Q3 2022 AltaGas Ltd Earnings Call
Good morning, ladies and gentlemen.
Thank you for standing by welcome to the Alpha gas third quarter 'twenty two financial results Conference call. My name is Jeff and I'll be your operator for today's call.
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'll be a question and answer session.
As a reminder, this conference call. It is being broadcast live on the Internet and is recorded.
I would now like to turn the conference call over to Adam Mcknight Director Investor Relations. Please go ahead Mr. Mcknight.
Thanks, Jeff and good morning, everyone. Thank you for joining us today for Alta Gas's third quarter 2022 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 and John Morrison, Senior Vice President Investor Relations and corporate development.
We'll proceed on the basis that everyone's taken the opportunity to review the press release and our third quarter results.
Similar to previous quarters, we published an earnings summary presentation that you can find on our website.
The presentation walks through the quarter and highlight some of the key year over year variances and nonrecurring items that we would assume that would be helpful to 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 or detailed modeling questions.
As for the structure of the call will start with Randy Crawford.
Providing some comments on the financial performance and progress on our strategic priorities, followed by James harmless, providing a more detailed walk through of our third quarter financial results, our near term outlook in 2022 guidance.
And then we'll leave plenty of time at the end for Q&A.
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 our 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 SEDAR and Edgar filing system.
And with that I'll now turn the call over to Randy.
Thank you Adam and good morning, everyone.
We are pleased to have another opportunity to connect with the investment community and provide an update on our company our strategy and our third quarter performance the.
The third quarter highlighted our continued strong operational execution across the platform our.
Our utilities business achieved a robust performance, while our midstream business achieved record third quarter global export volumes.
Quarter exemplifies the advantages of our diversified business model, which delivered stable operating results. Despite some inflationary and other pressures the challenged midstream performance in the quarter.
And we continue to expect to achieve our earnings guidance range for the year.
Our utilities delivered strong results in the third quarter, but normalized EBITDA, increasing by $53 million on a year over year basis.
The performance reflected the benefit of strong asset optimization activities at Washington gas.
Solid performance at the retail marketing business and continued capital investments in infrastructure upgrades, including our various accelerated pipe replacement programs across the utility network.
The strong asset optimization results were driven by the distinctive if contractual asset position at WGN and our team's ability to execute on the ongoing demand for pipeline capacity and storage, which also help facilitate LNG exports to Europe during the quarter.
These activities produced considerable positive impacts for both our customers and all the gas is approximately half of the benefit created through this activity is flow back to customers in the form of rate really are.
Our efforts related to this activity is providing strong financial benefits to our customers and therefore, helping to reduce absolute utility bills. During this period of higher energy costs.
Our regulated utilities continued to demonstrate stable and predictable results delivering the critical energy that our customers need as we approach the winter demand season.
Our strong multi year growth is supported by the continued investment across our networks to improve the safety and reliability of our system.
Reduce long term operating costs and deliver improved environmental outcomes, all of which better outcomes for all our stakeholders. Our operational excellence transformation is resulting in real wins.
The deployment of our pipeline replacement model in 2020 has significantly increased the effectiveness of our capital replacement program the.
Investments have lowered leak rates and leak backlog by 55% compared to 2020.
Reduce methane emissions and significantly reduced operating costs, allowing us to help offset inflationary cost pressures.
We remain dedicated to operating our utilities asset base and building resilient infrastructure focused on driving better outcomes for our customers.
With the recent extension of our save AARP program by the Virginia regulator, who approved a U S $880 million investments through 2027, along with a significantly the pipe upgrades across their network.
Continued to maintain the safety and reliability of our system and deliver strong rate base growth.
I'm also pleased with our ongoing efforts related to the energy transition.
Recently, WGS signed an Mou.
<unk> development project in Virginia, which we look forward to providing additional detail in the coming period.
He introduced legislation in Virginia for these investments will provide an ROE incentive for this type of project.
Throughout this transition we will continue to advocate for our customers to provide energy affordability.
Work is always focused on our customers access to safe reliable and affordable energy, which is especially important during these periods of rising energy prices like we're experiencing today.
Our midstream business continued to deliver strong operational performance, including exporting approximately 110000 barrels a day of combined propane and butane to Asia from our two export terminals during the quarter.
We continue to focus on our ability to connect rising North American LPG production to premium global markets.
Strong operational performance during the quarter was however impacted by a combination of factors, including lower realization to Canadian butane spreads and higher rail and ocean freight cost, which we believe will alleviate in the coming period.
Our midstream assets have an excellent footprint and the prolific Montney basin.
And our strategy remains focused on the fact that the marginal molecule in natural gas and natural gas liquids will most profitably be export it to the key demand markets.
The growing demand for energy in Asia will be the driving force behind the midstream platform.
Leveraging our first mover advantage as the first and only company with the capability to export LPG is off the west coast to Asia through the L. G CS.
And we are also constructive on the medium term development across the basin.
Increasing activity by our producing customers is providing encouraging visibility to future volume growth.
As a result.
