Q3 2023 AltaGas Ltd Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the Altra gas third quarter 2023 financial results Conference call. My name is Sarah and I'll be your operator for today's call.
All lines have been placed on mute to prevent any background noise. If you have any difficulties hearing the conference. Please press star zero for operator assistance at any time after.
After the Speakers' remarks, there will be a question and answer session.
As a reminder, this conference call is being broadcast live on the Internet and recorded.
I would now like to turn the conference call over to Adam Mcknight Director Investor Relations. Please go ahead Mr. Mcknight.
Thanks, and good morning, everyone. Thank you for joining us today for Alta Gas's third quarter 2023 financial results Conference call.
Speaking on the call. This morning will be Vern, Yu, President and Chief Executive Officer, and James Herbalists, 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'll proceed on the basis that everybody who has taken the opportunity to review the press release and our third quarter results. This call is being webcast I encourage those of you listening on the phone lines to follow along with the supporting slides that can be found on our website.
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 a 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 followed by James harmless, providing a more detailed walk through of our third quarter financial results, our near term outlook.
2023 guidance.
And then we'll leave plenty of time at the end for Q&A.
Before we begin I'll remind everyone that we will refer to forward looking information in today's call. This information is subject to certain risks and uncertainties as outlined in our forward looking information disclosure on slide two of our 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 Good morning, everyone.
It's great to be here today to discuss Alta gas's third quarter financial results.
And to provide you with an update on our operations and our corporate priorities.
During the quarter alter gas made significant progress in a number of these strategic priorities that will create long term value and I'll touch on these in my remarks.
In Q3, we also demonstrated strong financial performance and stability management was focused on operational excellence and proactive risk management.
Let's start with slide four.
Here, we show Alto gas continued to execute on its long term business strategy and.
And we delivered strong results across the board.
Q3 came in with normalized EBITDA of 252 million and normalized EPS of <unk> 10 per share, which were both above our internal expectations for the quarter.
With the completion of Q3, coupled with our prior results for the first half of the year, we're well positioned relative to our 2023 guidance.
And in fact, we now expect to come in in the upper half of the range.
Let's move to slide five.
Which shows that midstream performance in Q3 was robust.
Operating results reflect record export volumes and strong global demand for L. P. Gs and these results highlight Canada's west coast advantage for L. P. J S.
Global LPG demand has been robust this year growing by 3% over 2022.
We expect similar growth in 'twenty, 'twenty, four which will continue for many years to come primarily on the back of growing long term demand for LPG is in Asia.
In Q3 global export volumes were up 7% year over year track.
Fractionation and liquids handling was up 12% year over year.
Our gas processing volumes were down modestly in the quarter due to maintenance. However volumes have already recovered from these planned outages.
We had 93% of global exports told are financially hedged in the third quarter protecting our structural west coast advantage.
For the balance of 2023, 87% of our global export volumes are told are financially hedged. We have also been active in hedging our 2024 exposure, where 76% of Q1 is now hedged or more than 50% hedged in Q2.
This reflects our ongoing commitment to reduce the volatility in our midstream segment.
Let's move on to our Pipestone acquisition that we announced in August since the announcement, we have received all material regulatory approvals, including Canadian competition Act approval.
We are currently working on finalizing commercial agreements with our customers and locking in fixed price EPC contracts for pipestone too.
Which will allow us to F I D and closed the transaction.
Which we expect to occur prior to year end.
As a reminder, the acquisition is a strong strategic fit for al to guess.
It will be risk or creative through long term take or pay commercial contracts and the deal reduces our overall commodity exposure.
The transaction was also purposely structured to reduce our leverage.
And it will drive 5% earnings accretion once pipestone two comes online.
We're excited to close the transaction and integrate the assets into alpha gasses midstream value chain.
Our reef LPG export expansion continues to make good progress the.
The project is in the feed stage with an expected in the first half of 2024, we have plans to start site clearing work before the end of the year.
And finally, we continue to make strong advancements on long term commercial agreements that will de risk of the expansion.
Just as a reminder, we're proud to have strong local partners for the projects.
This includes first nations local communities and the Prince Rupert Port Authority.
Slide six shows that our utilities segment performed in line with our expectations in the quarter.
