Q2 2023 AltaGas Ltd Earnings Call
Good morning, ladies and gentlemen, thank you for standing by.
Welcome to the <unk> second quarter financial results Conference call. My name is Sergio and I would be your operator for today's call.
Lines have been placed on mute to prevent any background noise. If you have any of these equal. This hearing the conference. Please press star zero for operator assistance at any time.
After the Speakers' remarks, there will be a question and answer session.
As a reminder, this conference call is being broadcast live on the Internet and recorded.
I will now like to turn the conference over to Adam Mcknight Director Investor Relations. Please go ahead Mr. Mcknight.
Thanks, and good morning, everyone. Thank you for joining us today for Alta Gasses second quarter 2023 financial results Conference call.
On the call. This morning will be burned new 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 corporate development and Investor Relations.
We will proceed on the basis that everyone has taken the opportunity to review the press release and our second 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 thought would be helpful for the market to understand.
As always today's prepared remarks will be followed by an analyst question and answer period, I'll remind everyone that we will be available after the call for any follow up or detailed modeling questions that you might have.
As for the structure of the call will start with Vern you, providing some comments on our financial performance and progress on our strategic priorities.
By James Herbalists, providing a more detailed walk through of our second quarter financial results near term outlook in 2023 guidance and then we'll provide lots of opportunity at the end for Q&A.
Yeah.
Before we begin I'll 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 SEDAR and with that I'll now turn the call.
Over to Burton.
Thanks, Adam and good morning, everyone. It's great to be here today to discuss our Q2 results and update you on our operations and other corporate developments.
Before we do that let's spend a few minutes on why you think alto gasses future is very bright.
I've already had the opportunity to take a deep dive into the business.
Visiting our offices and operations and have connected with our employees customers partners and shareholders.
This is an enhanced my already bullish view of Alto gas and I am excited to leverage the company's exceptional assets in the months and years ahead.
I came to help the gas because they saw an opportunity to create a highly sustainable and growing infrastructure platform with.
Our robust investment proposition.
We are positioned to deliver industry, leading dividend growth through stable and growing cash flows.
And we will be able to improve our risk profile as we re contract commercial agreements in midstream.
Timely rate cases continue to optimize our capital spend.
While managing our costs in our utilities segment.
In utilities, we're modernizing the network with our accelerated pipe replacement program and adding new customers across the DMV.
In midstream, we continue to see growth in volumes for global exports and value chain optimization opportunities.
I believe the long term fundamentals for al to gases businesses are strong.
Western Canada will deliver significant growth in both natural gas and NGL production as the industry ramps up production to feed LNG, Canada and other export facilities.
These growing NGL volumes will need additional west coast egress to maximize value for our customers.
Good news is rip it and Ferndale can deliver this today at our reef project will provide even more egress when it's up and running in late 2026.
The future of our utilities segment is also very bright.
Natural gas remains the largest energy source for homes in the DMV and the electrical substitution costs for this energy or more than three times that of natural gas.
As we continue our conversation on the energy transition.
Need to be mindful and balanced the critical needs of energy affordability and energy reliability with our regional and national climate goals.
All of this cements. The fact that natural gas is a key part of todays energy mix and will be part of that energy mix for decades to come.
Q2 was impacted both financially and operationally by the devastating wildfires across Alberta and BC.
Our thoughts are with the people and the communities affected by these fires.
I want to thank our dedicated employees, who are involved in wildfire relief and helped with the recovery efforts across the communities, where we operate their actions reflect the values of our company.
So let's talk about the quarter.
Alta gas continued to execute on its long term strategy during Q2.
A wildfire and the timing of some of our hedges had a negative impact financially in Q2.
Despite these results the first half of 2023 was in line with our expectations and today going to reiterate our 2023 full year guidance was normalized EPS in the range of $1 85 to $2.05 and normalized EBITDA in the range of one.
0.5 to $1 6 billion.
The company continues to show steady progress in our long term deleveraging class, where we are now approaching our near term target of being less than five times on a debt to EBITDA basis, and we have line of sight to get to four and a half.
We are pleased with the progress shown on removing the milestones remaining to complete the mountain Valley project, including the receipt of all remaining permits to finish construction and start operation of the pipeline.
This was reinforced by the U S Supreme Court ruling.
Yesterday to vacate the stays that were placed on the pipeline by the fourth circuit.
The partners now have a clear path to the pipeline being completed by the end of the year.
