AltaGas Announces Strong Second Quarter Results

Source: www.gulfoilandgas.com 7/29/2021, Location: North America

AltaGas Ltd. reported second quarter 2021 financial results and provided an update on the Company's operations.

HIGHLIGHTS
- Normalized EPS1 of $0.08 in Q2 2021 compared to $0.06 in Q2 2020, demonstrating 33% Y/Y growth and alignment with AltaGas' focus on driving steady EPS growth and consistent earnings durability.
- Normalized FFO per share1 of $0.56 in Q2 2021 compared to $0.51 in Q2 2020, demonstrating 10% Y/Y growth and continuing to provide the foundation for increased returns of capital and fund accretive expansion.
- Normalized EBITDA1 of $230 million in Q2 2021, compared to $206 million in Q2 2020, representing a 12% Y/Y increase. Results reflected strong execution across all segments, partially offset by the negative effect of the unfavourable move in the CAD/USD exchange rate, the impact of AltaGas' rising share price on long-term incentive programs and asset sales.
- The Utilities segment reported normalized EBITDA of $99 million in Q2 2021 compared to $80 million in Q2 2020, representing a 24% Y/Y increase. On a local currency basis, Utilities normalized EBITDA was up 35% Y/Y and reflected ongoing regulatory, capital and cost discipline, as well as improvements in Retail performance.
- The Midstream segment reported normalized EBITDA of $142 million in Q2 2021 compared to $111 million in Q2 2020, representing a 28% Y/Y increase. Performance was driven by record global exports of 90,106 Bbls/d of liquified petroleum gases (LPGs) to Asia for the quarter, a 12% Y/Y increase in gas processing volumes, and a 35% Y/Y increase in fractionation volumes.
- On April 23, 2021, AltaGas completed the monetization of its non-core U.S. Transportation and Storage business, which significantly advanced the Company towards its goal of reducing leverage below 5.0x Net Debt1 to Normalized EBITDA and providing an enhanced margin of safety moving forward.

CEO MESSAGE
"AltaGas delivered strong second quarter results, continued to execute on our strategic plan, and left the platform well-positioned to meet the Company's 2021 and longer-term growth plan" said Randy Crawford, President and Chief Executive Officer. "We grew normalized EPS by 33% year-over-year, reflecting the continued strong operational and financial performance of the business. During the quarter, the Utilities segment continued to drive strong execution, which was centered on providing safe, reliable, affordable, and outstanding service to our customers. On a local currency basis, we grew Utilities normalized EBITDA 35% year-over-year, reflecting recent investments and upgrades across our network. New customer connects within the WGL footprint continued to track modestly ahead of our expectation in the second quarter and was in-line with the strong population growth seen in the D.C.-Maryland-Virginia region over the past decade, which has eclipsed the national average by nearly 25% since 2010. We were also pleased to make headway in promoting combined heat and power (CHP) to larger commercial and industrial customers during the quarter, which is advancing our lower-carbon focus that is part of our climate business plan.

"As the world focuses on decarbonization and a changing energy ecosystem, we look forward to continuing to progress our climate business plan. We will leverage the core building blocks of end-use energy efficiency and the adoption of lower and carbon-free fuels. Our commitment to ongoing system upgrades to improve AltaGas' distribution and transmission network is priority one. During this evolution we will be focused on sustainability and be a tireless advocate for our customers and the best societal outcomes. Affordability underpins this evolution and we will carefully balance our competing priorities.

"For the second quarter, we continued to capitalize on the tremendous market opportunity to export cleaner energy to Asia from the world class Montney play due to the rising demand for lower-carbon and ethically-produced LPGs in the region. Our global exports business shipped a record 90,106 Bbls/d of combined propane and butane to Asia during the second quarter; further demonstrating the value of our expanded platform. This included exporting fifteen very large gas carriers (VLGCs) to Asia in the quarter with Ferndale exceeding 50,000 Bbls/d of exports in June, which was a new record for the terminal. We also realized strong volume growth across our gas processing and fractionation facilities, which were up 12% and 35% year-over-year, respectively.

