Q4 2021 AltaGas Ltd Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the Altra gas fourth quarter 2021 financial results Conference call.
Ms Michelle and I will be your operator today.
All lines have been placed on mute to prevent any background noise. However, if you have any difficulties hearing this conference. Please press star zero for operator assistance at any time.
After the Speakers' remarks, there will be a question and answer session I'd like to remind everyone. This conference call is being broadcast live on the Internet and recorded I would now like to turn the call over to Mr. Adam Mcknight Director of Investor Relations. Please go ahead Mr. Mcknight.
Thanks, Michelle and good morning, everyone. Thank you for joining us today for Alta Gas's fourth quarter and full year 2021 financial results Conference call.
Speaking on the call. This morning will be Randy Crawford, President and Chief Executive Officer, and James Harmless 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 and Investor Relations and corporate development.
We'll proceed on the basis that everyone is taking the opportunity to review the press release, and our fourth quarter results and similar to previous quarters. We published an earnings summary presentation that you can find on our website. 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.
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.
As for the structure of the call will start with Randy Crawford, providing some comments on our financial performance and progress on our strategic priorities followed by James harmless, providing a more detailed walk through of our fourth quarter financial results near term outlook in 2022 guidance and then we'll leave plenty of time at the end for Q&A.
So just before we begin I'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 SEDAR and Edgar.
And with that I'll now turn the call over to Randy.
Thank you Adam and good morning, everyone.
2021 was a strong year for off the gas as we achieved a number of significant milestones across our platform.
I am proud of the strong financial and operational performance that we delivered over the course of the year and the progress we made on our ESG initiatives we.
We delivered earnings per share growth of 25% year over year and normalized EBITDA growth of 14%.
These results were well within the ranges are April 2021 increased guidance.
The operational and financial impacts associated with the devastating flooding impacted communities in British Columbia, and Washington State during the fourth quarter.
Our 2021 operating results built upon the strong growth that we delivered the past two years and is a testament to our diversified model that continues to demonstrate strong advantages throughout market cycles and operating environments.
Continued to deepen our organizational capacity and significantly advanced at the gas long term corporate strategy by improving operating practices that are focused on long term operational excellence.
And our utilities, we achieved 6% EBITDA growth.
Milder weather in Michigan N D C. During the first quarter.
We added 17000, new customers across our utilities network in 2020 , one while increasing our rate base by approximately eight 5% year over year through our continued investment in our networks enhancing the safe and reliable service we offer our customers.
Our utility operations were strong and.
And we continue to center on the same regulatory capital and cost discipline that we have been focused on instilling over the past three years.
Our continued investment and accelerated pipeline replacement as resulted in a 23% and 13% reduction in leaks since 2019 and 2020, respectively.
We are now exceeding our customer service metrics, having overcome the initial challenges we faced by changing our call center provider at Washington gas in the third quarter.
These are foundational improvements that will continue to accrue benefits well into the future.
With our midstream segment, we delivered an exceptionally strong performance. This year. Despite the unexpected headwinds faced in the fourth quarter. We are extremely proud of the financial performance that we've delivered over 2020 one.
With more than 2 billion of investment in the recent years within the northeast D C and our global export platform.
We are excited about the egress solutions that we have been able to provide to producers in the region and our ability to provide critical source of needed natural gas liquids for key Asian markets.
We also take great pride that our infrastructure and operations will support better global environmental outcomes that align with lower carbon and lower emissions future that is upon us.
We successfully completed the integration of petrol gas and achieved combined synergies has exceeded our $30 million target.
This is a testament to the strong talent, we added to complement the existing strengths of our organization.
Through the combination of our export assets, we were able to average approximately 90000 barrels a day of global exports in 2021.
Which was in line with our annual target.
With the flooding behind us the platform is well positioned to achieve our 2022 export target of 97000 barrels a day.
Our gas gathering and processing and fractionation liquids handling operations also demonstrated strong growth, which is a testament to the integrated value chain we operate.
We continue to make strategic investments in our Montney and global export platform with a continuous focus on connecting customers and markets over the coming years.
The macro environment for energy fundamentals continues to strengthen as the tightening supply and demand picture drives commodity prices to levels not seen since 2014.
The unfortunate events that had been unfolding in eastern Europe , illuminate the critical value of energy independence and diversity.
These events are already producing far reaching geopolitical implications regarding energy security.
Germany recently announced plans to further diversify its energy supply with the recent announcement of planned additions for two new LNG terminals as well as numerous discussions by foreign countries related to the investment in long term contracting a diverse energy supply.
We are fortunate in Canada, and the United States to have access to abundant sources of energy.