In the second quarter with delivered normalized EBITDA of $239 million and EPS of <unk> <unk> per share compared to $276 million of normalized EBITDA and 14 cents per share of EPS in the second quarter of 2022 midstream.
Results were inclusive about $7 million from negative wildfire impacts.
And another $12 million due to hedge and ship timing impacts, which will reverse the next couple of quarters.
Should increase second half EBITDA by $12 million.
Normalized EPS by <unk> <unk> per share and normalized <unk> by <unk> <unk> per share in the second half of 2023.
In the utility segment operating performance was relatively in line with expectations.
But did include another 4 million of negative weather impacts stemming from warmer than normal weather in Michigan in D C.
Midstream delivered strong volume performance in the quarter total gas inlet volumes grew by 11% Frac.
Fractionation volumes increased by 32% and global experts were 4% higher for all on a year over year basis.
Some of these volumes were impacted by the wildfires, where we saw a backup in global exports and outages at our north Pine fractionator.
We're very excited about the long term opportunity associated with growing our global exports business and providing Canada with more global connectivity for LPG is as we increase throughput at rip it in Ferndale.
<unk> will add to that it's a very exciting project for us. It will further bolster our leading LPG export business by adding even more U S. For the basin, we continue to refine the engineering and construction of plants for the projects and we're hoping to have a positive <unk> <unk> for the.
Projects either at the end of this year or early next year.
And with that I'll turn the call over to James.
Yeah.
Thank you Vern and good morning, everyone I am pleased to provide a more detailed overview of the quarter as Vern mentioned, we obviously had some headwinds and timing issues that impacted financial results during the second quarter, but we did show operational strength across a number of areas. While we continue to remain positive on the long term outlook for the platform.
We achieved normalized EPS of six cents normalized EBITDA of $239 million in normalized <unk> per share of <unk> 53.
Results were slightly below our expectations and we are inclusive of approximately $7 million of wildfire impacts in approximately $12 million of hedge and ship timing impacts.
Despite the second quarter being modestly behind our expectations. We are pleased with where we sit on a year to date basis through the first two quarters and we are reiterating our 2023 guidance.
Together, the wildfire hedge and ship timing impacts reduced normalized EPS by approximately <unk> <unk> in the quarter with the hedge and ship timing impacts representing approximately <unk> of this impact, which we expect to reverse in the second half of 2023.
Turning to the operating segments. The utility segment reported normalized EBITDA of $102 million in the second quarter of 2023 as compared to $116 million in the second quarter of 2022.
The largest driver of the year over year variance was the divestiture of the Alaska utilities, which closed in the first quarter of 2023.
Alaska Utilities had contributed $15 million in the second quarter of 2022.
Washington gas delivered normalized EBITDA of $69 million in the quarter, an increase of 6% on a year over year basis.
This growth was driven by the combination of interim rates in Virginia.
Ongoing capital asset modernization investments into ERP programs that are focused on upgrading our system and.
And favorable foreign exchange.
This was partially offset by warmer weather in the district of Columbia, which had a $2 million negative year over year impact in the quarter and unfavorable O&M expenses, driven by employee benefits and incentive costs.
Semco delivered normalized EBITDA of $19 million in the quarter, which is down 2 million year over year as continued customer growth was offset by warmer weather in Michigan, which had a $2 million negative year over year impact in the quarter and slightly higher O&M costs related to pension benefits.
The retail platform was down year over year, which was principally driven by the timing of swaps and higher cost gas and inventory during.
During the second quarter, we deployed $198 million of invested capital at the utilities on behalf of our customers, including $125 million through our various ERP modernization programs. These.
These investments are focused on upgrading the networks to improve safety and reliability of our system. While also bringing in sillery benefits of long term productivity improvements as.
As such we will continue to make these upgrades on behalf of our customers.
While balancing ongoing customer affordability needs. During this environment of high interest rates and inflation turning to the midstream segment normalized EBITDA came in at $134 million compared to $163 million in the second quarter of 2022.
The quarter included strong operations and year over year volume growth across the platform, including global exports, but financial performance was impacted by a number of factors. This included the wildfires in evacuation of the north pine facility for little more than 12 days, which had an approximately $7 million impact across the platform.
Most importantly, we did not have any safety incidents associated with the file wildfires and there was no damage to the facility.
We were able to return to normal operations once the evacuation orders lifted thanks to the dedication and hard work of all of our employees.
