AltaGas Ltd. ("AltaGas" or the "Company") reported first quarter 2023 financial results and provided an update on the Company's operations and other corporate developments.
HIGHLIGHTS
Normalized EPS1 was $0.98 in the first quarter of 2023 compared to $1.02 in the first quarter of 2022, while GAAP EPS2 was $1.58 in the first quarter of 2023 compared $1.27 in the first quarter of 2022.
Normalized EBITDA1 was $582 million in the first quarter of 2023 compared to $574 million in the first quarter of 2022, while income before income taxes was $619 million in the first quarter of 2023 compared to $504 million in the first quarter of 2022.
Normalized FFO per share1 was $1.63 in the first quarter of 2023 compared to $1.65 in the first quarter of 2022, while Cash from Operations per share3 was $2.10 in the first quarter of 2023 compared to $2.44 in the first quarter of 2022. Higher normalized EBITDA and lower normalized current income tax expense1 was offset by higher interest expense.
The Utilities segment reported normalized EBITDA of $401 million in the first quarter of 2023 compared to $408 million in the first quarter of 2022, while income before taxes was $590 million in the first quarter of 2023 compared to $426 million in the first quarter of 2022. The quarter included AltaGas making strong ongoing asset investments on behalf of its customers across the network, favorable foreign exchange rates, offset by warmer weather impacts in Michigan and the District of Columbia (D.C.), and weaker year-over-year performance at the Retail gas business, which was principally driven by the timing of swaps.
The Midstream segment reported normalized EBITDA of $183 million in the first quarter of 2023 compared to $174 million in the first quarter of 2022, while income before taxes in the segment was $138 million in the first quarter of 2023 compared to income before taxes of $159 million in the first quarter of 2022. There were several positive and negative contributors underpinning the modest year-over-year variance. The quarter included strong operations and year-over-year volume growth across global exports, higher fractionation volumes and realized pricing, and the favourable resolution of contingencies, offset by higher rail and ocean freight costs, modestly lower gas processing volumes due to the lost contribution of the Aitken Creek gas processing facility that was divested in the second quarter of 2022, and lower realized Asian-to-North American butane spreads in the global exports business. On a forward-looking basis, Asian-to-North American butane spreads are more constructive for 2023 and 2024 forward strip pricing.
In February 2023, AltaGas reached an agreement with Southern California Edison for the purchase of resource adequacy attributes from the Blythe facility from January 1, 2024, through December 31, 2027. AltaGas believes that the agreement reiterates the long-term demand for Blythe to provide stable and affordable power supply, and support California's longer-term energy needs.
In February 2023, AltaGas reached an agreement with an investment grade counterparty to extend the existing throughput and marketing agreement at the Ferndale liquefied petroleum gases (LPG) Export Terminal by five years through 2033. The extension is aligned with AltaGas' long-term focus of de-risking the global exports business and operating in strong partnership with its customers to drive the best collective outcomes for all parties.
On March 1, 2023, AltaGas closed the divestiture of its Alaskan Utilities to TriSummit Utilities Inc. for US$800 million (approximately CAD$1.1 billion), prior to closing adjustments. Sale proceeds were used to reduce debt while providing AltaGas with the financial flexibility to advance its strong growth opportunities across the Midstream and Utilities platforms over the coming years.
On April 4, 2023, AltaGas and Royal Vopak (Vopak) executed definitive agreements for a new 50/50 joint venture to further evaluate development of the Ridley Island Energy Export Facility (REEF), a large-scale LPG and bulk liquids terminal and marine infrastructure on Ridley Island. Development of REEF would further bolster AltaGas' first mover advantage and differentiated LPG value proposition through continuing to connect domestic customers to premium global downstream markets and add export capacity for Western Canada's growing LPG volumes. Should REEF reach a positive final investment decision (FID), the facility is planned to be developed and brought online in phases and have the capability to export LPGs, methanol, and other bulk liquids that are vital for everyday life. Vopak, AltaGas, and the Prince Rupert Port Authority have been working closely with First Nations rights holders and key stakeholders, including the local communities in Northwestern British Columbia and the Federal and Provincial regulators, to deliver a project that will operate with industry-leading environmental stewardship and has been granted the key federal and provincial permits to construct the first phase of the project.