I believe that gas utilities are irreplaceable and are a key part of the ongoing energy evolution.
Natural gas accounts for nearly 70% of U S household energy demand yet only represents a third of foam energy costs as such natural gas is the most cost efficient form energy source in fact switching to electricity would increase home energy costs.
By roughly 350% for the average homeowner and our franchise area.
It's also the most reliable source of energy for all matters.
As we all know about the declining and reliability of the power grid.
As such we believe our utilities will be critical in the years ahead.
We remained active on the regulatory front and all of our jurisdictions in the quarter.
In August we received a positive settlement on our Virginia rate case, which calls for $41 million U S of increases in rate base rates as well as a 32 million dollar U S increase in modernization riders.
In October we received a proposed system modernization extension in Maryland, which will run through the end of 2028.
Proposal will provide <unk> with another five years of visible growth.
The administrative law judge has recommended that the commission approve.
$330 million U S of capital to upgrade our system, improving safety and reliability.
This builds on our accelerated pipe replacement program in Virginia that was recently extended to the end of 2027.
Our rate cases in D C and Maryland remain ongoing we expect a decision in Maryland before at the end of this year and a decision in D. C. In the first quarter of 2024.
As we have messaged in the past, we expect to show a high degree of regulatory capital and cost discipline across all of our jurisdictions.
That will include being active with our regulators as we push for the most pragmatic approach to drive the best outcomes for all of our customers and stakeholders.
Now, let's spend a minute on WGS first large scale R&D initiative.
In October <unk> executed a definitive agreement with <unk> fuels to support on RMG project at the Prince William County landfill in Virginia.
Cared WJ all will become our LNG off taker for the RMG production that comes from the landfill. The R&D will be blended into our gas stream, which will reduce the carbon intensity of our energy as.
As part of the agreement <unk> will purchase interconnect infrastructure from Opel for around $25 million U S. The interconnection will be put into rate base and they will be eligible to earn 100 basis point Roe premium.
This is a great little deal for us it reduces the emissions of our customers and adds to our rate base and then we're actually able to earn an ROE in premium.
The more time I spend here at Alta gas the more excited I could become about our long term investment proposition.
James will cover this off in more detail in his section.
With that I'm going to turn it over to James to provide a more fulsome review of our third quarter results and update you on our financial priorities.
Thank you Vern and good morning, everyone.
As Vern discussed we're very pleased with the operational and financial results. We delivered in the third quarter of 2023, and the progress we have made across our strategic priorities.
We achieved normalized EPS of <unk> 10.
Normalized EBITDA of $252 million in normalized <unk> per share of <unk> 50.
These results were slightly above our expectations and leave us well positioned to achieve our 2023 guidance.
Within the midstream segment normalized EBITDA was at $185 million compared to $108 million in the third quarter 2022.
The quarter included strong operational performance across the platform, including record global export volumes strong year over year increases to fractionation and extraction volumes and strong Asia to North American LPG margins.
We exported more than a 118000 barrels of propane and butane to Asia across 20, built vlccs and one partially loaded ship.
This included more than 70000 barrels per day at <unk> and approximately 48000 barrels per day at Ferndale.
Global exports across all industries witness higher maritime shipping costs due to challenges at the Panama canal materially increasing rates globally.
However.
This was significantly mitigated from our existing time charters active Baltic freight hedges and higher tolling levels relative to last year.
The third quarter also benefited from AFDC related to MVP construction activities as forward progress continued on the pipeline as well as higher NGL and crude marketing contributions.
We continue to be well hedged and our global exports business for the remainder of 2023 with approximately 87% told or financially hedged in the fourth quarter with the merchant volumes hedged at an average <unk> of North American spread of $18 and 13th U S per barrel.
This combined with the improvement in propane Fai to North American spreads as well as us having worked through the higher cost butane inventory from the prior NGL contracting year, we expect strong contribution from the global export business in the fourth quarter of 2023.
We have also begun actively hedging for 2024 as part of our systematic risk management practices and currently sit at 76% hedged for the first quarter of 2024 with the merchant volumes hedged at an average to north American spread of approximately $17 U S per barrel and sit at more than 50% hedged.
For the second and third quarter of 2024.
We had a number of positive derisking initiatives advanced within our global export business over the past couple of months.