It is imperative that we invest in critical energy infrastructure continues as we continue the transition to the energy sources in the future.
Ultra gas is well positioned to support the continued development of energy resources, such as the Montney and to a lesser extent the Marcellus shale to facilitate the best outcomes for our customers in Canada.
The U S and Asia.
It's unfortunate that the narrow view that has been taken regarding M. D. P has caused significant delays to the completion of the pipeline.
The pipeline would ensure diversity and affordability of natural gas critical east coast utilities that serve the energy needs of the U S residents and businesses.
The two Bcf a day design capacity of the pipeline has the potential to free up natural gas originating in the golf that could be available for export to Europe .
They also take a lot of pride that our infrastructure and operations will support better global environmental outcomes that align with lower carbon and lower emissions future that is upon us.
Our midstream business will continue to be centered around our global export platform, which provides access to key west coast North American ports they.
They provide a structural advantage, which is a 60 per cent advantage over the U S Gulf coast, and a 45% advantage over the middle East for shipping timing savings.
This provides north American producers and Aggregators with the best Netback for propane and butane will providing diversity of critical LPG supply and contributes to the energy security in Asia.
In these uncertain times in which we live.
We take great pride in being able to be a steady and reliable energy provider in North America as.
As well as Japan, South Korea, and other key Asian markets.
And as I look ahead I am.
I'm extremely excited about the position of our company and the increasingly constructive energy demand fundamentals as the global economy continues to recover.
We remain steadfast in our strategy and are firmly committed to leveraging our strategically positioned utilities and midstream assets, both with significant organic growth opportunities.
So in closing I am proud of the role that all the gas plays in supporting North American energy independence, and our ability to export affordable butane and propane L. P g's to the world.
And with that I will turn the call over to James to review the financial results in detail.
Thank you Randy and good morning, everyone.
As Randy mentioned, we are very pleased with our 2021 financial results and the strong progress that we were able to accomplish during the year.
We achieved normalized EPS of <unk> 38 in the fourth quarter and $1 78 for the full year.
This included landing within the upper end of our 2020 , one guidance range of $1 65 to 180 and represented a 25% year over year increase.
Normalized EBITDA for the quarter came in at 341 million and $1 49 billion for the full year, which was slightly below the midpoint of our guidance range of 1.4 dollars 75 to 152 5 billion and represented a 14% year over year increase.
You'll recall that both of these guidance ranges where increase in April 'twenty, one versus our original expectations at the start of the year.
Normalized <unk> was 287 million for the quarter and approximately $1 2 billion for the full year, representing 19% year over year growth.
This strong cash generation provides us with the foundation to fund our strong organic ongoing organic growth opportunities and increasing our returns of capital to shareholders over the long term.
Turning to our segmented results for the fourth quarter normalized midstream EBITDA came in at 102 million compared to $128 million in the fourth quarter of 2020.
The quarter included continued year over year growth in our global exports platform, albeit at a slightly slower pace than would've otherwise been the case due to the devastating flooding that occurred during the fourth quarter and the large rail outages on the west coast.
All of the gas gathering and processing volumes increased 9% year over year in the fourth quarter of 'twenty, one well fractionation and liquids handling volumes increased 37% year over year.
Okay.
Growth within ultra gasses facilities continue to be more heavily weighted within montney facilities and the company's industry, leading footprint in the region.
Strong.
The strong volume growth numbers were offset by two major factors. The first was the $24 million related hedging loss that we previously disclosed in the third quarter.
This relates to the recognition of revenue for an LPG cargo that was loaded at the end of the third quarter at spot prices with the offsetting hedge loss not realized until delivery in the fourth quarter. Once the ship reached its destination.
The second factor was the logistical and cost challenges associated with the flooding on the west coast with the total financial impact of approximately $20 million.
Although we were able to mitigate some of the transportation and supply chain outages by redirecting certain propane volumes to rip it.
They were originally destined for Ferndale, we were not able to alleviate butane volume disruption disruptions with financial performance further impacted by higher transportation costs associated with rail switching to handle the large logistical outages.
Other factors that impacted the fourth quarter results include a few D. C on MVP no longer being recorded throughout 2021, the loss contribution from the U S storage.
Business that was monetized in the second quarter of 'twenty, one and the impact of the Gordon Dale blend and extend contract.
Considering the size and magnitude of the flooding and mudslides, we were encouraged by the Swift recovery by the team to get US back on track in early 2022.
Looking ahead, we continue to actively derisked, the midstream platform and reduce commodity price exposure and volatility where appropriate.
We're well hedged through 2022 with approximately 44% of global export volumes told where collectively hedged. This includes an average STI to north American financial hedge price of approximately $13 U S per barrel between our expected propane and butane volumes.