We expect our distinctive export platform to continue to move record volumes of LPG East Asia.
The improving forward spreads for LPG and the opportunity to mitigate some inflationary logistics cost will support the advancement of our corporate strategy as a leading north American energy infrastructure company.
We also see numerous opportunities to use our existing infrastructure system and competencies to contribute toward reducing global carbon emissions.
Our ongoing investment in capital projects will further north American energy security, while also providing reliable energy transport products like liquefied petroleum gas that has the potential to further human development lower emissions and drive better societal outcomes.
The ultra gas terminals up the west coast to North America position us as the largest export of Canadian LPG. In addition, our midstream energy transition team has made tremendous progress this past year to evaluate opportunities to both expand our existing platform and reduce our emissions while also assisting our customers in managing their carbon footprint.
Brent.
We are excited to participate as these concepts materialized.
In early October ultra gas and White cap was selected by the government of Alberta.
To enter into an agreement for continued evaluation on a rolling hills carbon sequestration hub northwest of Calgary.
Rolling Hills hub is a prospective open access project that would be strategically located near our <unk> gas plant and a.
Surrounded by Whitecaps extensive production and geological leadership in Central Alberta.
The agreement will permit ultra gas and white cap to commence a technical evaluation in the area and if successful we.
It could be awarded long term leasing rights with the government of Alberta for the project, but the potential in service date of 2026.
Rolling Hills, and other proposed carbon hubs have the potential to further reduce carbon emissions in Alberta and continues Canadian Energy's industry's long standing global leadership for environmental Steward chip that we are proud to be part of.
On another strategic now.
As was disclosed in late May alter gas announced an agreement to sell its Alaskan utilities to try summit utilities for U S 800 million or approximately Canadian $1 1 billion.
Cash proceeds will be used to fund long term growth opportunities and continue to strengthen the company's balance sheet, we're concentrating at the gas utilities platform in the high growth Eastern U S region.
This is another example of all the gas is proactive approach to recycle capital to fund our growth projects.
We continue to maintain a strong balance sheet and financial flexibility.
Find attractive return projects across our platform.
Looking ahead, we remain very positive on the road ahead for all of the gas.
At the utility, we will continue to invest to reduce cost and improve the customer experience.
The focus will remain on the innovation and Digitization work and continuing to improve the productivity and effectiveness of the pipeline replacement capital.
We continue to remain positive on the macro outlook for our midstream platform.
Given the improving forward outlook for Asia to North American LPG, the opportunity to mitigate some inflationary logistics costs and the structural growth we see in the basin over a multiyear perspective, Canada.
We also remain constructive on the long term role that candidate can play in providing global energy security.
We remain committed to focusing on our execution of our long term corporate strategy of building a diversified platform that operates long life energy infrastructure assets and connects customers and markets and is positioned to provide resilient and durable value for.
For the company stakeholders 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. We achieved normalized EPS was <unk> 10 in the third quarter of 22 compared to <unk> in the same quarter last year.
Normalized <unk> per share was <unk> 60, compared to <unk> 59 in the third quarter of 2021.
Normalized EBITDA of 233 million in the quarter compared to $239 million in the third quarter of 2021.
Overall, the quarter was characterized by strong utility's results being offset by softer contribution from the midstream segment.
Turning to the operating segments in more detail.
Utilities reported normalized EBITDA of $115 million in the third quarter compared to 62 million in the same quarter last year.
As Randy mentioned utilities growth was driven by strong asset optimization activities solid performance within the retail marketing business and continued capital investments across the network. The latter of which has been part of a multi year asset upgrading and investment programs across our utilities.
This was partially offset by higher operating costs to improve customer service levels.
We continue to upgrade our critical infrastructure with the deployment of $234 million of invested capital during the third quarter that was focused on driving better long term.
It comes for our customers.
This included $123 million being deployed on our various accelerated replacement programs.
These programs are focused on improving the safety and reliability of the system, but also delivering long term operating cost and environmental benefits.
The level of capital deployment was in line with expectations for the third quarter, and we are well positioned to deliver on planned network upgrades, which will result in an approximate 8% year over year increase in rate base in 2022.
Washington gas realized normal EBITDA of $60 million in the quarter, which was materially ahead of performance last year. During what is the seasonal low for gas demand across the <unk> region.
This was driven by the combination of asset optimization activity as well as continued ERP investments customer growth and higher base usage, which was partially offset by increased O&M costs.
<unk> and <unk> combined normalized EBITDA was $25 million in the third quarter, which was relatively unchanged from the same period last year.
Higher customer usage and growth was offset by higher O&M costs, while colder weather in Michigan was offset by warmer weather in Alaska.
And finally, the retail business generated $31 million in normalized EBITDA and $8 million year over year increase which included higher gas margins and favorable timing of gas swaps, which was partially offset by higher P. J M costs.
The midstream segment reported normalized EBITDA of $108 million in the third quarter of 2022 compared to 181 million in the same quarter last year.