Subsequent to quarter end, AltaGas reached an agreement for a seven-year time charter with two one-year optional extensions for a new 86,700 cubic meter dual-fuel Very Large Gas Carrier (VLGC) with delivery expected in the first half of 2026. The agreement extends AltaGas' value chain reach into Asia, will reduce maritime shipping costs by approximately 25 percent relative to current Baltic freight forward pricing, and lowers pricing volatility on a long-term basis. The incremental time charter builds on the two new dual-fuel VLGCs that AltaGas will be taking delivery of in late 2023 and early 2024, which will reduce AltaGas' maritime shipping costs and provides long-term pricing visibility.
As announced on November 21, 2022, Randy Crawford, AltaGas' President and CEO, will retire from the Company in the first half of 2023 as part of a planned leadership succession process with a successor to be announced before the end of second quarter of 2023. The succession process remains on track with AltaGas expecting to announce a new President and CEO prior to June 30, 2023.
Following a solid first quarter, AltaGas is reiterating its 2023 full year guidance ranges for normalized EBITDA of $1.5 billion to $1.6 billion, and normalized EPS guidance of $1.85 - $2.05, compared to actual normalized EBITDA of $1.54 billion, normalized EPS 1 of $1.89 and GAAP EPS 2 of $1.42 in 2022. AltaGas continues to target delivering regular, sustainable, and annual dividend increases that compound in the years ahead with an anticipated five to seven percent compounded annual growth rate through 2026. Annual dividend increases will be a function of financial performance and determined by the Board on an annual basis.
CEO MESSAGE
"I am pleased with our strong first quarter results as we continue to execute our strategic priorities and position the platform to achieve the Company's 2023 and longer-term growth plans" said Randy Crawford, President and Chief Executive Officer. "We are well-positioned to meet our 2023 guidance ranges, including normalized EPS guidance of $1.85 - $2.05 and normalized EBITDA guidance of $1.5 billion - $1.6 billion.
"Through ongoing investment and associated cost reductions, our regulated Utilities were able to overcome the impact of warmer weather and the lost contribution from the Alaska Utilities in March, to deliver solid first quarter earnings results. We continue to make investments in our network on behalf of our customers and execute our regulatory strategy to update our rates on a timely basis to reflect the current operating cost environment, including cost of capital.
"Our Midstream business delivered strong results which included the export of approximately 99,444 Bbls/d of LPGs to Asia, delivered across 16 VLGCs. As we look forward, with the new annual LPG supply contracting completed at pricing levels reflecting logistics inflationary impacts, a lower risk profile from increased tolling levels and a significant hedge portfolio, we are well positioned to achieve our forecasted profitability. We are excited to reach an agreement with our joint venture partner for the potential expansion of our export platform to provide increased LPG export capacity to meet long-term export demand, while providing cost synergies opportunities, product optionality and access to a new dedicated dock.
"The closing of the Alaska Utilities sale at the beginning of March has allowed us to pay down debt and move towards our medium-term 5x net debt-to-Normalized EBITDA target. These strong balance sheet improvements position AltaGas with the flexibility to opportunistically invest in both organic and inorganic growth opportunities, such as the REEF expansion project upon favorable FID."