We also have 74% of our expected frac exposed volumes hedged in 2022 of $33 per barrel.
Normalized utilities' EBITDA was $238 million in the fourth quarter compared to 259 million in the comparable quarter of last year.
The year over year decrease was largely due to unfavorable weather conditions and the impact on retail marketing power and gas margins and higher PJM costs in 2021.
Lastly, the continued weakness in the U S dollar to Canadian exchange rate drove a further $7 million year over year impact during the quarter compared to the fourth quarter of 'twenty two.
WGN reported normalized EBITDA of $183 million in the fourth quarter up 8% year over year.
Driven mainly by the positive impacts of the Maryland D C rate cases.
Continued ERP investments as well as higher returns on pension assets and asset optimization.
It also included some costs associated with replacing replacing the customer call service provider at Washington gas following service and performance issues with the former provider.
So I'm, calling and Sars combined normalized EBITDA was $60 million in the fourth quarter down 6 million from the same period last year due to warmer weather in Michigan, partially offset by colder weather in Alaska, and slightly higher operating and G&A costs related to employee benefits and.
And finally, the retail business generated $27 million lower normalized EBITDA contribution on a year over year basis due to a combination of outsized performance in the fourth quarter of 2020, which was driven by the timing.
Of PJM fixed costs, and the timing impact of swap gains between the third and fourth quarters of 'twenty, one the latter of which had the effect of pulling profits into the third quarter of 'twenty, one rather than the fourth quarter of 'twenty one.
The corporate and other segment reported a normalized EBITDA of $1 million compared to $5 million in the same quarter of 2020.
The $4 million year over year decrease was driven by the combination of higher expenses related to employee incentive plans as a result of Alta gasses rising share price over the course of 2021 and the <unk>.
Monetization of Pomona and ribbon in 2020.
During the quarter, we recognized a $271 million pretax impairment on the mountain valley pipeline to reflect the heightened risks and legal challenges associated with the project given recent court rulings.
We continue to believe the pipeline will be completed and is vital to long term energy security on the U S East coast, but the impairment reflects some of the recent risks on the project.
Subsequent to the quarter end ultra gas closed the sale of a 60 megawatt Standalone energy storage development project and delete a California for total proceeds of approximately $15 million.
Alta gas also agreed to sell an interest in certain midstream processing facilities to a customer during the first quarter for total consideration of approximately $234 million.
The transaction is expected to close in the second quarter of 2022.
Turning to our balance sheet, we're maintaining additional approach a disciplined approach to capital allocation within a self funding model that will continue to strengthen our balance sheet and increased financial flexibility over the medium to long term.
We remain steadfast in our goal to reduce our net debt to EBITDA to below five times in the medium term.
2021 year end net debt was $8 3 billion compared to $8 2 billion at 2020 year and this was above our expected levels due to a combination of factors, including a larger than expected working capital.
<unk> higher gas costs.
Cost of gas in storage within the utilities, which should start to unwind in the next few quarters.
Looking ahead at the gas continues to focus on delivering durable and growing EPS and <unk> per share while lowering leverage ratios.
We are maintaining our 2022 guidance ranges, including normalized EPS of 180 to 195 per share normalized EBITDA guidance of one five to $1 55 billion capital.
A capital program of approximately $995 million.
And with that I will turn it back to the operator for questions.
Thank you.
Ladies and gentlemen, we will now conduct the analyst question and answer session.
If you would like to ask a question. Please press Star then the one on your telephone keypad.
If you would like to withdraw your question. Please press the star followed by the team.
There will be a brief pause while we compile the Q&A roster.
Your first question comes from Linda <unk> of TD Securities. Please go ahead.
Thank you.
I'm just wondering beyond the broad industry implications on recent unfortunate geopolitical events and the clear value of our western Canadian and North American energy security and supply.
How are you thinking about maybe the implement implications that might have on Alta gas its strategy and maybe any specific operational potential impacts beyond constructive demand fundamentals.
Hi, Linda Good morning. This is Randy Thank you for the question.
Specifically.
On the geopolitical unrest and its impact on an altar gas specific like I would say, there's not an impact overall, but as I said in my prepared remarks, we're seeing a lot of interest from foreign markets that are interested in controlling their destiny around energy and those recent events we believer.
They're going to bolster that appetite so.
So we're going to continue to work with these entities for contracting offtake at the plants and so these customers are looking to acquire the rights to output.
And I expect that to come.
So that's one of the impacts that were clearly seeing from an operational perspective.
We continue to deliver and the team's doing an excellent job.
Great and just as a follow up are you what about your domestic customers are you seeing rumblings potentially of a supply response to meet the need for domestic demand.