The first was that we entered a five year transportation agreement with CN in October the agreement provides ultra gas on our customers with cost and service predictability to support our growing LPG exports to Asia.
The agreement will provide predictability for our existing business and future volume growth, including the recent expansion.
The second was progress on final commissioning on two of Ulta gasses, new vlccs over the third quarter with the boreal pioneer expect it to have its maiden voyage in December of 2023, and the boreal Voyager expect it to have its first passage in March 2024.
These two seven year time charters with optional extensions will reduce our total shipping costs to Asia by approximately 25%.
Compared to a standard VLCC and normal shipping.
The vessels deployments will also remove pricing volatility and derisk maritime shipping costs on a long term basis consistent with our plan to commercially derisked, our midstream business over the long term.
In total we will have three time charters operating 2024 with a fourth currently under construction and set to be commissioned in the first half of 2026.
Turning to the operating segments. The utility segment reported normalized EBITDA of $71 million in the third quarter of 2023 as compared to $115 million in the third quarter of 2022.
Financial results were in line with our expectations with.
With the year over year decline, principally driven by the large Q3 2022 asset optimization contribution at WGN, <unk>, which we share with our customers and the loss contribution of the Alaskan utilities, which were divested on March <unk> 2023, and had contributed $13 million normalized EBITDA in Q3 of <unk>.
Thousand 22.
During the third quarter, we deployed $204 million of invested capital at the utilities on behalf of our customers, including $130 million through our various modernization programs.
These investments are focused on upgrading the network to improve safety and reliability of our system, while also bringing ancillary benefits of long term productivity improvements.
These programs also provide an immediate return on investment through rate writers and are not challenged from regulatory lag.
As such we will continue to make these upgrades on behalf of our customers, while balancing ongoing customer affordability needs. During the current environment of high interest rates and inflation.
In the corporate and other segment, we reported normalized EBITDA loss of $4 million compared to normalized EBITDA of $10 million in the third quarter of 2022.
The decrease was mainly driven by lower contribution from Blace due to turnaround activity in 2023, and higher expenses associated with employee incentive plans due to alter gases rising stock price.
Alta gas has made tremendous progress on restructuring the platform over the past four years, including Derisking the balance sheet.
This includes significant leverage leverage reduction with approximately 90% of the company's debt now being fixed under a properly staggered maturity ladder, while also having optionality for additional debt repayments.
These moves so strongly positioned Alta guests for the current operating environment and protected the company from the material increases in interest rates over the past 18 months.
Looking ahead, we are focused on continued commercial derisking as outlined on slide seven this includes higher tolling in global exports.
<unk> and systematic hedging for residual commodity exposure, our strong focus on take or pay and fee for service contracting customer and resource play diversification and long term cost contracting like the five year CN agreement and VLCC time charters within the utilities, we are focused on utilizing AARP modernization.
<unk> for upgrade assets to improve safety and reliability active and systematic hedging in the retail business advocating for weather and usage normalization across jurisdictions, which are currently in place in Virginia, and Maryland, as well as for prescribed timelines for rate cases across all jurisdictions.
Turning to capital allocation on slide eight we are focused on balancing our three pillars of balance sheet capacity shareholder returns and organic growth.
On the balance sheet, we continue to target reducing leverage to our four five times net debt to normalized EBITDA target over the coming period as we complete our multi year deleveraging journey.
Along that vein, we were excited about the strong progress that has been made on construction activity at the mountain Valley pipeline over the past three months.
The pipeline is expected to be placed into service during the first quarter of 2024, and we will provide critical energy security to utilities in the Eastern U S.
The updated aggregate capital cost of the pipeline to $77 2 billion with Alta gases.
<unk> contribution contractually cap at its original $352 million investment for 10% equity interest.
This cap was hit in 2019 with no additional cash contributions impacting us as a result of this structure.
As previously disclosed Alta gas does not consider its equity stake as core and we will consider a monetization of our stake as one of the most immediate pass to moving towards our four five times leverage target.
For shareholder returns, we target a payout ratio of 50% to 60% of earnings per share, which is consistent with our payout ratio over the past three years.
And finally on capital spending we continue to take a prudent approach to our investments.