RESULTS BY SEGMENT
BUSINESS PERFORMANCE
Utilities
The Utilities segment reported normalized EBITDA of $401 million in the first quarter of 2023 compared to $408 million in the first quarter of 2022, while income before taxes was $590 million in the first quarter of 2023 compared to $426 million in the first quarter of 2022. First quarter normalized Utilities EBITDA was in line with AltaGas' expectations and included select positive and negative factors which largely offset each other relative to the first quarter of 2022. The largest positive factors impacting results on a year-over-year basis included ongoing asset investments on behalf of its customers across the network, favorable foreign exchange rates, interim rates being in place in Virginia due to the current rate case, and lower operating and administrative expenses. These positive factors were offset by warmer weather in Michigan and the D.C. which do not have weather normalization, weaker year-over-year performance at the Retail gas business which was principally driven by the timing of swaps, and a decrease in asset optimization at Washington Gas in the quarter.
AltaGas continued to upgrade critical infrastructure and make ongoing investments on behalf of its customers during the first quarter of 2023 with the deployment of $151 million of invested capital1, including $66 million deployed on the Company's various Accelerated Replacement Programs (ARPs). These investments continue to be directed towards improving the safety and reliability of the system and connecting new customers to the critical energy they require to carry out everyday life. These investments should also bring long-term operating cost benefits to our customers. AltaGas will continue to make these ongoing critical network upgrades on behalf of our customers, while balancing ongoing customer affordability. This latter focus is particularly important during the current economic environment of higher interest rates and inflation across the broader economy. AltaGas remains acutely focused on judicious cost management across the Utilities platform and driving the best outcomes for its customers and stakeholders.
Midstream
The Midstream segment reported normalized EBITDA of $183 million in the first quarter of 2023 compared to $174 million in the same quarter of 2022, while income before income taxes was $138 million in the first quarter of 2023 compared to $159 million in the same quarter of 2022. There were several positive and negative contributors underpinning the modest year-over-year variance. This included strong operations and year-over-year volume growth across global exports, higher fractionation volumes and realized pricing and the favourable resolution of certain contingencies, offset by higher rail and ocean freight costs, modestly lower gas processing volumes due to the lost contribution of the Aitken Creek gas processing facility that was divested in the second quarter of 2022, and continued lower Asian-to-North American butane spreads in the global exports business.
AltaGas exported 99,444 Bbls/d of LPGs to Asia during the first quarter of 2023, including nine VLGCs at RIPET and seven VLGCs at Ferndale. Higher export volumes were driven by strong ongoing customer demand in Asia, higher available LPG supply, and a lack of logistical challenges that were partially present in the first quarter of 2022. AltaGas' gas processing volumes were in line with the Company's expectations in the first quarter of 2023 with the year-over-year decrease primarily due to the impact of the Aitken Creek divestiture in the second quarter of 2022, which was partially offset by higher throughput volumes at Townsend and Younger. Fractionation volumes for the first quarter of 2023 increased by approximately 25 percent on a year-over-year basis due to higher North Pine, Harmattan, and Younger throughput. AltaGas remains focused on partnering with Western Canadian producers and aggregators to increase direct global market access through long-term tolling arrangements that can drive the best collective outcomes for all parties, while also having an active hedging program to proactively lock in structural margins and de-risk cashflows for merchant exports.
AltaGas is encouraged by the B.C. Government and Blueberry River First Nations historic agreement that was announced in January 2023 that will provide a pathway for a partnership approach on land, water, and resource stewardship with the Treaty 8 First Nations. Well licensing activity in the area is the highest in five years and is supported by the Montney being one of the most prolific resource plays in North America and has the potential to provide decades of steady natural gas and NGLs to support Canada's domestic demand and play a larger role in meeting global energy needs. AltaGas looks forward to continuing to work in Northeastern B.C. with First Nations right holders and stakeholders on sustainable resource development in partnership with local communities and delivering on the growing global demand for responsibly developed energy supplies.
