AltaGas reaffirms 2020 outlook with release of 2019 results
AltaGas Ltd. has reported fourth quarter and full-year 2019 financial results. AltaGas also reaffirmed its 2020 outlook and provided an update on its business and near-term priorities, which remain on track.
Randy Crawford, President and Chief Executive Officer commented, "2019 was a transformational year at AltaGas and I am extremely proud of what our team accomplished. We laid out a balanced funding plan in December 2018 and we surpassed our targets. Looking back at what we achieved in 2019, both financially and operationally, I am impressed at how quickly the AltaGas team was able to focus and execute the plan. We were able to significantly strengthen our balance sheet, reposition our business and enhance our value proposition.
"We executed our business strategy and delivered strong financial and operating results at the top end of our guidance range. We completed $2.2 billion in non-core asset sales, exceeding our $1.5 to $2.0 billion target, and refocused the company on our Utilities and Midstream businesses. We executed a $1.39 billion capital program, the largest in the company's history, that brought both RIPET and the Marquette Connector into service on-time and on-budget. We also reduced net debt by approximately $3 billion, which significantly strengthened our balance sheet, solidified our investment grade credit rating and positioned the company to invest in its ample organic growth opportunities.
"Looking to the future we are now well positioned as a diversified, low-risk, high-growth energy infrastructure company with ample investment opportunities in our Utilities and Midstream businesses. We enter 2020 with a clear line of sight on a significant portfolio of organic growth opportunities with a strengthened balance sheet and the financial flexibility to execute. In January, we took a final step towards self-funding when we suspended our Dividend Reinvestment Program. We now have the capacity to fund approximately $1 billion in annual growth with internally generated cash flow and incremental debt capacity, while maintaining our investment grade debt metrics. We also maintain an inventory of non-core assets that can be monetized as an efficient source of capital to fund strategic acquisitions like our indirect investment in Petrogas or further strengthen our balance sheet, eliminating any need for common equity under the current plan.
"In the long-term, our strategy is designed to provide reliable, attractive, long-term earnings and dividend growth. Within our Utilities business, we expect to have one of the higher rate base growth rates among U.S. Local Distribution Companies at an 8 - 10 percent compound annual growth rate through 2021. In our Midstream business, the completion of RIPET and our significant up-front investment within our Northeast B.C. and energy export strategies establishes a strong platform for continued organic growth. We are leveraging our first-mover advantage at RIPET to attract more molecules to our integrated Midstream footprint, driving continued opportunities to expand our asset base and export volumes. Our strategy provides producers with the unique ability to take full control of their product through fixed fee and tolling agreements, passing along the incremental value for their Canadian propane in international markets through direct access to premium Asian pricing.
"SAM's exercising of its put option will result in AIJV obtaining operational control of Petrogas' assets, with access to butane storage facilities and the Ferndale LPG Terminal, the only operating LPG export terminal on the U.S. Pacific coast. These strategic assets are complementary to our existing Midstream footprint and energy export strategy on the west coast. AltaGas expects to fund its portion of AIJV's purchase obligation with internal cash flow, the sale of remaining non-core assets and incremental debt capacity resulting from the incremental EBITDA associated with the increased indirect ownership interest.
"With visible near-term growth opportunities our strategic priorities have not changed as we continue to focus on preserving a strong balance sheet, returning capital to shareholders through our dividend and executing on low-risk, capital efficient organic growth, through a self-funding model. We are now well positioned for 2020 and beyond and I look forward to the opportunity to continue building a successful track record here at AltaGas." concluded Mr. Crawford.
RIPET contributed $36 million of normalized EBITDA in the fourth quarter of 2019 and exported approximately 36,400 bbl/d for delivery to Asian markets. Fourth quarter deliveries were negatively impacted by the CN rail strike in the quarter. The facility averaged two ships per month, with a total of 15 ships for the year. As the cornerstone asset of our Midstream business, RIPET has extended our integrated value chain in northeast British Columbia, attracting additional volumes to our system, providing strong netbacks to producers, and advancing future growth across our platform.
Gas processing volumes increased for the quarter compared to the fourth quarter of 2018, with the addition of the Aitken Creek North facility and new volumes from the Nig Creek facility. Equity earnings from Petrogas increased to $31 million for the quarter compared to $5 million in the fourth quarter of 2018 due to higher export volumes, improved export margins and a one-time payment related to the termination of a customer contract.
The fourth quarter is seasonally a stronger quarter in the Utilities segment, as the majority of revenues are recognized in the first and fourth quarters, and the expenses are somewhat linear in nature throughout the year. The progress we are making in updating rates in our various jurisdictions positively impacted normalized EBITDA in the fourth quarter, particularly the positive impacts from the 2018 and 2019 Maryland rate cases combined with the positive impact of the $8 million adjustment relating to the final order in Virginia and higher revenue from accelerated pipe replacement program spend, slightly offset by the impact of the AltaGas Canada Inc. initial public offering.
District of Columbia
In January 2020, a rate case was filed with the District of Columbia Public Service Commission requesting a US$35 million increase in base rates, including US$9 million of annual PROJECTpipes surcharges currently paid by customers for accelerated pipeline replacement. The request to increase rates is attributed to growth in rate base and general cost increases in operations and maintenance since the last rate case was filed in 2016. The rate case also requested approval for a Revenue Normalization Adjustment mechanism to reduce customer bill fluctuations due to weather-related usage variations. Washington Gas has a similar mechanism to account for weather-related usage variations in both Maryland and Virginia.
