resources, so so valuable.
And when we look at our customers you know a lot of our customers have been proactive and they already have permits in place.
Some of our customers are not slowing down and so we do still think that that resource is going to be developed and we think that we're in a good spot to work with our customers to help develop it.
And.
But just the royalty review.
Too early to tell I know, but any indications of that.
Causing any variability in drilling attention.
But what we didn't know about the royalty review is that they.
We're taking a look at the process.
Seeing if they can make it simpler and do we know.
Theyre looking quite a bit of the Alberta.
Royalty process, and we're very familiar with that and so we're not we're not.
Read that it's going to have a huge impact on on say development in that area.
Okay.
Quite early days, but there is an update to the BCA climate plan I wondered if you see any impact on that.
Their business, specifically methane emission targets and requirements there.
Also there is some.
Indications are that the new projects tend to have enforceable plans to meet net zero in 2015.
Do you see any.
Any immediate impact that you can talk to with respect to how you might develop a midstream business there.
Yes, we've we took a look at the <unk>.
He sees no climate plan and when we look at our facilities, where we're always looking at.
Reducing our carbon footprint and so we are looking at electrification of our facilities or carbon capture.
And working with our customers to do that.
And we just don't think that that's going to slow down anything it's just going to change the way we might develop.
Okay. That's fair and last question for me I wondered if you could there is a couple of comments about growth in AR.
G&A, both in the utilities and in the corporate sector segment I Wonder if you could.
The effects of inflation.
Yeah, I think the growth is.
And G&A in that business.
To a large extent in this quarter related to accruals around long term incentive, but but overall I think the growth and the cost is consistent with the growth in the business.
And I think the team has done an excellent job of managing its cost in implementing the digitization new technology for productivity overall and I think that's generally a win this quarter is particularly related.
To the long term incentive.
<unk>.
Okay fantastic. Thank you.
This concludes the Q&A portion of today's call I will now like to turn the call back over to Mr. Mcknight.
Thanks, Kathy and thank you everyone. Once again for joining our call today and for your interest in Ulta gas and as a reminder.
Investor Relations team will be available after the call for any follow up questions that you might have.
That concludes our call this morning, and I hope everyone enjoys the rest of the day you may now disconnect your phone lines.