AltaGas' realized frac spread averaged $27/Bbl, after transportation costs, as most of AltaGas' frac exposed volumes were hedged at approximately $35/Bbl in the first quarter of 2023, prior to transportation costs. AltaGas is well hedged for 2023 with approximately 84 percent of its remaining 2023 expected frac exposed volumes hedged at approximately US$27/Bbl, prior to transportation costs. In addition, approximately 68 percent of AltaGas' remaining 2023 expected global export volumes are either tolled or financially hedged with an average Far East Index (FEI) to North American financial hedge price of approximately US$12/Bbl for non-tolled propane and butane volumes.
2023 Midstream Hedge Program
Corporate/Other
The Corporate/Other segment reported a normalized EBITDA loss of $2 million in the first quarter of 2023 compared to a loss of $8 million in the same quarter of 2022 while income loss before taxes was a loss of $109 million in the first quarter of 2023 compared to a loss of $81 million in the first quarter of 2022. The year-over-year increase in normalized EBITDA was mainly due to lower operating and administrative expenses.
VOPAK AND ALTAGAS FORM A NEW JOINT VENTURE FOR LARGE-SCALE LPG AND BULK LIQUIDS EXPORT TERMINAL IN PRINCE RUPERT
Vopak and AltaGas announced the execution of definitive agreements for a new 50/50 joint venture to further evaluate development of REEF, a large-scale LPG and bulk liquids terminal with marine infrastructure on Ridley Island, British Columbia, Canada. Development of REEF would further bolster AltaGas' first mover advantage and differentiated LPG value proposition in connecting the company's domestic customers to premium global downstream markets for the growing Western Canadian LPG volumes. REEF will have the capability to facilitate the export of LPGs, methanol, and other bulk liquids that are vital for everyday life and will provide long-term optionality to product exports for AltaGas. REEF has been granted the key Federal and Provincial permits to construct storage tanks, a new dedicated jetty, and rail and other ancillary infrastructure required to operate a state-of-the-art and highly efficient facility.
Should REEF reach a positive FID, it is planned to be developed and brought online in phases. This approach will provide the most capital efficient build out of the project, match energy export supply with throughput capacity, mitigate the challenges that large development projects can have on local communities, and provide local construction and employment opportunities that would extend over longer time horizons. AltaGas has executed a long-term commercial agreement with the joint venture for 100% of the capacity for the first phase of LPG volumes, subject to a positive FID. AltaGas will also be responsible for the construction and operational stewardship of the facility. Future phases of the project will be developed as additional long-term commercial agreements and critical milestones are achieved to deliver the maximum value for all stakeholders.
Vopak, AltaGas, and the Prince Rupert Port Authority have been working closely with First Nations rights holders and key stakeholders, including the local communities in Northwestern British Columbia and the Federal and Provincial regulators, to deliver a project that will operate with industry-leading environmental stewardship and bring the strongest benefits to all parties involved. Key determinations and permits have been received from the Federal Government and an Environmental Assessment Certificate has been received from the British Columbia Provincial Government.
AltaGas is currently working through front end engineering design (FEED) activities, where deliverables will include a refined capital cost estimate, a project execution plan, a construction schedule, and a projected in-service date, among numerous other items. FEED and other development activities are expected to be completed by late 2023, followed by an FID by the joint venture. Solidifying long-term economic rail agreements in partnership with the rail operator will also be key for the joint venture to be able to reach a positive FID and ensure the project advances, and, in turn, delivers strong benefits to the joint venture partners, First Nations rights holders, the Prince Rupert Port Authority, local communities, upstream and downstream customers, and other key stakeholders.
Vopak and AltaGas are excited to further evaluate the development of REEF and build on the strong partnership between the two companies, under this new joint venture agreement. Vopak and AltaGas thank all stakeholders for the continued embracement and ongoing partnerships as part of this project. Working with stakeholders and seeking strong partnerships is part of both organization's individual and collective DNA and is engrained in how Vopak and AltaGas approach their businesses every day.
CONSOLIDATED FINANCIAL RESULTS
Normalized EBITDA for the first quarter of 2023 was $582 million compared to $574 million for the same quarter in 2022. The largest factors leading to the variance are described in the Business Performance sections above.