Our first bucket of capital is also allocated to utility system betterment utility customer growth and midstream maintenance spending, which collectively ensures that we have safe and reliable assets for existing operations.
After that we allocate our discretionary growth capex, where utilities modernization programs and core midstream growth projects. This capital is always deployed in line with our individual risk adjusted hurdle rates and ranked against the various opportunities in front of us, including all organic growth projects repayment of debt.
M&A and potentially share buybacks.
Post us, reaching our leverage targets on the ladder.
Turning to our value proposition on slide nine we are excited about the road ahead.
We are positioned to deliver industry, leading dividend growth through stable and increasing cash flows we.
We will be able to improve our risk profile through commercial constructs and our ongoing balance sheet deleveraging.
The long term fundamentals for Alta guests are strong.
The Canadian upstream industry will deliver significant growth in natural gas and NGL production.
Growing NGL volumes, we will need additional west coast egress to maximize value for our customers and provide critical energy security to Asia.
Our utilities have a bright future with natural gas being a critical fuel that will be required to balance the needs of energy affordability and energy reliability with our climate goals.
As Vern highlighted on the back of the strong third quarter and year to date results. We are well positioned to achieve our 2023 guidance figures of normalized EPS of 185 to 205.
Normalized EBITDA of one five to $1 6 billion and expect to be in the upper half of the guidance range.
We look forward to hosting our Investor day on December 5th where we'll release, our 2020 for guidance and provide an update on our corporate strategy and provide our near and long term corporate priorities.
And with that I will turn it over to the operator for the Q&A session.
Thank you, ladies and gentlemen, we will now conduct the.
A question and answer session, if you'd like to ask a question. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press star one again, there will be a brief pause while we compile the Q&A roster.
Your first question comes from the line of Jeremy Tonet with Jpmorgan. Your line is open.
Hi, good morning.
Okay.
Hi, Jeremy how are you.
Good good thanks.
Just wanted to start off with the LPG export economics here.
Clearly things are looking pretty good right now, but just wondering how you guys think about the sustainability of export economics at this point and also how you think about a bit more color on how you think about leveraging that into potentially tolling are firming up in general just any thoughts along those lines would be helpful.
Great. That's a great question Jeremy.
Well, maybe let's just start with the fundamentals I think.
The Asian market is obviously, the best market for North America <unk> and.
And in fact Asia today looks to imports about 3 million barrels a day of propane and butane about 2 million barrels of that comes from the U S. Gulf Coast about $1 million comes from the Middle East, we're continuing to see obviously in the Permian increased NGL production and.
Every incremental barrel there is looking to go offshore so for the Canadian producer I think there's less and less incentive to take your NGL barrel to the U S and more and more incentives to go west.
Since rip, it's been up and running.
On average if you look at the positive netback that you can get by going to Asia as opposed to going into Conway our Bellevue.
Over the last six years, it's averaged about $3 per barrel.
After taking into account all of the costs, that's rail costs shipping costs and our capital charges.
At our export facilities. So if you were told customer you'd be seeing that $3 a barrel over the last six years.
As we look today, that's that's well over $5 a barrel so I think the.
Long term and immediate positive contributions that this will make to our our customers are pretty obviously very strong. So right now we're in active dialogue with producers in western Canada to improve their net backs.
Obviously, we're talking to.
Asian buyers on a reversed all basis for them to access cheap Canadian barrels and now we're talking to NGL aggregators to see if we can lock up long term.
Tolling deals. So I think we've talked about in the past of getting to 50% next year, and then higher overtime to that 60 plus percent range as we look to.
Our reef projects. So I think we're very bullish on the structural west coast advantage, and we see that only getting better as the fundamentals they're big.
Big tailwind for Us right now Jeremy.
Got it that that certainly makes sense.
And just wanted to pivot to pipestone, if I could if it might be able to provide a little bit of incremental color with regards to the synergy potential and along the lines of LPG export I guess, having greater supply I guess, what do you see that kind of adding your experts your efforts on your prior.
Points you made there.
Sure.
Just a couple of initial observations and all.
Turn it over to James to talk about the accretion and maybe Randy can talk about how many barrels we see here for incremental exports. Obviously, we feel the transaction was highly strategic for us.