Is it still too early to see that those conversations picking up.
I think that definitely are there we're seeing continued importance of natural gas and the impacts from.
Some of the things in Europe overall, but overall I I'll, let blue comment.
Specifically with the utility, but but we're continuing to see a lot of activity around that.
Increasing request for supply.
Yep.
Yeah happy to Hi, Linda So we are seeing we are seeing an increased response in some of the supply basins that we of course access and Thats, primarily driven as you alluded to to the.
We're also seeing an increased focus on those.
As producers responding to an increase in.
The climate initiatives, so certifying our gas and those types of things. So I think it's quite positive from that we certainly haven't had any access issues to supply and when we go out to talk to the markets. We have a very robust response.
Is that all looks quite positive.
Thank you.
And I'll just add to.
I'm, sorry, Linda I was just going to add that into our pipeline capacity perspective, right that it will continue to need that infrastructure to be built out even to have that supply response.
Yes, good point and just maybe a quick question for James.
The asset sales midstream and the brush power plant.
What would be that the EBITA contribution from those that sold assets can you confirm that this is either credit neutral or positive and are there.
I'm just curious also the rationale for selling the midstream assets and my therapy other assets sold this year.
Thanks for the question Linda I mean at the end of the day when we look at.
The midstream assets the multiple.
On that sale is roughly nine to 10 times EBITDA. So you can you come back into the foregone EBITDA from from close to year end on that number and we don't expect it to impact our guidance ranges and we see it as a credit neutral I mean, it will obviously bring down our net debt to EBITDA figure from where it was at year end you get is closer to about <unk>.
5253 times versus where we exited 2021.
And with respect to the decision to sell it I mean, it's consistent with our approach around creating value by operating these assets and this was a non operated interest. So that was some of the strategic rationale behind us exiting but the liquids associated with this plant continue to be dedicated to our liquids infrastructure.
That's helpful context, Thank you I'll jump back in the queue.
Yeah.
Your next question comes from Gary.
Of Bank of America. Please go ahead.
Hey, good morning, and thank you for taking my question.
Just wondering if you could comment on there was a report in the U S news out but that all of the gas is taking bids for a day.
Take your stake in one of your Alaska gas utilities, just wondering if you could.
Touch on that at all or potentially comment on whether you would consider selling any other gas utility assets.
Yes. Thank you for the question.
Obviously, we've talked about our core and noncore assets and utilities assets are core and I won't.
Cannot comment on any specific asset sale as you can appreciate that.
We continue to look at opportunities you might have a strong track record of recycling capital and looking at ways to drive shareholder value.
But philosophically our strategic objective is for our invested capital to be in the assets that are always providing the growth dynamic and that's what we look at all of our assets. So our objective is to position our assets. So that we can profitably grow and leverage the asset for growth.
And so that's how we really approach does that I can't comment anything specific on any rumors that are out there.
Okay no. Thank you I appreciate.
That color and maybe just along similar lines Avi.
See the MVP pipeline, it's having some delays as you alluded to in the opening remarks and in the past.
<unk> said that you would consider transacting that after its in service any changes to your outlook on that is the in service date now appears less clear.
Yeah, I mean, I think we've said that we would be patient along those lines and so I don't think.
Just a comment in general right I think the key area and MVP is the biological opinion.
And once.
We get clear clarity on that in the packets cleared I think everything will fall into place.
Most importantly, the MVP pipeline is consistent with what I've talked about the approach to the U S needs to take to ensuring access to clean energy clean burning energy and its.
It's not that long ago is now that we are importing natural gas and using significantly more lots of coal. So now that we've created the cleaner energy independent country, we should not.
You have to worry about those same concerns that theyre, having in Europe , but we can't take it for granted and so this is a really important pipeline and we've got to continue to recognize just how fortunate we are in energy in North America.
Hey, I wouldn't mind, just adding that I wanted to remind people that we always positioned MVP is a way for us to get below five times debt to EBITDA quickly right. So we continue to believe that the pipeline will be built and once it is we can get to below five times through monetizing that pipeline, but we haven't incorporated into our 2022 funding.
Plan, which I think is an important thing to point out and we're not reliant on the sale and monetization of MVP to maintain our current ratings. We can continue to improve our credit ratings through organic growth.
Within our <unk>, and obviously EBITDA and the investments we've made in the past. So I just wanted to I want to make sure that we put that into context from a delay standpoint with respect to this non core asset.
Got it. Thank you very much for those responses I appreciate it.
Your next question comes from Robert <unk>.
CIBC. Please go ahead.
Yes, I'd just like to follow up on MVP.
Of your equity partners have taken a different approach and the level of impairments they've taken so what does this mean with respect to alignment on a project or the partner install generally aligned.