The quarter was reflective of strong liquids and global export volumes across the platform, but was more than offset by other factors, including lower realized agent to Canadian butane spreads.
Commodity price volatility and higher rail and ocean freight costs, which include a fuel charges based on the rising cost of diesel throughout the quarter and year to date.
Our processing facilities were positively impacted by the recovery of turnaround costs at Townsend and Gordon Gordon Dale well performance at the extraction and Frac facilities was very strong.
Overall throughput volumes were modestly down year over year due to the loss contribution from the 18th Creek facility that was sold earlier in the year.
Ultra gas exported a third quarter record of more than 110000 barrels per day of cleaner burning LPG to Asia, which was spread across 19 full and one partially loaded VLCC.
This included approximately 63000 barrels per day of propane being exported it rip it.
47000 barrels per day of combined butane and propane being exported at Ferndale.
Given the strong year to date export volumes ultra guests now expects to exports slightly more than 100000 barrels per day from the two terminals in 2022 compared to previous expectations of approximately 90 97000 barrels per day.
Despite the strong volumes in the quarter with financial results for the midstream segment fell short of our expectations and I wanted to address the factors underpinning. These results and more importantly, the actions we are taking to mitigate them in a little more detail.
There were two major contributors to the lower profitability lower realized Aegean to Canadian butane spreads and higher rail and ocean freight costs.
In regard to the lower realized agent to Canadian butane spreads as we've disclosed in the past we came into the quarter less hedged on butane than we have been in the past.
During the quarter, a few things happened demand for butane within Asia was softer than expected due to the lockdowns and reduced economic activity in China.
That caused some cascading impacts into our traditional export markets in South Korea and Japan.
We also saw some oversupply of naphtha, which caused some substitution into certain butane demand markets. This.
This collectively squeezed agents Canadian butane margins.
The key thing I would like to shares that we do not view these structural headwinds, but more timing related and we continue to have a very positive outlook for the structural advantage for lpg's off the west coast going forward and that Asia will remain the premium global market for LPG.
We will proactively lock in that structural advantage as volumes and prices become firm for a merchant barrels heading into 2023 contracting season.
Shorter term, we will also shift our product mix to the propane versus butane in Q4.
As we have seen continued strength in propane pricing in 2022 and into 2023.
Finally in terms of the Ocean freight and rail we are working through these headwinds and believe they will subside over the coming quarters Baltic.
Baltic freight remains at higher levels year over year, given increased shipping demand, we continue to take active steps to lower our costs with short term charters like maple guests.
We are also excited about the two dual fuel vlccs to be delivered in late 2023. In early 2024 that are expected to reduce total shipping costs on select export volumes to Asia by 25% compared to a standard VLCC and reduced pricing volatility for Alta gas and its customers over the seven year contract terms.
On the rail side, we continue to work with our valued partners with CN, and CP and be NSS to improve efficiencies and drive down costs and that will be an acute focus for the team in the next couple of quarters.
In terms of hedging approximately 57% of our global export volumes are told are hedged for the balance of the year.
This includes an average <unk> of North American financial had hedged price of 11 91 per barrel. We also have 74% of our expected frac exposed volumes hedged for the remainder of 2020 to $37 85 per barrel.
Now turning to the corporate and other segment, we reported normalized EBITDA of $10 million in the third quarter, which was a $14 million year over year increase driven by lower corporate expenses and lower employee incentive plan costs. This year.
On the corporate development front as Randy mentioned, we continue to work closely with Tri summit to close the divestiture of our Alaska and utilities, which remains on track for the first quarter of 2023.
We received approval under the Hart, Scott Rodino Act and from the committee on foreign investment in the United States. We also continue to advance work on other required regulatory approvals, including the change of control application with the regulatory commission of Alaska.
<unk> has been an excellent partner to work with and we're very focused on delivering the best outcomes for all our stakeholders involved when we close the transaction.
As Randy mentioned, we also announced the close that we close the remaining 26% equity ownership of Petro gas from Eaton Mitsui in the quarter and we now own 100% of the platform.
The transaction was principally funded with recycled capital from the recent sale of our non operated interest in the Aitken Creek gas processing facility as well as modest draws the short term debt from the companys existing credit facilities.
While it emits who is no longer an equity investor in Petro gas they remain a valued partner to our company. They are an important global exports offtake customer through the asset most energy joint venture.
We and <unk> are also continuing to evaluate future opportunities and collaborate on prospective energy transition projects as both of our organizations pursue various lower carbon initiatives over the long term.
We look forward to continuing to work alongside it Mitsui and remaining long term partners as we have been for nearly a decade.
Despite a softer third quarter, we continue to expect to achieve guidance ranges that were previously disclosed at our Investor Day in December 2021, and our 2020 to invested capital plan of approximately $955 million is unchanged.
And with that I will turn it over to the operator to open the call for questions.
Thank you, ladies and gentlemen, we will now conduct the analyst question and answer session. If you'd like to ask a question. Please press star.
The number one on your telephone keypad, if you would like to withdraw your question. Please press star followed by two.