It's risk accretive as it increases the amount of take or pay contracts, we have in our portfolio decreases our overall commodity exposure. It was done where we've issued a bunch of equity to the vendors. So it is actually leverage accretive and I think we paid a very fair price so it.
It checks all the boxes, but I'll turn it over to James to talk about.
How accretive we see the transaction and then Randy will talk about the export position.
Yeah. Thanks, Bryan so in terms of accretion Jeremy when we announced the deal we said that it was going to be about 4% to 5% accretive to EPS. Once pipestone too has been built and online.
We would expect that to be 24 months after.
<unk> has accomplished in terms of.
Advancing the pipestone transaction to close obviously, we've received regulatory approvals in burn touched on that in our prepared remarks, but.
But we are advancing commercial discussions with customers in the in the area. We're very encouraged by the level of demand for processing and liquids handling capacity in the area. So we see those moving moving ahead positively. We're also obviously trying to lock down our EPC contracts on the engineering front. So that we can be in a position to.
Clarified by the end of the year and potentially close the transaction by the end of the year and the demand for the liquids handling capacity is it really goes to the heart of your question around additional barrels being available for export which both of these facilities bring so I'll turn it over to Randy.
Thanks, James Yeah. The Pipestone gas plant is located in a great part of the Montney very liquid rich.
Deep cut capability, so San Juan.
Produces about 4000 barrels a day of LPG that with vigor.
Gas processing arrangements, we market those barrels for our customers.
And where will those will be good egress to Fort Saskatchewan, and then we have access to those barrels to move to exports from their pipestone too will double dose so eight plus thousand barrels and we plan on exporting those as well so all the customers we're talking to you about gas processing.
We're looking forward to being able to export those barrels to Asian markets.
Very helpful. Thank you for that and if I could just pivot real quick here to capital allocation seems like MVP might just be hitting the finish line here and that could potentially unlock a lot of.
New flexibility for all of the gas upon a successful sale. After MVP completion, just wondering if you could update us on capital allocation in light of this dynamic and how you see things progressing going forward.
Well I'll start off and I'll, let James add on if I Miss anything here.
Obviously, we've talked about getting to four five times debt to EBITDA.
MVP is obviously the catalyst that gets us there.
In a material fashion. So it's great to see good progress on the construction of the pipeline and we're hopeful that the proponent will be able to.
Finished construction in Q1 of next year.
And as James mentioned in his prepared remarks, obviously, we're actively looking.
To sell our interest in the pipeline once once there's clarity on <unk>.
Operations I think when we get to that four five times target, we will have about $1 $4 billion per year of investment capacity and as James mentioned, we will be balancing that investment capacity with managing the balance sheet.
Making sure we take care of safety and critical maintenance capital that we have in our systems and then continuing to grow our company with.
Organic growth projects and we've talked about a few already today and over time, if we're at or a strong balance sheet position that a lock unlock the possibility of doing share buybacks as well.
Over to you James if you want to add anything.
That was pretty thorough.
Great. Thank you for that one quick last one on the analyst day anything we should be expecting there.
Well, I think where we're going to provide a lot of.
Color on why we're very bullish on the business I think the fundamentals for the West Coast business as we've talked about are extremely strong I think that fundamentals for our gas utilities.
In the eastern part of the United States, There is improving each and every day I think.
The energy evolution is going to take a lot longer and it's going to be more challenging than perhaps policymakers have thought of and I think some of the developments with the U S northeast offshore win really.
Kate home on energy reliability energy affordability, and energy security and how we need to balance that off against.
Our climate goals. So I think we'll have a great opportunity to deep dive into the fundamentals of both of our businesses and how well we're very excited about the growth prospects for the company is really as James mentioned in his prepared.
Remarks that we believe we have an industry leading investment proposition Jeremy.
Wonderful thank you very much.
Your next question comes from the line of Darius <unk> with Bank of America. Your line is open.
Hey, guys. Good morning, Thanks for taking the question.
Maybe just.
Digging into the new agreement that you announced with rail.
On transport to Rip it can you maybe discuss a little bit about how that's expected to impact cost in the near term and over the term of the contract also maybe any additional color that you can add as far as does it include escalators or.
Any other terms that we should be aware of thank you.
Yes, it's James here I can I can touch on some of the cost aspects.