Oh, Thanks for the question Oh, absolutely I think.
Partners are our focus there.
To get this pipe and the critical nature of this pipe.
Don't think that's changed in any way.
Yeah, Robert It's James here I mean, if you look at our approach to the impairment. It is very consistent with the approach that the operator took so we use similar probability assessments, obviously cash flow profiles and estimates around asset retirement obligations. If the pipeline is decommission so are our impairment.
Really followed the assumptions that the operator, you. So we're closely align there as well.
Okay that was going to be my next question just.
What you would estimate there are <unk> to be the asset retirement obligation should.
If things don't work out the way you envision in the project ultimately be stopped.
Well, yeah. If you look at Nextera is fighting I think they've disclosed an asset retirement obligation of roughly 400 million or our obligation would be about 10% of that which is our equity ownership in the pipeline and that's what we factored into our model.
When we ran our impairment analysis.
Okay and then.
Yes.
A couple more quick ones here, but just is there any update on the butane export license progress.
Hi, Robert It's Randy Toone, I believe right now, it's just going through.
Public notification and that's a certain number of days and so we should have that license here.
Probably within the next couple of months.
Okay, and then finally.
It's a thinly veiled question, but how.
How would a non operated liquids pipeline and answer your business. So far once you become available.
On the market.
Yes.
Oh, Okay, I'm, sorry, Rob I was just trying to understand the question says like that look I, just again backfill sophocles.
We are focused on creating value, we're an operating company and we add value through our model of operational excellence and controlling the asset. So we think thats a critical part of how we operate and how we add value to our customers.
I think that's kind of where we would look at that.
Okay. Thanks very much.
Okay.
Your next question comes from Robert Kwan of RBC capital markets. Please go ahead.
Great. Good morning, if I can come back to one of the answers James you gave earlier just around the leverage target of under five times and just with the MVP delay.
Are you really just linking getting there with MVP.
Only or if you think about the uncertainty in the extended timeline do you see other assets that could help you get to that target. Maybe if you can also comment on just some of the recent M&A that we've seen in the past week or so for.
Midstream and Western Canada, as well as <unk> in the U S.
Yeah, So Rob I my comments around MVP was that if we were able to if the consortium was able to hit its original in service date, which was estimated as Q2 'twenty. Two we saw it as an immediate way for us to get below five times and that's how we positioned it when we talked about at our Investor day and rolled out our guidance.
We still think we can get to five times, even without an MVP monetization is obviously just going to take us longer to get there with the organic growth that we would see on the platform and when we run our models five years out we can get below five times net to EBITDA, but it takes time without the monetization of MVP, if we're able to move forward with it in 2023.
Assuming that's the new in service dates once we go through the.
Some of the.
Once we revisit the biological opinion and move that through the process. Then obviously, we can get there in 2023, so that's what I meant when with respect to that asset.
I'll defer to Randy on some of the M&A activity.
Thank you Robert appreciate the question and so.
Got my comment in general about some of the LDC and the other activities.
I'm actually excited that the private side has seen the value that these interested if that's.
Intrinsic in these assets in and we're going to continue to work to extract that additional value and improve the overall value of our utility assets.
Overall, that's exciting to see that the recognizing that intrinsic value.
I guess, it's Randy.
You mentioned in the private side seeing the value.
In terms of trying to reach that leverage target is there any kind of thought of whether it's asset or a combination of non MPP assets just to strike, while the iron is hot and get yourself to under five times.
Like I said I don't want to comment on anything specific but the fact is I think our management team has shown at <unk>.
We focus on creating shareholder value right, and but but we've got a lot of additional value to extract and investments.
A lot of these assets. So I think that we will continue to look at opportunities to recycle capital, but in general I think we've got a pretty good track record of that but overall excited about the fact that the intrinsic that these assets is being recognized.
Got it if I can just essentially the couple of small questions on guidance.
The guidance statement, specifically called out.
That in effect of 21% tax rate I'm, just wondering if theres something.
To read into that and the other is you've highlighted the mix.
Yields versus midstream and EBITDA <unk>.
Igniting, it's a small change, but midstream is going up notwithstanding MVP is coming out of this year and you also have the asset sale you just announced so im just is that commodity prices or is there something else going on in either of the two segments that's changed since December .
So I just want to address the first part of your question with respect to effective tax rate I mean, we've we've always assumed an effective tax rate of roughly 21% to 22% when we've rolled out our guidance. So I don't I don't think there was anything unique.
Unique about that we've disclosed it in the past if I if I'm. Following your your your second question I mean, obviously, we've reaffirmed the.
The guidance range that we rolled out.