There will be a brief pause while we compile the Q&A roster.
Your first question comes from Darius larceny from the Bank of America. Please go ahead.
Hey, guys. Good morning, Thank you for taking my questions.
So the first one I just wanted to talk about export volume little bit.
You guys came in higher than your annualized guidance for the quarter, albeit in the context of softer market conditions could you maybe just talk about what kind of flex you have in <unk>.
The ability to perhaps that you are seeing softer condition.
Export maybe more towards the.
Your original.
Target, which is I think 97000 barrels per day.
Or basically just kind of turn that levered to respond to market conditions on the export side, if you could.
Thank you Darius as Randy I appreciate the question James.
James alluded to this in his comments in terms of the flexibility optionality to move between products that we have and as we built this core competency and I think that.
That is something that the team is always focused on to generate real.
Value going forward.
James Rainey Michael Hayden.
Hi, This is Randy toone.
At Ferndale, we do have the ability to.
Pushed more propane and butane and that's our plan for Q4 as James mentioned so.
Propane margins are very strong still so we are going to move less barrels in Q4 than say Q2, and Q3, and we're going to move more protein because it's better spreads.
And I'll just add various like obviously, if you look historically, our strongest volumes typically come in Q2 and Q3 as we take <unk>.
Delivery of butane from some of the refineries in and around Ferndale, and then Randy touched on and we've disclosed it in our press release under the hedging table, we expect to be at about 98000 barrels.
For Q4, and that'll be heavily weighted to propane as opposed to butane. So we're only expecting about 8000 barrels a day of merchant butane during during the quarter versus those those volumes.
Got it I appreciate that thank you for the color.
One more maybe more high level can you discuss.
Yes, we're obviously at a higher interest rate environment here can you discuss.
Number one just at the at the ALJ level sensitivity to movements in interest rates relative to.
On your interest expense.
The significant refinancings coming up.
And weather.
Current high interest rate environment may be changing your thinking about monetizing noncore assets, perhaps accelerating some of those that might be in the plan in order to delever faster and reduce that interest expense burden.
It's James here again, Darius so look I mean, when we look at our maturity profile, we want to stress that we've got a lot of liquidity that's available on our short term credit facilities, we pretty much exited the quarter with $3 1 billion of available liquidity in terms of near term maturities we've got.
Only at the ALJ level about $500 million, that's coming due December 22nd.
Sorry December of 'twenty, two and then we've got another $300 million that comes due in June of 'twenty. Two 'twenty three we can easily accommodate those maturities on the line and then obviously with the end star sale expected to close in Q1, we can we can basically extinguished those liabilities and not have to access the MTN market in this.
Interest rate environment. So I think the team has done a great job to give us some of that flexibility to reduce our refinancing risk during a period of high interest rates and we've also been pretty active in setting up some term loans two year term loans that or.
Something that we can draw below our credit facilities currently which gives us some additional flexibility. So we can sit on the sidelines here and wait out a higher interest rate environment and have some flexibility and optionality in terms of when we access those markets.
Okay got it thank you very much.
Your next question comes from Jeremy Tonet from Jpmorgan. Please go ahead.
Hi, good morning.
Good morning, Jamie.
Thanks, just wanted to dive in a little bit more on I guess, the pressures on export margin and kind of where rail and shipping rates are now versus where.
Where they were in the second quarter and I guess expectations for.
'twenty three.
That shakes out.
How much of 'twenty three I guess it was locked in at this point versus open exposure to changing rates there.
Hey, Jeremy its Ed.
James here, So I mean, if you look at the <unk>.
<unk> for Baltic freight in 2022, we're at about $7 50, a barrel. If you look at the forward curve that drops down to about $4 79, four for 2023, and we've been pretty active in trying to hedge that.
And lock it in so we're about 83% hedged heading into 2023 on Baltic freight with respect to our expected volumes. So I think we're very well protected versus the problem. So we do we have taken proactive measures to mitigate that impact heading.
Heading into future quarters.
Got it thanks for that and then just as we think forward about.
Kind of the growth projects as you've talked about that like rapid expansion. Just wondering if you could expand a bit on.
Connecting strategy there going forward as we are hiring.
I'll call it let James comment on the financing strategy, but we are optimistic as you can see with the amount of volumes that we're moving in the demand in Asia and we have some robust discussions going on with the demand pull market. So as we look toward expanding those assets and rip it into the future the key to that is going to be.
Locking in some of those commitments as well and we're optimistic about that.
Yes, I mean in terms of in terms of financing that we mentioned the onstar sale that he is going to generate roughly $1 1 billion of proceeds as Randy mentioned some of that will be allocated to debt repayment and we will take our pro forma leverage down to.
Under five times when that closes so we've created some balance sheet capacity to be able to fund our portion of any kind of repeat expansion during the construction period and obviously once it's operational to bring on incremental EBITDA that will that will keep our leverage ratios manageable, but we're also obviously partnering.
With low pack on this potential expansion. So we that's how we were de risking some of the financing as well. So we feel that we've done a lot of work with the balance sheet to give us dry powder to be able to finance any kind of expansion once were ready to go forward with it.