Turn it over to Randy if he wants to add anything but I mean in terms of the contract itself. It does give us long term certainty over rates, obviously those rates are lower than manifest rates. So we would expect to see a positive impact to margins based on what we were paying under the expiring contract all contracts have with CP.
Escalators to them and this one is no different but the fact that we were able to lock in rates for a five year period below manifest rates was that was an important initiative for us that will improve margins.
Yes, I can just add to that.
All rail agreements have escalation clauses.
I can't get into the details of the contract due to confidentiality but.
We feel that we've got a very strong contract that gives us certainty, especially going into when we're trying to derisk reef.
Trying to get long term growing arrangements for our customers. So we feel it's a very strong contract and it's not just a terrific but it's.
So the ferndale and to earn up to north CPUC. So.
Thank you for that.
And one more if I could and this is on the utility side of the business.
The RMG deal that you announced with WGS as you've mentioned in the opening remarks, obviously, it seems like a pretty favorable deal with the 100 basis points premium just curious what the potential runway might be for.
For any additional deal similar to that to acquire some infrastructure and potentially get anoro premium.
Well I think it's a great question. We're excited about our LNG, we think that has a big place and our overall portfolio I think.
We're starting that journey, but maybe blue can comment on.
The transaction, we're looking at right now yes. Thanks. Thanks, Brian Yeah. We are excited about the transaction as you are well aware.
Virginia passed what is known as the Virginia Energy Innovation Act that law came into effect, which opened up the opportunity to bring some of these alternative or lower carbon impact fuels into the regulated process. This is our first large transaction under that particular law. There are certainly other trans.
<unk> opportunities in our footprint, we continue to work multiple opportunities across our geography, and we're balancing those opportunities with the with the work that we're also doing around ensuring that policymakers understand the opportunity and the benefit to customers for this so we like this we like this project we will take.
49% of the physical gas supply on the project will take 10% of the green attributes on that and so our customers will benefit by flowing 100% of the molecules across our system and we'll blend that in which which helps our targeted emissions and also helps.
Those customers, who have specific needs and request on their particular climate targets. So we're really excited about the opportunity I think there's more to come for us across the portfolio.
Okay.
Great well. Thank you guys for the color I'll pass it along here.
Your next question comes from the line of Patrick Kenny with National Bank Financial Your line is open.
Hey, guys.
Touched on the reef expansion opportunity maybe just.
An update on the feed study.
How cost estimates might be tracking relative to your initial expectations.
Any comments around customer demand for off take and then.
Just to clarify the timing for a potential FID decision.
Okay I'll kick it off.
And then turn it over to Randy if I Miss anything so we're well into seed where we're obviously looking to materially de risk our capital cost exposure here, while we want to do is do as much modular construction as we can and limit the amount of site construction that's been.
<unk> done so in fact, we're modifying the design a little bit to allow us to do that.
I think the capital I don't think we are well enough along to give you an estimate what the capital might be but suffice it to say, it's going to be more than what rip it cost, but it will still be quite manageable.
And obviously, we have a 50 50 partner with bowl pack to share of the overall capital commitment.
Customer interest for the expansion is quite strong we're seeing demand interest from producers.
Buyers in NGL aggregators, so on that front, it's very exciting so I think our hope is to take <unk>.
Sometime in the first half of next year.
And I think we have all the milestones in front of us to allow that to happen and obviously you were bullish on the project because we're starting with site clearing later this month, so I think the projects shaping up well and once the the Doc is up it'll give us more growth.
<unk> as we go forward just as a reminder, the initial phase of reef only uses up 10% of the of the dock space.
Anything you want to add Randy.
I will just reiterate we're very positive both project so much so that we are.
We are going ahead with tree clearing.
And that just gives us more confidence in.
The Earth works for the project and.
Our goal is to really get a better understanding of the capital cost before we pull the trigger so but we know we're quite confident that that will happen.
Okay. That's a great update guys. Thank you.
And then maybe just a quick clean up question on the a the lower.
Contributing from life in the quarter.
Was that just the normalization of performance year over year or has there been.
Any structural decline.
And margins for some reason.
And then maybe just an update on.
How are you thinking about maximizing the value of the asset either through further contract extensions from here or potentially monetization over the near term.