For the first quarter of 2023, the average Canadian/U.S. dollar exchange rate increased to 1.35 from an average of 1.27 in the same period of 2022.
Income before income taxes was $619 million for the first quarter of 2023 compared to $504 million for the same quarter in 2022. Net income applicable to common shares was $445 million or $1.58 per share for the first quarter of 2023, compared to net income applicable to common shares of $357 million or $1.27 per share for the same quarter in 2022. Please refer to the Three Months Ended March 31 Section of the MD&A for further details on the variance in income before income taxes and net income applicable to common shareholders.
Normalized net income was $277 million ($0.98 per share) for the first quarter of 2023, compared to $285 million ($1.02 per share) for the same quarter of 2022. The decrease was mainly due to higher interest expense, partially offset by lower net income applicable to non-controlling interests, the same previously referenced factors impacting normalized EBITDA, and lower preferred share dividends.
Normalized funds from operations for the first quarter of 2023 was $460 million or $1.63 per share, compared to $462 million or $1.65 per share for the same quarter in 2022. The slight decrease was mainly due to higher interest expense, partially offset lower normalized current income tax expense and the same previously referenced factors impacting normalized EBITDA.
Depreciation and amortization expense for the first quarter of 2023 was $111 million, compared to $112 million for the same quarter in 2022. Factors impacting depreciation and amortization expense in the first quarter of 2023 included the impact of the Alaska Utilities disposition, partially offset by the impact of new assets placed in-service.
Interest expense for the first quarter of 2023 was $105 million, compared to $71 million for the same quarter in 2022. The increase was mainly due to $9 million of interest relating to the subordinated hybrid notes, higher average interest rates, higher average debt balances, and a higher average Canadian/U.S. dollar exchange rate.
Income tax expense was $163 million for the first quarter of 2023, compared to an income tax expense of $107 million for the same quarter of 2022. The increase was mainly due to the tax impact of the Alaska Utilities Disposition. Current tax expense of $53 million was recorded in the first quarter of 2023, compared to current tax expense of $45 million recorded in the same quarter of 2022. The increase in current tax expense was mainly due to the impact of the Alaska Utilities disposition in the first quarter of 2023.
FORWARD FOCUS, GUIDANCE AND FUNDING
AltaGas continues to focus on executing on its long-term corporate strategy of building a diversified platform that operates long-life energy infrastructure assets that connect customers and markets and are positioned to provide resilient and durable value for the Company's stakeholders.
Following the first quarter results, AltaGas expects to achieve guidance ranges that were previously disclosed in December 2022, including:
2023 Normalized EPS guidance of $1.85 - $2.05 per share, compared to actual normalized EPS of $1.89 and GAAP EPS of $1.42 in 2022; and
2023 Normalized EBITDA guidance of $1.5 billion - $1.6 billion, compared to actual normalized EBITDA of $1.54 billion and income before taxes of $716 million in 2022.
AltaGas continues to focus on delivering durable and growing normalized EPS and FFO per share while targeting lowering leverage ratios. This strategy should support steady dividend growth and provide the opportunity for ongoing capital appreciation for its long-term shareholders. This includes AltaGas having announced plans to deliver regular, sustainable, and annual dividend increases that compound in the years ahead with an anticipated five to seven percent compounded annual growth rate through 2026. Annual dividend increases will be a function of financial performance and determined by the Board on an annual basis.
AltaGas is maintaining a disciplined, self-funded capital program of approximately $930 million in 2023, excluding asset retirement obligations. The Company also expects approximately $90 million of capital investments that were approved in 2022 to rollover and be deployed in early 2023. The 2023 capital program includes continued strong investments in the Utilities and Midstream businesses that are focused on ensuring long-term safety and reliability of the asset base and position AltaGas to meet its customers long-term needs and drive the best collective outcomes for all stakeholders.