Got it and just one last one circling back to the first question. Thank you for the data points on shipping, but with regards to rail just any thoughts I guess on.
The shape of the cost going forward, if that's coming in or expanding and what's locked in for 2003 at this point.
I'll, let Randy to comment on that I'd say overall, we're we continue to work with with our partners at CN and others and there is a lot of this is focused on really optimizing on both sides in terms of making sure that we're as efficient as possible as we move our rail going forward.
Andy I'll, let you go ahead.
Yes.
And he said we continue to work with our third party service providers on on on rates and.
We always optimize our fleet to minimize our lease cost for railcars and yet for US to go ahead with a bigger expansion, we definitely need to see lower rates from our service providers. So we are working hard to get those in line.
And I think Jeremy in terms of scale here in the quantities that we're moving and that's going to do is we work with our partners.
There's a good bit of scale here as we drive down cost and move more volumes and so working with our partners having flexibility on to rail networks as well as.
Going to be critical in the future in through 2023 so.
We're working very diligently in that regard.
Got it that's helpful I'll leave it there thanks.
Your next.
Question comes from Linda Hazard Dallas from Citi Securities. Please go ahead.
Thank you I'm wondering if you can update us on your path to achieving your allowed Roe.
Where do you see the gap.
When do you expect to achieve it and then looking forward as interest rates.
Likely remain elevated how do you see your allowed ROE.
Shifting over time.
If you can provide any context to that that would be appreciated.
Hey, Linda it's James here I'll start with your last question first I mean, obviously we.
We have been before this current inflection point in interest rates going up we were in a period, where interest rates had been declining and we saw <unk> be relatively sticky despite that and consistently above the 9% range. So we wouldn't expect a high degree of correlation.
With respect to allowed ROE is now in a rising interest rate environment, we do expect them to stay fairly sticky in terms of your your broader point on ROE is obviously the teams down in the utilities have done a great job trying to close that gap I mean at Semco and <unk> star, we've been consistently at or allowed ROE at WGN always taken active.
Strides to invest in the system with respect AARP to drive that down and we've been very very active on the rate case front and this year is no different. So obviously the D. C rate case, that's been filed as well as the Virginia rate case, that's been filed is going to update rates with respect to our current current structure and we will continue to continue to close that gap, but there's still some work to do there.
Especially in D C, where we've been out of the hearing room since 2016 and had to file two rate case filing is just to try to catch up on test years here right. So in D. C. We're still in a 29 year 2019 test here.
So there could be additional filings to try to reflect the investments we've made in that system to service our customers and the ability for us to fully earn our allowed return.
And I'll just add that James is.
This is these two rate cases, the Virginia rates will go into effect subject to refund in this quarter and the D C rates.
And once resolved, we'll be going into effect in 2023. So those are key drivers as we put those in plus the efficiencies in that and what blues team is working on overall. So I think those are going to help us progress as we've been continuing to do over the last few years is driving <unk>.
Our allowed return on our current investments and continuing to move up the base as we progress going forward. So thank you for the question.
Thank you and on a separate note maybe you can help us.
I understand a little bit more your opportunity with white cap.
For the Rolling Hills carbon sequestration hub.
What sort of milestones at what pace need to be achieved.
To get to in FY <unk>.
To be in service by 2026.
And maybe you can also comment on the bookends of magnitude of investments.
And your view on what you are.
You in your current partner bring to the table.
Would potentially another partner bring anything incremental to the table as well to bolster.
The value proposition for this project.
Hi, It's Randy Toone here, it's early days for this this.
This project, but we are quite proud to team up with white cap, who have you know.
The.
Expert in this field they already have an existing Ccs.
Asset and they've been awarded other.
Projects, along the way so we are going to focus on the geotechnical work and that's what we've been awarded right now is to de risk the poor space and we do believe that the poor space near Hormats is.
Is ideal for carbon and that's what we're going to be working on over the next six to 12 months is this making sure that the pore spaces capable and it is really close to her mountain, which is our largest emitting source. So it is.
Help be helpful for us to reduce our carbon footprint for <unk> as well.
Thank you.
Yeah.
Thank you. Your next question comes from Rob Hope from Scotia Bank. Please go ahead.
Good morning, everyone I wanted to circle back on the global export.
Margins just wanted to get a sense of how youre thinking about the risk profile of the business. We saw you enter Q3 with about 75% of volumes hedged there but.
But margins were weak.
Can you give us a better understanding of whether or not you had shipping locked in for Q3 or the hedging in 2023, new phenomenon and then I guess secondly, as you move forward.
Could you see.
Emphasis on locking in kind of a transport as well as the margins.
I'll, let James gave you some of the specifics, but yes certainly.
The increasing spreads.
Spreads and the fundamentals are such that we we continue to lock in.
Those margins as we move forward I'll, just make a comment on generally like Derisking, the midstream and the expert is a top priority for us and I talked a bit about the demand market and the producers and tolling. So in the long term will be heading there.