During a period like this we were also reminded of the great customers and partners, we have across our operations as everyone came together and had opened in regular communication to ensure the safety of our employees and all our stakeholders and the communities surrounding the facility.
We also had a $7 million impact due to ship timing in the quarter, which will positively impact the third quarter and a $5 million impact due to hedge timing, which is expected to positively impact the fourth quarter results.
The quarter was impacted by lower marketing contribution lower Asia to North American butane margins as a result of higher cost butane in inventory from the previous contracting season.
And lower realized pricing on fractionation Williams.
In the second quarter, we exported we exported approximately 116000 barrels per day of propane and butane to Asia spread across 19, vlccs as well as one partially loaded ship.
This included over 70000 barrels of propane exported from repeat and 45000 barrels per day of combined propane and butane from Ferndale.
The quarter included 36% of global exported volumes tolls.
Told volumes do generate lower EBITDA per barrel of LPG exported with continued to advance our lower risk business model.
We continue to be well hedged and our global exports business for the remainder of 2023 with approximately 77% through a combination of toll and financial hedges with the financial volumes hedged at an average <unk> to north American spread of $15 32 U S per barrel.
As a result, we expect a strong contribution from the global export business in the second half of the year and particularly in the fourth quarter. Once we move through the remaining impact of higher cost butane inventory from the last NGL contract year.
As a reminder, we expect to take delivery of one new VLCC time charter at the end of 2023, a new time charter in early 2024 as well as a third in the first half of 2026.
Each of these time charters are expected to reduce our ocean freight costs by approximately 25% relative to normal Baltic freight pricing and lock in pricing on a long term basis.
In the corporate and other segment, we reported normalized EBITDA of $3 million compared to a loss of $3 million in the second quarter of 2022.
$6 million year over year improvement was mainly driven by lower operating expenses associated with employee incentive plans.
In terms of other developments, while there was two stays placed on the mountain Valley pipeline by the Virginia for Circuit of Appeals those have now been vacated by the Supreme Court of the United States yesterday.
The project can now move ahead with a targeted completion date of 2023 yearend.
We've always believed in the fundamentals of MVP and the benefit of being able to bring Marcellus Utica gas down into east coast utilities and consumption markets.
The pipeline's initial two Bcf per day capacity is fully subscribed principally with investment grade Counterparties and strong demand pool shippers and it is further expandable through incremental compression, including firm and interruptible service.
We've always been transparent with regards to MVP being a non core asset to our strategy and once the project is de risked it would be considered for monetization to reduce leverage and bring us closer to our long term leverage goals.
We have made significant progress towards lowering our leverage ratios and increasing the margins of safety within the business over time, including lower risk commercial constructs as we continue to focus on delivering durable and growing EPS and <unk> per share growth.
Within the utilities through a number of regulatory events during the quarter in April Washington gas FCC of Virginia staff and the office of the Attorney General filed the proposed stipulation for settlement.
Includes a revenue increase of $73 million and return on equity of 965%.
Washington Gas also filed a rate application in Maryland to increase rates by $28 million during the quarter net of costs currently collected through the stride ERP program.
We expect the Maryland PSC to make a decision on that application in mid December .
We also filed an application in Maryland for the third phase of the stride ERP program for approximately $495 million of spending between 2024 through 2028, which will continue to provide runway to modernize the system and drive better long term outcomes for our customers in the jurisdiction.
And finally in the district of Columbia, The PSC amended the schedule on our active rate case in that jurisdiction and a hearing has tended to be scheduled for mid September with a final decision on that case now expected in early 2024.
At the halfway point of the year, we are sitting in line with where we expect it to be when we issued our 2023 guidance back in December and our overall outlook for the year Hasnt changed including our expectations of normalized EPS guidance of 185 to 205 per share and normalized EBITDA guidance of one five to one 6 billion.
And with that I will turn it over to the operator for the Q&A session.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
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One moment. Please for your first question.
Your first question comes from Rob Hope from Scotia Bank. Please go ahead.
Hi, good morning, Thanks for taking my question.
A question for Brian with being in the seat a couple of weeks now can you add some initial impressions.
What you think.
A key strength of the ultra gas story, where are the key opportunities are and then longer term how do you envision.
A company with northeast BC midstream.
Northeast.
Yes.
Gastro distribution assets do you think about a longer term basis.
Yeah.
Hi, Rob Thanks for the question.
<unk>.
I think thats, probably the top of mind question I get from everyone I talk to whether it's employees.