On December 20, 2019, the Commission issued a final order approving certain of the Hearing Examiner's findings, some of which were favorable to Washington Gas, resulting in an $8 million increase to normalized EBITDA in the fourth quarter of 2019. The final order includes an approved rate increase of US$13.2 million associated with the roll-in of SAVE surcharges, an allowed return on equity of 9.2 percent and the Tax Cuts and Jobs Act regulatory liability of US$25.5 million which will be refunded to customers over a twelve-month period.
In November 2019, a settlement agreement was filed for an approximate US$20 million rate increase and an allowed return on equity of 9.87 percent. The Michigan Public Service Commission approved the settlement in December 2019 and the new rates became effective January 1, 2020.
Normalized EBITDA for the fourth quarter of 2019 was $425 million, compared to $394 million for the same quarter in 2018. Factors positively impacting normalized EBITDA included contributions from RIPET and higher contribution from Petrogas, higher contributions from Washington Gas' utilities primarily due to Virginia and Maryland rate cases and higher margins from the retail gas and power marketing businesses. These were partially offset by the impact of asset sales, higher operating costs at Washington Gas and the impact of the CINGSA rate case decision received in the third quarter of 2019.
Normalized FFO and normalized adjusted FFO (AFFO) were impacted by lower interest expense and the same factors impacting normalized EBITDA. In the fourth quarter of 2019, AltaGas received $3 million of dividend income from the Petrogas Preferred Shares (2018 - $3 million) and $2 million of common share dividends from Petrogas (2018 - $2 million). AFFO was also impacted by higher net cash paid to non-controlling interests.
Normalized utility adjusted funds used by operations (UAFFO) for the fourth quarter of 2019 were $241 million ($0.87 per share), compared to $192 million ($0.71 per share) for the same quarter in 2018. The increase was due to the same drivers impacting normalized AFFO, partially offset by higher utilities depreciation.
Normalized net income was $186 million ($0.67 per share) for the fourth quarter of 2019, compared to $120 million ($0.44 per share) reported for the same quarter in 2018. Factors positively impacting normalized net income included lower interest expense, lower depreciation and amortization expense and the same previously referenced factors impacting normalized EBITDA. Also driving the increase in normalized net income was a low normalized effective tax rate, which was impacted by the accretion of regulatory amounts through tax expense and non-taxable equity earnings.
Net loss applicable to common shares for the fourth quarter of 2019 was negatively impacted by provisions recorded in the fourth quarter of 2019 and higher unrealized losses on risk management contracts, partially offset by the same previously referenced factors impacting normalized EBITDA, lower depreciation and amortization expense, lower interest expense, and gains on the sale of assets.
Interest expense for the fourth quarter of 2019 was $77 million compared to $110 million for the same quarter in 2018. The decrease was predominantly due to lower average debt balances as a result of proceeds on asset sales.
AltaGas recorded an income tax recovery of $87 million for the fourth quarter of 2019 compared to a recovery of $63 million in the same quarter of 2018. The increase in tax recovery was mainly due to tax recoveries booked on asset provisions in the fourth quarter of 2019, partially offset by a tax recovery on assets classified as held for sale in the fourth quarter of 2018.
GUIDANCE AND FUNDING
AltaGas' previously announced 2020 strategic plan is designed to capitalize on the significant growth potential of its Utilities and Midstream assets. Specific priorities include:
- Ensure safe reliable operations, providing effective and cost-efficient service for customers.
- Enhance returns and capital efficiency through base rate cases, and facilitate timely recovery of expenditures and improve safety through increased utilization of accelerated rate recovery programs.
- Enhance the business through asset optimization and operational efficiencies to reduce costs and deliver an improved customer experience.
- Maximize the unique structural advantage within our integrated platform in the Montney region.
- Increase utilization and export volumes at RIPET.
- Execute the planned $900 million growth capital program, including a targeted 10 percent increase in the Utilities rate base.
- Pursue capital efficient organic growth through disciplined capital allocation while improving balance sheet strength and flexibility.
AltaGas reiterates its outlook for 2020, with anticipated normalized EBITDA in the range of $1.275 - $1.325 billion and normalized EPS of $1.20 - $1.30 per share, underpinned by increasing contributions from its core businesses and lower interest expense due to lower leverage.
Growth in the Utilities segment is driven by rate base growth and achieving higher returns through rate case settlements, increased utilization of accelerated replacement programs, and operating costs and leak remediation reduction initiatives. The consolidated Utilities rate base is expected to grow at approximately 8 - 10 percent annually in 2020 through to 2024.
Growth in the Midstream segment will be driven by a full year of contributions and increased utilization at RIPET and increased volumes at the northeast B.C. facilities including North Pine, Townsend and Aitken Creek, as well as higher expected margins on U.S. Midstream storage and transportation.
AltaGas expects to fund its capital investment plan through significant embedded growth and existing financial capacity, with no expectation for raising common equity in the near-term. This growth is underpinned by the stable and growing cash flows generated at its Utilities business and the increased utilization and volumes at its existing Midstream facilities as a result of the significant up-front capital investment in RIPET and its northeast B.C. strategy. The Board will continue to assess our dividend in the context of our strong earnings growth outlook, while balancing these near-term priorities.