In terms of the.
Derisking all of the aspects of the cost structures, we're active in that role and I'll, let James talk a good bit above that.
Yes, Rob I look I mean in terms of in terms of going forward the proactive steps that we're taking.
Taking to improve margins are product mix and shifting our product mix. If you look at where we've been year to date at the end of at the end of September in terms of product mix, we've been 27% of our exports have been butane versus 73% propane right and the fact that we've seen pressure year over year on those.
<unk> margins in Q4, we're going to shift that and drop that percentage inclusive of butane tolls down to about 12% to 13% and prioritize propane. So that's how we're going to that's how we're going to improve the margin profile going forward and we can potentially do that into into Q1 of 2023 as well in terms of freight we.
We had hedged some of that in the past, we're being much more proactive and much more aggressive on hedging that going forward and locking in lower rates that we see in the curve out into 2023 relative to where the prop month is right now.
Alright, I appreciate that and then maybe just a follow up question on tolling.
How are discussions going with customers. There are they are they more willing to come up the curve and understand the benefits of shifting to Asia or are they.
Still more focused on kind of commodity pricing and the overall.
Challenges in that market.
Yeah.
Brian I think Randy Thanks for the question I think the discussions are going reasonably well, there's increased interest producers aggregators, but I think they want to participate on the upside and the direct access to Asian pricing.
And the demand market as well as looking at that so I think youll see going forward a model, where we partner in terms of sharing some of those upsides as well as is putting in the tolling rates. So I think those discussions are.
We are active and we're anticipating progress as we move forward in the coming months.
Thank you.
Your next question comes from Matthew Weekes from IAA capital markets. Please go ahead.
Okay.
Good morning, Thanks for taking my question.
Talk about kind of an improving outlook for export margins based on the forward curve.
And I'm, just wondering whether that's more driven by sort of higher Asian prices are on the demand side or whether it's more.
Coming on the supply side and sort of if theres cascading effects from from China, and intermittent locked out there if you see that kind of continue.
More lockdowns, how would you see that impacting the forward outlook for export margins. Thanks.
Hey, it's Randy Toone here, we've already seen.
The effects of winter in Asia, and so that's where we're seeing a lot of demand and the pickup and so you can see that with the FBI propane spreads right now.
And we see that continued right through Q1.
In <unk>, starting in Q2, as the new supply year for propane and butane here in Western Canada, and we do see significant amount of LPG being produced without it without demand. So we do see that there'll be a strong case for <unk>.
For getting those barrels export it with their with their customers.
Okay. Thanks.
Ill turn it back thank you.
Thank you. Your next question comes from Andrew Kuske from Credit Suisse. Please go ahead.
Thanks, Good morning, it's probably you Randy Randy question.
I guess just on the Canadian midstream business, putting the export business aside for the moment.
If you look at your value chain.
What do you think is missing in the portfolio and do you think there's some opportunities to really expand by way of partnerships into maybe greater frac capacity.
Enhancing logistics efforts or storage.
Any color along that line would be appreciated.
Yeah.
Yeah.
Thanks, Andrew I'll go ahead, and start and let Randy add to that but yes, we see it.
Significant opportunities with our logistics partners to <unk>.
Continue to control cost optimize rail schedules debottlenecking capacity.
And so yes, I think theres, a tremendous amount of opportunity for us to continue to.
To work together going forward and I think youll see the team doing that because at the end of the day when you move in this quantity of product.
Logistics is going to be the key driver.
First optimizing capacity as well as reducing costs, so being the least cost operator and using our scale is going to be a key driver going forward.
It's Randy Toone here.
Frac, we do right now our northeast B C. Fractionator is as full and so we are looking at a potential.
Small.
Expansion on that Frac and as Randy mentioned, we are looking at partnering with on the logistics the logistics side to lower our long term logistics costs and like James mentioned, we are partnered with with both back to continue to look at LPG exports. So we are partnering on a number of fronts.
But largely focused on frac logistics and exports.
So maybe when you look at all those things.
Combination do you see greater opportunities to bulk up and partner up before itself has got the relationship with <unk>. There's another player in the market is looking for some strategic capital or partner out or potential frac expansion.
How do you think of the <unk> specifically.
Yes, I think that's it's a good point, we see that as a as really creating a hub.
For <unk> and <unk> and working together as the Frac capacity gets expanded because it's going to be necessary. We believe in the long run.
And in the.
The most valued market is clearly going to move the Lp's east to Asia. So yes, we think the <unk> is going to be a big part.
Of our continued expansion into our long term goal of 200000 plus barrels a day.
This space.
And then finally, if I can just squeeze one more in and it's probably for James is just how do you think about the hedging program on a go forward basis any changes or are you keeping it basically the same.
I touched on that thanks, Andrew I touched on it in our prepared remarks, obviously, we have been much more active into in terms of hedging out into 2023 on Baltic freight, but we've also got about 42% of our.