The board of directors are investors and really what attracted me to coming over to al to gas is number one I think the fundamentals of both businesses are quite strong if we start with the W. G. L gas for sure remains the lowest cost energy source to provide <unk>.
This hitting in the Dnb.
And Thats, a pretty substantive margin I think it's like by 300% or something in that range.
Also if space heating and the dnb by gas is actually more G H G friendly than electrifying.
That part of the.
The energy value chain, and I think it's a pretty substantive GHT benefit as well, but there will be opportunities for us to lower that gas footprint and yet I think you've seen things at my prior company did and I think we can bring those experiences over here.
<unk>.
With midstream, obviously, theres very strong tailwind or liquids growth in the WCS b on the back of natural gas development for LNG exports out of Western Canada.
So that is one of the key factors that.
Drawing energy fundamentals.
Others, great embedded growth opportunities here in the business you are seeing.
Visible capital that's available to be deployed for modernization of the utility the utility continues to add meters and grow its customer base, each and every year, so that the demand for natural gas.
Actually on the rise in our on our franchise areas.
Within midstream.
I think the export story is really unique for Canadian midstream companies.
There's more opportunities to expand exports, there's more opportunities to grow the value chain in midstream to take advantage of our unique value proposition and we've got.
A great growth project underway right now with reef.
Its initial incur.
Incremental capacity will be in the range of 50000 barrels a day, but that only uses up a very small portion of the dock that were going to build there.
And as you mentioned the company is not without challenges.
I think it's fair to say that we're not quite firing on all cylinders at this time and if we can make progress in optimizing both businesses I think we're going to create some shareholder value.
So obviously at the utility we've got a narrow the ROE gap, we've got to improve some of our regulatory relationships with regulators, particularly in D. C. We need to create better alignment on the energy dialogue, where energy affordability energy reliability and climate are all taken in.
To account in the various regulatory frameworks we have.
We're going to make efforts to improve the risk profile in midstream.
We know we need to do more tolling, we need we know we need longer duration contracts and we need to make sure. We're very tightly managing any command residual commodity risk that we have.
We are on our journey on deleveraging the balance sheet and you can see that we've made good progress. So after the last couple of years and we have line of sight now on how we get to our target debt to EBITDA metrics. So that still remains to be done. So at the outset I think my phone.
<unk> with the team is to maximize all of these priorities, where we take advantage of our opportunities work on our challenges and then.
That will create optionality for us on what the company looks like in the future. So that's job one.
And as you know we're always.
Keenly focused on.
Maximizing shareholder value and that's what we're going to that's what we'll be doing.
Alright, I appreciate that color and then maybe just as a follow up just in terms of the risk profile of the business as well as Europe .
Increasing the interconnectedness when you take a look at the global export business overall, how do you balance additional growth opportunities.
Versus just terming up the existing base business and our longer term manner.
Is it first fully contract and extend the contract at the base business before any additional capital.
Sanctioned and then I guess.
When you look at any capital be fully backstopped by contracts.
Oh, I think there's going to be some timing lags in making that happen Rob.
Think we understand long term once the capital's fully deployed that cash.
Cash flows need to be highly highly contracted.
Probably debatable to what percentage at this particular point in time.
So I think the team here has talked about getting to at least 60% told over time on all of the volumes that we have and if we're able to go higher than that I think that is an opportunity.
To decrease the volatility in that business, which should be positive.
For us overall.
Alright Thats great.
Good to hear from here and congratulations on the neural thank you.
Thanks, Rob.
Thank you.
Your next question comes from Jeremy Tonet from Jpmorgan. Please go ahead.
Hi, good morning.
Hi, Jeremy.
Just wanted to follow up a bit more with the LPG export business, if we could.
And just I guess vision for how much.
Risk can be taken off the table, how much tolling hedging how far out do you see it going at this point or strategic views on where that stands.
And also I guess on the back of that as it relates to 2023 open exposure.
Do you feel that leaves ultra gas position within the guide is there a bias towards the low end or the high end of the guidance at this point.
Maybe I'll take the first part and then I'll turn it over to James to get into some of the details.
Bob.
I think what.
We're aiming for is.
More tolling.
And what we've seen is over time that tolling that we're able to get from the customer basis is gradually going up.
Inc.
When the facility came on stream there was strong customer interest than during Covid. There was a decline in customer interest and this year, we're starting to see some demand pull customers from Asia, who have now seen that the barrels are there ratably the barrel.