"During the quarter Petrogas purchased a real property interest in approximately 1,600 acres of land adjacent to the Ferndale LPG export facility. The incremental land position will provide Petrogas with the enhanced logistical flexibility to support our existing lower-carbon LPG exports into Asia. The land will also provide optionality around pursuing other promising energy transition development projects that are under early-stage exploratory work, fall within our long-term strategic focus, and could represent further positive economic and employment opportunities for the region. During the quarter, AltaGas also entered into a seven-year time charter with a three-year optional extension for two new 91,000 cubic meter dual-fuel VLGCs with deliveries expected in late 2023 and early 2024. The agreement will extend our value chain reach into Asia. The vessels are 15% more fuel efficient, carry 8% larger loads and will reduce total shipping costs to Asia by approximately 25% compared to a standard VLGC. Their deployment will also remove pricing volatility for AltaGas and its customers on a long-term basis.

"We are enthusiastic about our long-term growth prospects and remain confident on being able to achieve the increased financial guidance that was set concurrent with the first quarter. We also remain acutely focused on maintaining our strong credit ratings and, most importantly, continuing to reliably deliver for our customers. Our continued focus on execution and strong performance will provide the foundation for ongoing dividend growth and profitable expansion that will uniquely position AltaGas to drive long-term shareholder value creation."

BUSINESS PERFORMANCE

Utilities
Utilities second quarter normalized EBITDA of $99 million was up $19 million year-over-year, despite an unfavourable move in the CAD/USD foreign exchange rate that resulted in a $9 million headwind during the quarter. On a local currency basis, the Utilities segment normalized EBITDA increased by $28 million or 35% year-over-year. This growth was driven by continued rate base growth from ongoing capital investment across the network through accelerated replacement program (ARP) investments, the recent D.C. and Maryland rate cases, and marked improvements in Retail performance.

Our strong 8% forecasted rate base CAGR through 2025 is underpinned by disciplined investments across the network, which are focused on driving better customer outcomes through improved network safety and reliability, reduced leak rates, and lower operating costs. The Company continues to make progress towards closing the ROE gap at WGL through updating rates, capital discipline and acute cost management. During the quarter, the Maryland and D.C. rate cases became effective, which drove increased firm revenue of $8 million. On July 1, a rate case was filed at CINGSA requesting a US$1.9 million rate increase. Our rate case activity is focused on updating rates to reflect current operating costs and minimizing regulatory lag.

The Utilities segment also benefited from a stronger pricing environment and improved power and gas margins in the Retail business, higher returns on pension assets, customer growth and lower COVID-19 related costs and other tailwinds. These were partially offset by higher G&A and lower asset optimization revenue.

Midstream
The Midstream segment reported normalized EBITDA of $142 million in the second quarter of 2021, a 28% year-over-year increase. Strong growth was attributed to solid execution across all businesses, including global exports, fractionation & liquids handling, and gas processing. Performance was also reflective of the progress made on the integration of Petrogas, where AltaGas and its customers are realizing strong benefits from the combined platform.

Global exports contributed $70 million in normalized EBITDA during the quarter and achieved record volumes of 90,106 Bbls/d of LPGs shipped to Asia, across 15 VLGCs. This included Ferndale exceeding 50,000 Bbls/d in June, which is a new record for the terminal. Record export volumes were underpinned by strong operations and efficiencies across the two terminals, robust demand for North American LPGs within Asia and ongoing growth in throughput volumes in AltaGas' gas processing and fractionation facilities.

The strong underlying fundamentals of the current commodity price environment were again seen in the quarter. Total gas processing volumes were up 12% year-over-year while fractionation volumes were up 35% year-over-year. Similar to the first quarter, producers in the Montney region continue to execute on active drilling programs and ramp up production to meet take-or-pay commitments, driving increased throughput at our expanded Townsend and North Pine facilities. Within the Montney we continue to see the strongest acceleration in development activity north of the Peace River, which is in line with our core footprint in NEBC. Processing and fractionation volumes at AltaGas' non-Montney facilities also increased during the quarter, driven by improved commodity prices and resulting increased production volumes. The Midstream segment also benefited from stronger Alberta power prices, which generated higher earnings from the cogeneration plants at Harmattan during the quarter.

The average spot NGL frac spread for the second quarter of 2021 was $20.54/Bbl, however due to AltaGas' hedging program the Company's realized frac spread averaged approximately $11.59/Bbl (net of $13.41/Bbl in transportation costs), as 84% of AltaGas' frac exposed volumes were hedged at $25.00/Bbl. AltaGas remains well hedged through 2021 with approximately 98% of total expected frac exposed volumes realized or collectively hedged at approximately $25.70/Bbl and 79% of 2021 total expected global export volumes realized, tolled or collectively hedged. The latter includes an average FEI to North American financial hedge price average approximately US$10.79/Bbl, including both propane and butane for the hedged and non-tolled volumes.