Merchant barrels and tolling barrels are locked in for 2023 already heavily weighted to Q2 and Q3 in terms of those hedges, which is where we see some softness in <unk>.
<unk>, Tim Mount Bellevue pricing. So we have been very very proactive and we will continue to be here as we as we continue to get closer to the re contracting year that Randy mentioned on April one.
Okay. That's great. Thank you very much.
Thank you. Your next question comes from Robert Kwan from RBC Capital markets. Please go ahead.
Hey, good morning.
First I just wanted to dig into the numbers and on the global export from the $43 million net that you highlighted.
Sure.
Can you quantify what the.
The impact was for rail.
One hand, and then ocean freight.
Great on the second side of things, how you see that.
<unk>.
Magnitude, whether it's this quarter and then into 'twenty three and then just taking a step back as you think about 2003, I know that you've got formal guidance coming up.
Can you just talk about the headwinds and tailwind outside.
Outside of those factors.
Acts would be yet.
Tailwind of interest rates, probably a headwind, but are there other things to be thinking about it into 'twenty three.
Robert It's James here I'll start with your your Baltic freight and rail question I mean, if we look at it in terms of the quarter Baltic freight was a year over year was.
Probably around $10 million to $11 million higher net of our hedges that were in place and rail was about 10% to $11 million higher inclusive of a fuel surcharge.
I touched on it in terms of our prepared remarks, and some of the earlier answers that we've been very very active trying to lock lock in the lower rates that we're seeing on Baltic freight already into 2023 relative to 2022. So we do expect that to improve quite dramatically as we head into the new year just to put it into perspective.
The the prop month on the Baltic freight is about $7 50 for 2022 and into 2023 itself $4 79, So we do see some considerable improvement there.
In terms of our in terms of headwinds and <unk> I mean, you touched on FX, but if I look out to the balance of the year and we expect to be in our guidance range. Obviously, the headwinds that we've been experiencing all year has been compressed butane pricing, which we've taken active steps now to mitigate for Q4 by reducing our export.
Volumes on butane considerably we're cutting them in half relative to where they've been year to date in terms of our overall volumes and then on the tailwind side, we're going to take advantage of stronger <unk> pricing in Q4, and obviously into Q1 of 2023 and the balance of that year and then we expect FX to be a material tailwind that $1 35 versus <unk>.
We set our guidance when we did that we were at 126, so thats going to be a material tailwind as well and then we do see some continued strength.
In the utilities on the <unk> book early in Q4, and some some strong results within retail so when we when we take all the puts and takes that's why we feel comfortable that we're going to achieve our guidance range.
Prove results in Q4.
Got it.
So just.
Tapping with.
And star, which is still outstanding and you've done a lot of work.
Beth highlighting value of assets in and getting that debt down I guess as we look forward here and particularly just with.
The way the share price performs.
Can you just refresh how youre thinking about other value maximizing options other monetization.
Upsides as well as what are the current thoughts on a larger structural change.
Robert This is Randy.
So as we said in the past and we continue to believe that our diversified utilities and midstream strategy is the right one and it continues to deliver value to our shareholders.
And you know our primary focus is always about creating and generating shareholder value and our management team is think has done an excellent job of them.
Administrative that so at this point we think.
Right.
Operating from a position of strength and will continue to.
To look forward.
And maximize value for shareholders, but at this point, we're very comfortable with the approach and our diversified model.
And Rob I can just add in terms of sorry in terms of okay. Sorry, I was just going to add to Randy's comments I mean in terms of what we can possibly do in terms of other capital recycling opportunities, we've been pretty consistent with that looked at the work that we did with <unk> and the anticipated close in Q1 has given us some additional flexibility in.
<unk> Optionality and we can continue to be patient with MVP and once that we get a clear line of sight in terms of in service and completion date. There. We can we can try to maximize value. So there are still additional levers to pull.
Pull but we're not we're not dependent on MVP to be able to fund the organic growth that we see on the platform.
And we do have.
The ability to be patient with with MVP to maximize value.
Got it.
Just to finish here on guidance.
You have an accounting change in the quarter relatively meaningful.
And so what.
Would you have been able to reiterate your guidance ranges absence of the accounting adjustment.
Well I don't.
We couldnt characterize there's an accounting adjustment. This is obviously with respect to our normalization policy. So just just to provide just to provide a little bit of <unk>.
Color around that when we bought Petro gas, we obviously had to revalue the assets and liabilities with respect to that acquisition and we had to set up some contingent liabilities for <unk>.
Commercial disputes and some commercial matters that we had to work through and we've been successful in mitigating some of those throughout 2022 and thereafter in there related to operations. So they are recorded in our GAAP numbers and we feel it makes sense to leave them in our normalization or to leave them at our normalized EBITDA.
And it is something that will recur. So we do expect some additional mitigation to take place in the balance of this year and into 2023 as we continue to work through some of these liabilities and extinguish them and put them Tibet.
Okay, but if I'm interpreting it right left at year to date EBITDA by $30 million back then.
On earnings so.