At our Investor day, the asset sales that I referenced in the past, yes, we'll be it'll be a bit of a grind to our overall EBITDA between the close date and the sale date, but there are some tail winds around frac spread that can more than offset that and that's why we were not going to move our guidance range, we're still going to land within that guidance range in midstream will benefit.
From some tail winds on frac spread that will help to offset some of the EBITDA that will lose by closing this transaction.
Got it okay. Thank you.
Your next question comes from Jeremy Tonet of Jpmorgan. Please go ahead.
Hi, guys. This is Steve on for Jeremy.
Just a couple for me.
As far as the flooding goes are there any long term impacts on the on your strategy going forward is there any possible steps you're thinking about taken to kind of help avoid.
I'm repeating this in the future.
Yeah, Steve Thanks for the question Sir.
Overall, I think that the optimization of our ports and the activities that the team did to manage through this was excellent in and we're always taking in.
Looking at a variety of things around the unit trains and optimization in storage that can only enhance and mitigate some of these impacts this was quite a significant event, but but certainly we are taking a variety of different optimization steps.
To ensure that we can move our products consistently every day, Randy do you want to add anything else to that.
Sure.
Yeah. The the railroads are a very important piece of the supply chain for Canada and that was a significant outage for them.
And they are the railroads are trying to build their own.
A real resiliency into their networks, and so through forest fires and floods.
They're trying to build that resiliency themselves along with what Randy said that we're building in.
Yes.
Yes.
Got it and then.
Far as I know.
So with the blend and extend contract with Gordon Dale and then Theres some contracts coming up again in 2022. So I just wanted to see you.
A similar contract agreement would be viable for the ones that are coming up soon.
Would you look to do just maintain the cost of service on the ones that are cost of service.
Just how you think about that going forward.
Yeah, I think I know the ones that you're referring to that it shows that are coming up and unfortunately, our website is a little out of date.
So thanks for pointing that out and we will we will update that but we don't have any immediate contracts that are that are coming up for renegotiation that would subject us any kind of blend and extend discussions with customers. So we apologize for that.
On the website.
Understood, but beyond that.
What is a blend and extend contract though is on the table.
Just how do you favor contract terms I guess.
So when you say hey look typically the with the approach that we'll take on a blend and extend this is obviously to try to keep the same NPV on these contracts right. So if we're going to drop the rate where we're looking for some extended terms. So that when we do an NPV calculation, we can more or less maintain the returns that we're going to generate.
On those contracts.
Your question is philosophical that's the way we will typically try to try to approach it and obviously the rates on those contracts that are coming up for renegotiation need to need to reflect where the market is as well.
Got it I appreciate the color guys.
Your next question comes from Rob Hope of Scotiabank. Please go ahead.
Hi, Good morning, everyone I want to go back to the gas processing sale kind of what was the Genesis of this does it change how volumes are allocated to that specific facility and does it also.
I would say.
Alter the fee structure for the remaining volumes.
So Robert it's James here No I mean look at the end of the day the liquids associated with that processing facility continues to be dedicated to our liquids handling infrastructure in the region. So what we're foregoing obviously as the gas processing our share of the gas processing fee. When we had that non operated.
Investment that's what we're foregoing it doesn't really change anything else.
The remaining footprint through the way we run our business because it was a non operated interest and I will just add that we just don't see this transaction, having any adverse impacts impact on our overall midstream and energy expert value supply chain.
Alright, I appreciate that and then just moving over to Ric Vachon Ferndale, we've seen at EI.
<unk> share recently from Bellevue, and even more so from Edmonton. So as you take a look at your.
Your hedging profile through the rest of the year you are pretty good for Q1, but it goes down quite quickly for Q2 and beyond are you looking to layer on more hedges here or is this an opportunity to go out to your longer term customers and get more towards volumes here. So kind of how are you balancing duration for kind of near term torque.
Rob It's Randy Toone.
Yes.
We're going to take advantage of.
The higher <unk> prices and layered in more hedges when it's we're just looking at the April 1st supply and we just want to make sure that thats the supply agreements kind of line up with our hedging so you'll see more hedging come in here over the next probably over the next few weeks so.
And I would also add the macro is it lines up.
Obviously quite well and that will continue to layer those in as Randy had said, but we will focus on and also optimizing our network to get increased volumes and to continue to meet the demands of our customers. So I think it all goes but I think the macro setting up reasonably strong for the year for us.
Thank you.
Your next question comes from Ben Pham with BMO. Please go ahead.
Hi, Thanks, Good morning, I wanted to start with.
Your comments around de risking.
So over time and I'm I'm wondering I'm wondering if your comments around the geopolitical risks and tight supply commodity prices rising has.