Or there are consistently and that Theres, a price advantage for them to source there.
Barrels from Western Canada.
So we will have a combination over time of demand pull volume.
And a supply push volume, we should which should be beneficial to both sets of customers where producers are going to maximize their net backs by going to Asia.
And buyers.
Buyers from Asian buyers are going to maximize their profitability by accessing cheaper western Canadian barrels.
So that's going to.
It takes some time to firm up longer term holes and I think it's very consistent with the answer that I provided to raw that we want to get that number up and we want to lengthen the duration.
It's not something that's going to happen overnight, but the team's keenly focused on both of those objectives.
Hey, Jeremy it's James here with respect to your question on forecast, obviously, we're reiterating the range of one five to $1 6 billion and no different this year than any year halfway through the year, we've obviously experienced both headwinds and <unk> relative to the initial guidance when we rolled that out and in.
Late 2022, so in terms of some of the.
Headwinds that we can give you some color on obviously weather has been a constant theme in terms of headwinds with the utilities and that continued into the.
First our first month of the second quarter as we entered shoulder season. So that's been a headwind all year. We've obviously had retail that's been impacted by by milder weather and timing of some swaps and then we've also had the timing of some of our rate cases slip potentially even into early 2024 in the case of a rate case in front of the D C.
<unk> right now that have been that have been headwinds at the utilities with respect to midstream obviously, the wildfires was something that impacted the quarter to the tune of $7 million, we expect a little bit of a residual impact into the second half as we were.
We're still running on Gen sets at North Pine BC Hydro works to get high line power back to facilities in the area and then we touched on some of the continued drag on <unk> margins as a result of last contracting year and the fact that we were a little higher from a tolling percentage standpoint, so we're moving.
Slightly less merchant barrels, which hasnt dropped the weighted average cost of butane as quickly as we had anticipated when we rolled out our guidance and then in terms of tailwind I mean, some of the positives.
We're going to be a a few D. C. As MVP is making forward progress. The consortium is now booking AFDC on that project again in Q2 benefited slightly from that and we expect that the second half of the year will benefit from continued <unk> and then another tailwind is obviously stronger C. Three margins as the curve starts to set up for the winter season.
In Q4.
Got it that's helpful. Thank you for that and just I meant to ask as well on the LPG export how much of a propane export at repay is sourced from oil to gas.
Versus third party are you guys able to share that.
Hi, it's a it's Randy toone.
Approximately.
10000 barrels a day are sourced from our Elba gas barrels and the remainder, let's say another 60000 or source from customers.
That's helpful. Thank you.
Darrin I realize it's only been a month in the <unk>, but just curious I guess your thoughts on on the <unk> side getting out and meeting the.
The commissioners across your jurisdictions there.
<unk>, if you do that when you do that.
How you think about building those relationships to narrow the under earning.
As you said, there and curious specifically on Maryland, given shifts in the commission there any thoughts that you are able to provide.
On that.
Well I'll start and I'll turn it over to blue for some more color Jeremy.
Obviously, you hit the nail on the head.
Think it's very important for us to.
File timely rate cases.
But we also need to be to.
To control the narrative.
And have others advocate on our behalf as well obviously, we were very committed that natural gas is the most affordable energy for our customers. It's the most reliable energy for our customers' customers and in the D. M V. It's actually the lowest carbon.
Energy for our customers to heat their homes, we have to push that narrative hard.
With all of the regulators that we deal within the Dnb.
My plan is to work with blue to be there and be there regularly to actively help with that engagement, but we also want to build a coalition of energy users to also provide that message to the regulator because I think it's important to get the public.
Diet more dialed in on this particular topic.
Yeah.
So this is blue Jeremy I agree with everything <unk> said.
The process as you know in our particular jurisdictions, while we're active in rate cases, it limits our ability to be in active discussions unless it's focused on the rate case of course with the regulators. So we have a good relationship.
As you noted the Maryland PSC is turning over we're working our way through.
Through those new relationships I would say that our working relationship across all our jurisdictions are very good as Rob points out we constantly have a discussion through our customers on what they need and what they want and how we're able to help them manage that affordability and reliability, while progressing climate goals and we want to ensure that those voices are heard so where push.
All of those forward.
Collectively, but I agree with the outline that Vern said and we'll continue to work that process.
Got it that's very helpful I'll leave it there thanks.
Thank you.