Yeah, Hey, Betsy it's James here, So look in terms of <unk>, obviously, it's under an existing.
Three year totaling arrangement that expires at the end of 2023, so the variability in the cash flows wasn't as a result of that it was a small turnaround it needed to be done at the facility and that's why we saw a little bit of a pullback in Q3 that's already.
On track to recover in Q4, so it's not really any kind of margin erosion with respect to the facility itself.
Obviously, the actual the plant is very important to California's power grid and as a result of that we've been successful extending the contract by another four years. It takes us out to 2027.
And we've always said that that is an asset that has a remaining our sole remaining power asset and isn't core. So if we see if we see evaluation.
That reflects the extrinsic value of that asset then we would transact we have seen some positive developments along those lines with precedent transactions in the California power market. So that's what we'll continue to track and if we see the appropriate value for that asset then we would see that as another path to accelerate our deleveraging along with the mountain Valley pipeline.
Okay, great. Thanks for that clarity James I'll leave it there.
Your next question comes from the line of Robert Kwan with RBC capital markets. Your line is open.
Great Good morning.
If I can start with the utilities business.
<unk> highlighted the pretty significant ROE improvement that you've had to date.
Still lagging quite a bit.
The allowed ROE.
So can you just talk about <unk>.
I guess generally.
I get that but just how much.
A lag do you think is structural just as you think about the regulatory frameworks.
And your recoveries versus.
Where you are allowed with Chad.
Essentially what what's the bogey here.
Well I think the way we have to look at it Robert has jurisdiction by jurisdiction.
I think were pretty much bang on are allowed in Virginia, where very modestly below in Maryland.
This year because of whether we're going to be behind in Michigan, but over the history of the company we've been at or above the allowed there most of the time so.
So systemically the problem is DTC.
And that's been a problem for many years now where we are we're subject to weather risk as well as a very slow regulators. So.
In the current rate case that we have in front of.
The D C regulator, we're asking for weather normalization.
And in fact, another positive step that we've seen the jurisdiction is.
The commission has been asking for.
Commentary on mandatory timelines to deliver rate cases so.
I think once we get.
The existing decision in from D C that will materially.
<unk> closed the gap in that jurisdiction. Our plan is to file another rate case right after that to even try to get closer so.
Then hopefully we will be successful on weather normalization, which in this year would be.
Tier 300 basis points of return missed.
Mismatch, so blue did you want to add anything.
I think you hit the highlights I think it's positive that the commission is asking for.
Tori construct or structures that would facilitate a speedier response, we of course replied to that so we take that as a part of this positive sign that the.
Ah recognizing how long that process takes in some cases, and we're optimistic that that will be beneficial.
Robert It's James here.
Sorry, James I, just wanted to add one more thing and I think it goes to burns a comment around the subsequent rate case that we are planning on filing the important part there is that once we file that the historical test year would be 2023, so whatever gets embedded in rates as a result of that rate case would reflect costs costs that we've incurred.
And capital investments that we've made up to the end of 2023.
Okay. That's great color if I can just finish here on unreached. So obviously, you're kind of showing you sound confident that the <unk> can.
Can you just talk about though the contracting strategy and what needs to be done to get to our first half of next year.
Youre still short on that that I think where you wanted to be on tolling and then you've got all the capacity.
That you'd probably want to lock up a very significant portion of that so just given how difficult it's been to get Rick it totally.
Higher.
<unk>.
What do we need to see on reef to get to the <unk>.
So do you.
Primarily concerned about the commercial side or the capital side, Robert or how are you.
The commercial side.
Thanks, So if you look at our overall export book now it's something in the range of 125000 barrels a day.
We this year had about 40% tolling.
Next year, we're on track to get 50% tolling for that book.
Obviously.
Reef adds another 50000 barrels a day.
So we'd be up to total export capacity in the range of 175000 barrels a day.
Not taking into account some debottlenecking that may or may not happen as ferndale.
So ideally we'd like to be in that range of 100.
More than 100000 barrels a day of <unk>.
Exports on a long term basis.
Really.
<unk> been positive for us.
Is obviously LNG, Canada is coming into service here in the near future our producing customers up in northeast BC have been very active now in developing their drilling plans to fill.