Is that enough or does that change your view on on maybe the pace at which you are looking to derisk, our hedge your business over time or is it status quo from before.
Okay.
Hey, Thanks for the question.
What I was implying is that with the.
We've been consistently having discussions with the markets.
About one in them they want to reach back in control of our destiny and the team really have done an excellent job.
Validating the fact that we can deliver consistently to Asia.
The energy and so I think that as we look forward, we're going to see them.
Market, reaching back.
Entering into longer term type of tolling arrangements as well. So that's that's really hasnt modified our strategy I think it just looks that its sort of the next step is to validate the strategy for customers to reach back in and I think this.
Tragic events that are happening.
It just underscores the importance of being able to control your destiny and have access to.
Energy from reliable sources and diversity of that so that's what I was referring to and I think it just enhances our strategy.
Okay, and maybe I can switch to.
Utilities, you mentioned, 6% EBITDA growth rate base going up papers Han can you.
Perhaps that where earnings earnings when protests in 'twenty, One and then also where where you didn't plan on the ROE.
Sure.
I think overall it's been.
Driven as the historical investments that have lowered leaks reduce cost and such that we've done and we've continued to make improvements in the business improving the service levels and as you referenced the overall EBITDA and that's it. So I think we made significant progress Lou and his team.
Improving return on equity.
I have it in front of me, but I believe about <unk> 75, or so is the improvement in the ROE This year to date basis points, but I'll, let James that's right. Randy we're about we're still about a six to seven short of our allowed our ROE.
And we have made progress as Randy touched upon obviously you know we had some some headwinds in the fourth quarter that that directly went to us addressing customer service issues, where we've made tremendous progress there and we see those costs as transitory, we don't see them as ongoing now that we're starting to approach to service.
<unk> levels that we need to approach on the customer service side.
Okay. That's great. Thank you.
Your next question comes from Andrew Husky of Credit Suisse. Please go ahead.
Thank you good morning, I guess, that's a question for one if not both of the R&D is on the call.
It's really when you think about the transactional activity we've seen in Western Canada. Most recently.
And what do you think that means for asset values, but then also the competitive dynamics.
With greater presence of private capital in the basin.
And just competitively how does that how does it affect you in your footprint.
Well first of all I think that we are.
Our core competency of being able to export and attached global markets makes us quite distinctive from that standpoint.
And certainly with the rising energy prices and the need to get to these valued markets I think that puts us in a strong position vis vis our competitors I.
I think what you're seeing in the basin as well.
A lot of a lot of efficiencies and consolidation with regard to that that are driving.
Those types of transactions.
But overall I think that when you remain competitive if you look at your cost structures and you focus on your customers and give better access to markets I think that really will allow us to be.
<unk> continued to be distinctive and to grow our footprint and increase shareholder value.
Right.
Helpful and then.
This is a true partner for the second part of the question and it really winds up being on the hedging.
Around those export oriented businesses.
<unk> managed to grow but you also have this interesting opportunity to expand.
We continue to optimize the cost structure of those businesses. So how do you think about the.
Hedging.
Right now in the current market environment versus open and do you try to triangulate for really your capital projects in the future on the expansion plans, whether it be rip it or Ferndale.
Hum.
Well when we look at hedging we look.
Focus on that in terms of managing our cash flows and then as we look through at our earnings and plan, but we always are looking to optimize those assets more broadly right. We're looking at improving our logistics driving down our operating cost and that comes with the scale that we're building across the entity going forward. So.
We look as we move forward with our customers and move more toward a demand pull in tolling.
That's.
Clearly another way of hedging overall, and so I think that's our strategic approach over time is to continue to do that.
It activates.
<unk> and <unk>.
Monetize at the merchant activities to the extent that we can optimize the capacity.
And Andrew I'll, just add I mean, Randy Toone touched on one of the critical factors that we consider when we're looking to hedge and that's having clear visibility into.
The supply the quantity of supply that's available in the market and the timing of that as well so that factors into our decision making in terms of when we're executing those hedges. So so we even though we are.
We're hedged at a lower percentage between Q2 and Q4 as Randy Toone touched on you can expect that to go up as the contracting season kicks in on April one and we get better visibility into the timing and quantity of the volumes that are available.
Okay. That's helpful and then James if I could just sneak in one more and it really is on your comment on the working capital like obviously with the gas prices moving upwards.
General Youre passing through the cost of gas to the end user.
Just for clarity you have I would assume you have effectively metric relief from the decorators are just given the current circumstances.
Great Andrew I'm going to apologize I did not catch the last part of your question that came across.
A little.
Pixelated can you repeat that last part please sure. So just given the fact that you pass through the cost of natural gas to the end users and the regulated utility businesses.