Your next question comes from Andrew Kuske from <unk> Suisse. Please go ahead.
Good morning, maybe.
Maybe if we just focus on your western Canadian midstream business and.
Just your customer conversations and I guess is sort of twofold. It's one their expectations on volumetric growth on a longer term basis, given all the trends you talked about earlier on and then their desire to have an integrated service.
And in particular more integrated service from <unk>.
I think I will let Randy tackle that one.
Oh, Hi, Andrew so.
The discussions with our customers prefers toll Ngos.
From the producer side the producers in Western Canada. They are looking at market diversification.
For their natural gas and also further lpg's, we're providing them with a new premium market and so a lot of our sophisticated producers are looking at.
Additional tolling and long term tolling.
For both propane and butane and then our offtake customers, our Asian customers, they see us as a reliable secure source of LPG and we're seeing that.
Accelerate a lot of more customers are wanting to do.
Take the western Canadian price and.
Get the data advantage. So we are seeing that pull it.
And push from both sites.
Home products.
So Andrew I think this is a great opportunity for us because.
Having the premium market.
Laos, you over time to extend your value chain reach all through the NGL midstream infrastructure process, where if you're.
If you've got the best market to get to you will then be able to offer more services on a more bundled basis, which ultimately will provide investment opportunities for us and just.
Enhance the returns on our existing midstream assets so.
Over time, that's what we think the benefit of having the docs are and I think we're going to work hard work very hard on extracting as much value as.
As we can.
I appreciate that and then maybe just extending and building upon that.
What kind of return improvement do you think you can achieve especially on a risk adjusted basis. If you get the volume growth greater stability with a higher percentage of tolls maybe locked in on duration and then corporate wide.
Deleveraging, which should result in better financing costs also so I just collectively how do you think about that opportunity.
Beeps basis, and then the multiplier effect as you build up more infrastructure.
Well, that's a great question Andrew.
That'd be very imperative for us to earn a premium above the hurdle rate on capital that we invest whether it's in midstream or whether it's in utility.
We will we have a limited amount of capital that's available to us each and every year.
We're obviously deleveraging we're operating on an equity self financed model. So we're going to invest the capital into the highest return businesses are our highest return projects subject to making sure that our systems are safe and reliable.
I think maybe James and comment on the typical hurdle rates that we have.
In each of the businesses and obviously, we're shooting for a premium over those hurdle rates.
And the only thing I'll add Andrew to Burns commentary was obviously when we're looking at final investment decisions. We are looking at it on a risk adjusted return basis. So Vern talked about the fact that we want to get to a high degree of percentage of tolling as possible. So the higher the tolling percentage and the more stability in those cash flows and the longer duration.
All of the contracts themselves and that hurdle rate would be would be lower that's how we're basically looking at those risk adjusted returns.
And in terms of route to reef, we've talked about it in the past we feel that we can probably build that project at all six to eight times build multiple which would generate some strong returns that we've talked about some of our our hedging targets sorry, our tolling targets with respect to that that facility that would underpin the type of return that we could potentially be looking at with respect to.
When it moves forward.
Okay. Thank you very much.
Thank you.
Your next question comes from Robert Kwan from RBC Capital. Please go ahead.
Great Good morning.
You talked earlier about some of the opportunities and I'm just wondering it's still early so are there things, though that you are thinking about.
Alta gas to do differently.
I guess, specifically where do you see.
The business mix.
Are you thinking about leverage whether it's the targets themselves or at least the timing to get there.
And then.
Just the overall kind of structure.
The company.
I think Robert.
Youre getting to is is a commentary on the disciplined capital allocation.
And as you know.
From my past experience, that's something that's been very important to me and I think in the long term, that's what how we optimize shareholder value and you're right. The starting place for disciplined capital allocation is a strong balance sheet.
The team here has done a great job on deleveraging the company.
We've got.
The target credit credit metric.
Have line of sight to that now I think with a combination of.
Embedded EBITDA growth, that's going to happen from the capital that the company has invested over the last couple of years.
And select asset sales of non core assets, we should make significant progress hopefully sooner rather than later to get us to that four five times medium term target.
Once we're there we will reevaluate where we want to be but that right now. The main goal is to get from five one to five.
545, sorry as quick as we can and then one more there we're going to have one bill.
Billion plus per year of annual investment capacity, where we don't need to issue any equity and that investment capacity will then go to the best capital allocation investment that we can made make and which will grow EBITDA and then we will be in kind of that.