Are you, saying that that actually reverses out and push it down in Q4 by an equal amount or again coming back to that original question could you reiterate guidance without that change.
So the amount that it impacted our EBITDA was about $26 million year to date, and we would we would be able to reiterate guidance without that without that amount yes.
Okay. Thank you.
And just to clarify it doesn't reverse in Q4, that's not what I'm, what I'm messaging I'm, saying that there is additional liabilities.
Commercial disputes that we can settle that will give rise to additional EBITDA going forward.
I understand.
Thank you. Your next question comes from Robert <unk> from CIBC Capital markets. Please go ahead.
Hey, good morning, everyone.
Answer the majority of my questions at this point, but I'm wondering just on the transportation cost breakdown you gave there James that how much of the.
Higher costs were related to things you can control or how much was related to things we can control.
Fuel surcharges.
And if you don't have it handy, we could take that offline.
Okay.
I do I do Robert I mean, I can I can give you I can give you an order of magnitude here for the quarter right I mean for the quarter. The fuel surcharges were related to tending to increasing cost of diesel about $6 million to $7 million of the rail increases that I that I talked about I mean going forward.
And we are going to take active steps to control that as well bye bye basically putting in hedges in place as an attempt to control that cost for the year.
That's just the fuel surcharge was roughly about $12 million to $13 million, but the team could break that down a little further after the call.
Yes.
Helpful Color and then my last question has to do with the Rolling Hills.
<unk> sequestration hub.
I was just wondering if you can describe what you think the company's relative advantages in developing a hub like that.
Specifically what are the opportunities there to leverage some of your assets or those of your partner.
What's the interplay might be with.
Petro gas.
I ask the question because obviously there is considerable other activity trying to develop similar hub. So I'd just like to know how do you where do you see having a relative advantage and then how much.
I have to spend too.
And that develops or evaluation process.
Hey, Robert It's Randy Toone here.
We feel that her mountain is advantaged.
Because if you know what it is or large emitter.
We've teamed up with white cap, who who are experts in this field to evaluate the pore space and when we've looked at this port space It looks very ideal for carbon so.
Proximity to the emission source and the ideal.
Poor space looking attractive and also partnering with whitecap.
That this is a very advantaged project to do the evaluation process go forward.
It's not material dollars.
Some of it's internal folks on both sides. So it's we don't see it as a significant amount of money.
Okay. Thanks for that.
Thank you. The last question comes from Patrick Kenny from National Bank. Please go ahead.
Yes, good morning, I, just wanted to ask on the 5% to 7% dividend growth guidance.
And I know you've reiterated full year cash.
Cash flow guidance, but.
As you work through the logistical cost pressures here on the midstream side can you just remind us how.
How much of the decision to come in at the low end versus the high end of the dividend growth range really depends on midstream performance.
Hey, Patrick it's it's James here, obviously, we revisit our dividend and where we're going to set that every year and kind of in line with our annual.
Business plan and guidance for the following year, but when we rolled out the 5% to 7%.
Guidance range with the midpoint being six obviously.
We clearly articulated that we can fund that dividend just through rate base growth and keep our payout ratio constant right. So if midstream continues to grow then we would get.
A declining payout ratio if you if you use a 6% midpoint in the dividend and we still feel comfortable.
With that narrative around the dividend. So we will obviously provide any views that we have on the dividend in line with when we rollout 2023 guidance, but just wanted to reiterate some of the philosophy that went into setting that range given the growth that we see on both platforms.
And Patrick this is Randy and obviously, that's a board decision, but I mean from our standpoint, continuing to affirm guidance. The strong performance at the utility in the short term nature of.
These.
Midstream.
Short term challenges, we're very we're still confident in our long term.
Business strategy.
And the board will make that decision here shortly.
Got it thank you.
And then just to come back to the the various levers that you can pull on the balance sheet.
You mentioned MVP, James but any update on how you guys are thinking about life now with I think just over a year left on the contract are you looking at.
Extension opportunities there or perhaps.
Looking to <unk>.
For price discovery process sometime in the new year.
No look I mean, I'll go back to the comments I made earlier I think we've done some great work with the balance sheet and we've put ourselves in a position where we can be patient youre right that we are now going to be moving into a period of trying to extend that contract.
And we feel confident just given the performance of life and how important it is to California's power needs that there's a continued need for to dispatch that asset and its performed extremely well here over the last three years to help them through some crucial crucial times from a from an energy demand standpoint, so I think that the construct or the macro is setting up well for constructive.
Discussions on an extension of that so we're in no rush to sell it like I said, we can we can generate some very very stable EBITDA for us and we've got other noncore assets that we can potentially monetize to meet our funding needs going forward.
Yeah.
Okay, that's great I'll leave it there thanks guys.
Thank you.
Thank you. This concludes the Q&A portion of today's call I will now turn the call back to Mr. Mcknight.
Thanks, Jeff and thank you everyone. Once again for joining our call today and for your interest in Ulta gas that concludes our call. This morning, I hope everyone enjoys the rest of the day and you may now disconnect your phone lines.
Okay.