The fact that Youre working capitals are increasing right now just given this winter.
Given the fact, we got gas prices that you're not getting any negative blow back from the debt raters at this point in time, just given the regulatory protections.
No no yeah, no I appreciate that clarity, we arent I mean, if obviously the to put it into perspective. The 50 55 Bcf of storage that we have the cost of that gas our weighted average cost of gas is 75% to 80% higher.
Year over year and from it will unwind, we'll start to collect it but the rating agencies, specifically give us an allowance for.
The cost of that gas because of the pass through nature that you touched on so it wouldn't be a drag to our <unk> to debt metrics with S&P.
Okay. That's great. Thank you.
Thanks.
Your next question comes from Patrick Kenny National Bank. Please go ahead.
Thanks, guys just a quick follow up.
You touched on the LPG supply re contracting season this spring but.
Just given the pause on activity in northeast B C and how tight fractionation capacities in Western Canada right. Now if you do have to reach further into the Bakken or other basins to backfill supply just curious what impact if any there might be on your export margins year over year.
Well I'll, let Randy.
Can you comment on that a bit more separately, but.
We're actively looking to source volumes from.
The Balkan in other basins and certainly there might be some margin differential because of cost, but overall, having the best markets.
Products is certainly helpful in that sense, So I look at it as incremental as we go to the other basins going forward from a plan that Randy.
Yes.
Quite confident in the new supply come April one.
Out of Western Canada, so either northeast B C or for Saskatchewan.
The Bakken is logistically, it's we have to get real costs down to really make that those economics work, but we are working on a number of initiatives to make that happen over the next one to two years.
But we feel that we can meet our targets sufficiently with the with the volumes in Western Canada.
Yeah.
Okay, that's great.
And then James just on the recent hybrid issuance and I guess the associated redemption of the series K perhaps.
It's like the math was a no brainer on that one.
I know you have some time here, but how are you thinking about other potential prep for <unk> I think the series C is due this fall and then you know a few more still to come over the next couple of years, but just curious how the math might be looking today, assuming you can refi with hybrids along the way on similar terms as this.
This most recent one.
Yeah, Great Great question pattern obviously.
Have been very active in terms of trying to replace a hybrid press with hybrid.
Instruments with us with a cost advantage that you touched on I mean, we're going to continue to monitor the markets in terms of cost and accessibility between now and when we have to make that decision. This fall when the series C comes up for rate reset I mean, if I look at even where the underlying have gone and some of the spreads just given interest rate pressures that.
Everyone is seeing across the curve I still think that we can make series C work, but I don't want to I don't want to make that determination now we'll have to wait until we get closer to that redemption date.
And make the call now, but we are open to it we're going to continue to evaluate and do what's what's best from a from an all in cost standpoint between those two instruments.
Okay, that's great I'll leave it there thanks.
Thank you.
Your last question comes from Linda or Dallas.
<unk> Securities. Please go ahead.
Thank you just a clean up question on your maintenance capital just curious what's driving the increase year over year.
Do you have any facilities that have planned outages and maybe you could give us some context as to what they are and which quarter.
And then given that maintenance capital is going up in 2022.
Do we revert to our run rate beyond this year.
Looking more like the last five years, a $20 million to $35 million or do you expect to the inflationary factors that maybe there'll.
There'll be some sort of a discrete step out beyond this year as well.
Linda it's James so yeah, the maintenance Capex in in 'twenty, two is going to be a little higher because we had a a few turnarounds that we deferred from 'twenty one into 2022 we expect to do those between Q2 and Q3 of this year and obviously under our contracts were able to flow.
Through the cost of those turnarounds to to end use customers. So we don't anticipate inflation being an issue.
Okay. Thank you.
And as another follow up.
There's the potential for CP to go on strike mid March.
How.
What impact might that have on your operations and how might you be able to mitigate that if they if they do go on strike.
Hopefully not for too long, but just give us a sense of how youre thinking about that.
Hi, Linda it's Randy Toone.
We UCP.
So, but not for <unk>, a small part of our business most of our railcars are on CN. So we do see it having a small impact, but we don't see it as a material impact and as we saw with other <unk>.
With the railroads they don't last very long.
Great. Thank you.
Yeah.
Ladies and gentlemen, this concludes the Q&A portion of today's call I will now turn the conference back to Mr. Mcknight. Please go ahead.
Thanks Michelle.
Thank you everyone. Once again for joining our call today and for your interest in Ulta gas and as a reminder, we will be available after the call for any follow up questions that you might have that.
That concludes our call. This morning, I Hope you all enjoy the rest of your day you may now disconnect your phone lines.
Yes.
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