Virtuous circle of deploying capital and growing our EBITDA growing growing our dividend and then see of having that that cycle repeat.
So hopefully that answers your question Robert.
Yes, that's great.
Mentioned earlier in the call just optionality on what the company looks like in the future can you just elaborate on what you were getting at there.
Yes, I think theres lots of energy infrastructure companies out there some of them are pure play some of them are diversified.
We've seen diversified companies trade at premiums, we have seen them trade at discounts.
We will continue to evaluate what is the best in almost all of the mall structure for this company, but right now we.
What we are.
And earlier, we've got we've got to get both of our businesses as close to optimal.
As we can as job one because that that creates optionality.
So I can put words in your mouth effectively as you think about wherever the decisions youre going to make here, whether that's financial operational asset wise are you looking to basically just continue to pursue this.
<unk> the company get it into a position where as many of these.
Options for value creation are on the table is that fair.
For sure that's management's job is to continuously look at how do we maximize shareholder value.
For our shareholders.
Okay, and specifically you talked about just the interplay between <unk> and.
And diversified so that seems to be.
But important to have.
That optionality to go either way.
I think any.
Company always needs to be looking at that regardless of what space through.
Okay. That's great. Thank you very much.
Thank you. Your next question comes from <unk> from CIBC capital markets. Please go ahead.
Alright at this point and you just have a couple of follow ups, maybe I'll follow up on Rob's question. There on how you're looking at the business differently you have the existing debt targets that are in place that.
Hybrids.
Do you have a view on what the leverage should be if you were to include the hybrids in that.
Calculation, how does that change your outlook on the metrics.
Rob.
The metric that we've always cited did exclude presses and hybrids from it and that's the relative progress we've made and it's been significant when burned touched on some of those targets in the context of our desired ratings as well that's always factored in from a from a ratings calculation standpoint, right. So I don't think it changes the overall.
<unk> on a GAAP basis that we want to get to at four and a half.
Obviously hybrids and perhaps are included in the rating agency calix and for us to get to Triple B with with Fitch, We've got to get to a five five times.
<unk> to debt.
Obviously with respect to S&P to get to Triple B, we need that 14% to 15% on a regular basis with respect to <unk>.
<unk> to debt percentage, so it doesn't really change the overall four and a half, though I think we're still pushing towards that and we've always consistently benchmarked ourselves against that excludes excluding prefs or hybrids.
Okay, and then just a clarification here on the impact of the wildfires extending into.
The third quarter or is that really limited just to the impact on the power cost from having to run on the Gen sets a reserve.
Or anything else.
Cumulation of barrels or.
Just logistics and things like that.
Okay.
It's the form.
Former and quantify it.
Sure.
The lesson of Jefferies.
It's a significantly less than the Q2 impact.
It's a couple of million dollars and it is very much limited to the fact that we still got a run on Gen sets operationally the facility started to run pretty much at nameplate capacity when when the evacuation order was lifted and people will be able to get into the facility inspected and make sure that there was no damage and we were able to ramp up.
Okay. Thanks, everyone.
Thank you.
Your next question comes from Daria Philosophy from Bank of America. Please go ahead.
Hey, guys. Good morning, Thanks for taking my question.
On the utility business, just maybe more of a broad.
Strategic type question, how do you think about how the retail business factors into the overall risk profile.
Ability flash predictability of earnings.
Or asked another way are the synergy.
That you get from that business in the incremental EBITDA do they make the slightly enhanced risk profile and less predictability in earnings.
Worth it.
Think about the tradeoff between the two thank you.
I think the.
The retail business has historically generated reasonable profitability for the company over time.
There is obviously more.
Volatility of that comes from that business.
Because and particularly here because.
The company hasn't been employing hedge accounting that has changed and going forward youre going to see less volatility out of that business. So when theres a firm fix.
Fixed price gas sale, obviously the team locks in a fixed.
Fixed price gas purchase there will be some volume variability due to weather, but that is actively track and tightly managed so I think.
We have the right systems procedures and people in place.
This is a profitable business for us and as you will see starting next year there'll be less volatility out of this segment.
But I just want to add.
Something that Burton touched on which I think is an important distinction when it comes to the business itself has been very resilient and performed well through COVID-19. It obviously performed well through storm Uri as well because the team does a great job at managing volatility from an economic basis. They were able to they are able to lock in profitability with a very active.