That natural gas to get to LNG, Canada, and obviously, the most attractive place to drill is in the Montney and with that comes Ngls. So we're we're in deep.
Commercial discussions with incremental producers, who are very much looking at long term.
Export tolling arrangements with us so.
<unk>.
Before.
<unk> will have clear line of sight that.
That we're going to be successful in signing these guys up so I think yes.
It's quite exciting can't give you more than that right now because of the active commercial agreements but.
The <unk> are really behind us right now Robert.
Okay. So to be clear if you do get to go to the AGM in first half of next year, you're really going to have 100000 in hand or.
Basically be asking negotiating stage, where youre highly confident youll convert.
Shortly after our Heidi.
Yes, obviously some of these will ramp up over time Robert.
Total.
Yes, <unk> not going to come into service til.
Okay.
A 2026, so and then which is going to be.
Our ramp up so we will have to have very high visibility into tolling before that.
That much capital at risk.
Alright, just to be clear you would have the executed agreements.
That may not take effect until 2026, or maybe even 2027, but you'll have those agreements in hand versus.
We think we're going to have them in 'twenty is that fair.
That's the plan.
Okay. Thank you.
Your final question comes from the line of Ben Pham of BMO. Your line is open.
Hi, Thanks, a couple of cleanup questions firstly on the dividend.
Language in the deck you are mentioning grown our dividend today.
<unk> growth rate is that.
Replace that.
Previous guidance range if.
You've noted that $5 to 7%.
Well, Ben I think what.
What we're trying to make clear is that we feel like our cash flow our earnings are going to grow at a very healthy clip no different than what we had previously indicated.
What I wanted to clarify is we'll grow the dividend.
Up to that.
Growth rate subject to the.
The investment community wanting that dividend increase I think from my past experience.
Promising.
The full dividend growth to match the earnings or cash flow growth didn't always makes sense every year because of.
There are times when yields.
The companies.
Yield is dislocated so it's an N b an annual decision, but there is no change in the financial outlook at the company.
Okay and then just.
Yes.
Denmark, you have a year that you are growing EPS at.
At 2%.
Suggest that well then.
Thats, a pretty steep at 5% to 7%.
<unk> had previously.
Well, obviously, we're going to grow our dividend based on our view of the long term growth profile of the company not a single point year change in <unk>.
In earnings or cash flow, if we believe that the company is sustainably growing at 5% to 7% per year and in the investment community is receptive to our current dividend profile, we will grow.
Dividends, 5% to 7% per year.
Yes.
Okay, and then also not sure if this tweak to the.
Just your journey on the leverage reduction and purposeful laying out the five times you had in the past that your your sites as much quicker now five times of that was that purposeful.
Ben It's James here I mean, we've always set a target of five times in the medium term and four five times in the long term.
Dating as far back as 2019, what we've said is that obviously, we can we can get to four five times by through organic growth, but that would take us longer to get there.
Four five times is something where we can get to in a more immediate basis through the monetization of MVP and potentially Blake. So that is the that is the slight clarification in the messaging here.
Okay, Great I, just want to square that and then maybe lastly, you think about.
Monetize on MVP I know you've been talking about that for quite some time as noncore.
Yes, Scott somewhat choppy market to last 12 months.
Monetization pricing as being quite quite wide how do you.
How do you balance that dynamic work.
That's five times leverage target.
Yes, I mean from our standpoint, we still think that MVP has certain characteristics as the pipeline that are going to make it very valuable obviously, it's going to be free cash flow positive.
From the time it comes into service when CODI has accomplished it's a pipeline that could that could experienced organic growth through additional compression on the mainline and.
And obviously southgate is an ability.
For an investor to expand as well with the Southgate expansion potentially moving into an open season here as they decided to make forward progress. So we think those characteristics are going to be important ones that will attract significant attention for MVP on such a strong valuation for us and the last thing I'll leave.
On MVP is it is it does have 20 year offtake agreements with strongly rated utilities and obviously a strongly rated shipper that is very very active in the Marcellus. So we're very confident that we can get a strong price for this asset.
Okay.
Okay alright, thank you.
There are no further questions.
Thanks, Sarah 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 all enjoy the rest of your day.
You may now disconnect your phone lines.
[music].
Okay.
[music].
Yes.