2021 Midstream Hedge Program
Normalized EBITDA for the second quarter of 2021 was $230 million, which represented an approximate 12% year-over-year increase compared to $206 million for the same quarter in 2020, reflecting strong performance across both Utilities and Midstream businesses. Year-over-year growth drivers in the Midstream segment included the consolidation of Petrogas and stronger performance in global exports, continued robust performance throughout AltaGas' NEBC platform due to higher volumes and volume commitment associated with previously developed NEBC expansion projects and stronger Alberta power prices. This was partially offset by the lack of Allowance for Funds Used During Construction (AFUDC) recorded on MVP, a blend and extend contract at Gordondale that was signed in 2018 with new rates taking effect in 2021, and the loss of contribution from the U.S. Transportation and Storage business following the monetization that took place during the quarter.

Strong results from the Utilities business were driven by higher revenue from a larger rate base that was underpinned by ongoing ARP investments focused on system upgrades, higher firm revenue from the D.C. and Maryland rate cases which took effect in the quarter, higher margins in the Retail business, and higher returns on pension assets. This was partially offset by the unfavourable CAD/USD exchange rate, which had a $9 million impact on Utilities normalized EBITDA.

The Corporate/Other segment reported normalized EBITDA loss of $11 million, compared to $15 million earned in the same quarter of 2020. The $26 million year-over-year decrease was mainly due to: 1) the mark-to-market impact that AltaGas' rising share price had on long-term incentive programs; 2) the impact of asset monetizations, including Pomona and Ripon in the third quarter of 2020; and 3) the unfavourable CAD/USD exchange rate impact of $2 million.

For the second quarter of 2021, the average Canadian/U.S. dollar exchange rate decreased to 1.23 from an average of 1.39 in the same quarter of 2020, resulting in a decrease in normalized EBITDA of approximately $14 million on a consolidated basis.

Normalized net income was $23 million or $0.08 per share for the second quarter of 2021, compared to normalized net income of $17 million or $0.06 per share reported for the same quarter of 2020. The increase is due to the same factors impacting normalized EBITDA and lower interest expense, partially offset by higher depreciation and amortization expense and higher normalized income tax expense.

Net income applicable to common shares for the second quarter of 2021 was $24 million or $0.09 per share, compared to $21 million or $0.08 per share for the second quarter of 2020. In addition to the factors impacting normalized EBITDA, the increase was mainly due to: 1) the partial reversal of a provision recorded in the first quarter of 2021 due to an increase in the fair value of net assets held for sale upon close of the sale of the U.S. Transportation and Storage business in April 2021; 2) higher foreign exchange gains; and 3) the gain on sale of the majority of the U.S. Transportation and Storage business, partially offset by higher unrealized losses on risk management contracts and higher depreciation and amortization expense.

Depreciation and amortization expense for the second quarter of 2021 was $108 million, compared to $93 million for the same quarter in 2020. The increase was mainly due to the absence of an amortization adjustment in the second quarter of 2020, new assets placed in-service, and amortization expense on Petrogas assets upon consolidation.

Interest expense for the second quarter of 2021 was $69 million, compared to $71 million for the same quarter in 2020. The decrease in interest expense was mainly due to lower average interest rates and a lower average Canadian/U.S. dollar exchange rate, partially offset by higher average debt balances.

AltaGas recorded income tax expense of $3 million for the second quarter of 2021, consistent with the same quarter of 2020. Current tax expense of $27 million was recorded in the second quarter of 2021, which included $18 million of tax on asset sales.

GUIDANCE AND FUNDING
AltaGas remains acutely focused on growing EPS and creating earnings durability in the years ahead and is reiterating the Company's 2021 increased guidance ranges that were provided in April 2021, including:

- 2021 Normalized EPS guidance is $1.65 - $1.80 per share.
- 2021 Normalized EBITDA guidance is $1.475 billion - $1.525 billion.

AltaGas' 2021 capital expenditure plan, which remains unchanged at approximately $910 million, excluding asset retirement obligations (ARO), is heavily weighted towards the lower-risk Utilities business and is comprised primarily of ARP and system betterment projects that are anticipated to deliver stable and transparent rate base growth and strong risk-adjusted returns. The Company is allocating approximately 38% of AltaGas' consolidated 2021 capital to ARPs in its Utilities business, representing approximately 46% of the total 2021 Utilities capital program.


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