Hedging program, so really the volatility that we're seeing here is more to what Burton touched on and that's the the accounting or the lack of hedge accounting and that's something that we implemented may 'twenty may of 'twenty. Three so 24 will be the first year that we've got full hedge accounting for the entire year and that accounting.
Volatility of reporting volatility will go away, but the economics, the underlying economics of the business are solid.
Awesome. Thank you guys very much really appreciate that additional color one more if I can and this is just more clarification on the quarter you guys called out positive contribution from <unk>. After the MVP restart in June so I imagine that was just that.
Period.
Is there any way you could quantify what that contribution was in Q2.
What do you see it for the balance of the year and whether there's anything embedded in your current year guidance around that.
Yeah. So I'll start with the last part of your question with respect to the guidance. It was one of the tailwind that I touched on that that's helped to offset some of the headwinds and that's why we feel very very comfortable with the range in terms of the overall contribution to the quarter.
That is in our financial statements under the equity note, it's about $6 million.
For June and we expect it to average about $5 million to $6 million per month for the balance of the year as we make forward progress.
As a consortium on that pipeline and get closer to the in service date. So that's the overall contribution.
Great. Thank you guys very much really appreciate it.
Thanks.
Thank you.
Your next question comes from Patrick Kenny from National Bank Financial. Please go ahead.
Oh, Hey, guys just wanted to confirm assuming MVP gets done now and you are able to monetize your 10% stake.
Say early next year.
Would those proceeds go towards debt repayment on a permanent basis.
I E take.
Take down leverage by half a turn or so.
Or would you view it more as a dry powder to potentially accelerate organic growth or fund tuck in acquisition opportunities.
Hey, Patrick it's James here, we've always been pretty consistent that MVP was going to be an asset that when we were ready to monetize it was going to go straight to permanent debt reduction and it was obviously the quickest path for us to get to four five times over and touched on us being able to get there organically as well through EBITDA growth, but that.
I'm going to take some more time MVP is definitely the lever that but we want to pull to be able to permanently reduce our debt and get to that four five times target that we set for ourselves.
Way back in 2019.
Okay perfect. Thanks for clarifying that and then.
Maybe just from a corporate priority perspective.
Clearly firming up the cash flow quality profile of the midstream business and maximizing utility ROE is top of the list but.
Vern given your experience.
Looking.
And all kinds of opportunities in the power sector.
How are you thinking about maybe positioning the company over the medium term to potentially get back to developing large scale renewables again.
Or potentially owning other mid merit natural gas power plants.
And maybe if you can comment on if there's any regional power markets out there that might be of particular interest to you say over a five year horizon.
Well thanks for the question Patrick.
Right now Theres no plans to get into the power business.
It's not even on the radar.
We do have some energy transition investment opportunities in front of US obviously, we're working on carbon capture and sequestration hub here in Alberta and associated C O two pipeline network.
We've got.
We've got.
<unk>.
Clearance from the Alberta government to continue to work on that we've got strong.
Customer demand for that C. O two storage. So that's in front of US we're working on a couple of hydrogen hubs, one in Washington State and one in the DMV both of those play well into what we do here at Alta gas, which is <unk>.
Transport liquid.
Some gases and liquid energy so right.
Right now that's the focus because I think that's what we're good at.
Got it okay I appreciate the color I'll leave it there guys. Thanks.
Thank you.
Ladies and gentlemen, as a reminder show you how our question.
Star one.
Your next question will come from.
<unk> from <unk> Securities. Please go ahead.
Okay.
I wanted to belabor the point of the theory of this term.
It is topical as you can appreciate.
So beyond the strategic and capital market access and cost considerations are there any tax considerations when youre looking at and assessing the merits of our diversified.
<unk> company versus pure play and.
How do you factor in <unk>.
Federations around the scale of a pure play.
Versus.
Potential dis synergies.
The desk of additional corporate costs.
And.
Have you discussed this at any point with the credit rating agencies.
Those are that's a.
Those are great points Linda.
Theres, obviously, some funding and tax synergies with the structure we have today.
And there are relatively minor or cost synergies by having a consolidator.
Corporate function here that provide services to.
To both of the businesses. So those factors for sure we will have to be looked at as part of any analysis that we do longer term and what do we look like and you're right. If we would split up the company both remaining entities would be relatively small.
Thank you.
Thank you there are no further questions at this time you May proceed.
Thanks, 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 you enjoy the rest of your day and you may now disconnect your phone lines.