AltaGas Ltd

TSX:ALA

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the AltaGas Ltd. 2018 Second Quarter Results Conference Call and Webcast. I would now like to turn the meeting over to Jess Nieukerk, Senior Director, Investor Relations. Please go ahead Mr. Nieukerk.

[Jess Nieukerk, Senior Director of Investor Relations]

Thank you. Good morning, everyone. Welcome to AltaGas' Second Quarter 2018 Conference Call. Speaking today are David Cornhill, Co-Chief Executive Officer; Tim Watson, Executive Vice President and Chief Financial Officer; Adrian Chapman, President and Chief Executive Officer for Washington Gas; and Randy Toone, Acting President for Gas. I would like to acknowledge that Phil Knoll, Co-Chief Executive Officer, is also here with us today. Please note that David will provide some commentary on the recent resignation of David Harris. However, we will not be taking any questions on this matter. We will have a question-and-answer session following all formal comments from our speakers for all questions related to AltaGas' strategy and business. Before we begin, I'd like to remind you that certain information presented today may include forward-looking statements. Such statements reflect the corporation's current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance, and they are subject to certain risks, which could cause actual performance and financial results to vary materially from those contemplated in the forward-looking statements. For additional information on these risks, please take a look at our annual information form under the heading Risk Factors. I'll now turn the call over to David Cornhill.

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Thank you, Jess. Good morning, everyone. As most of you know, I assumed the role of interim co-CEO of AltaGas last week, along with Phil Knoll. A director -- Phil, is a director -- has been a director of the company who has tremendous background in utilities and midstream operations. Phil held senior roles in TransCanada, Duke Energy and Westcoast. As I mentioned, I do not intend to answer any questions with respect to David Harris' resignation last week. The board and David Harris mutually agreed to his resignation due to a complaint that was under investigation by the board. The complaint was not related to AltaGas' strategy, operations and financial reporting. David, as CEO of the company, was an important contributor, but more importantly, he led a team. And that team at AltaGas is very strong. The executive leadership team is stepping in and stepping up. I'm confident that we won't skip a beat as we search for a successor. The search for a permanent CEO is well underway, but as you can imagine, we expect it will take a bit of time. Phil and I will act as interim co-CEOs. I will largely look after corporate strategy, provide leadership to the executive team and oversee the integration of WGL and the asset disposal process. Phil will oversee and provide leadership for all operational aspects of the company, including the advancement of all our capital projects. Phil and I have worked together in various capacities over the last 30 years, and I want to thank Phil for coming onboard at this time and working with me and the rest of the AltaGas team. We need to keep focus on all the opportunities we have ahead of us. We are not standing still. We are charging ahead on all fronts. We are reshaping the company to align with our long-term vision. We will continue to deliver projects on time and on budget. Our pace will not slow, and our paths will not change. Turning to Q2 results. The last few months have been extremely busy at AltaGas, and we continue to advance our business. Second quarter results were solid. We achieved second quarter 2018 normalized EBITDA of $166 million and normalized funds from operation of $121 million, which is consistent with 2017 and in line with expectations. The WGL transaction closed after quarter-end with the receiving of regulatory approval in Maryland and Washington, D.C. in May and June, respectively. Our capital program for 2018 will be between $1 billion and $1.3 billion, with Midstream and Utilities comprising over 80% of the total. Our key projects remain on track, including RIPET, Central Penn Pipeline and Mountain Valley Pipeline. Washington Gas filed new rate applications in both Maryland and Virginia. Our asset monetization process is progressing. We announced the closing -- the close of the sale of 35% of Northwest Hydro in the quarter. We remain very comfortable with our funding strategy. Our outlook for 2018 remains unchanged. And when we look at 2019 and beyond, we believe we have significant opportunities to grow our business, particularly in gas and utilities. I'm going to pass the call over to the team. Tim will review our financial highlights. Adrian Chapman will provide updates on our regulatory development. And Randy Toone will discuss the process -- progress we are making on our large projects. I will close with our vision for AltaGas going forward and how we see this translating into long-term sustainable value creation for all stakeholders. Tim?

[Timothy William Watson, Executive VP & CFO]

Thanks, David, and good morning, everyone. On today's call, I want to cover the following topics: Financial highlights for the quarter; financial results, including by business segment; highlights of WGL's third quarter financial results that were filed this morning; WGL acquisition update in integration; outlook for the balance of 2018; funding strategy; and finally, financial strength and balance sheet. And I'll assure you, it will take less than a couple of hours anyhow, much less than that. So let's start with the financial highlights. Our second quarter results were in line with our expectations and consistent with the performance in the second quarter of 2017. Note that I will be referring to AltaGas stand-alone Q2 results as the WGL acquisition did not close until July 6, following the end of our second quarter. Normalized EBITDA, as David said, was $166 million and benefited from higher frac pricing as well as our new facilities being Townsend 2A and North Pine. These were offset by unfavorable FX rates year-over-year impacting our U.S. assets and the impact of U.S. tax reform. The absence of onetime items at SEMCO, which benefited Q2 2017, was also a factor. Now if we look at the performance of our business segments, we continue to see strong EBITDA growth in Gas, while Power was flat and Utilities declined about $5 million. Gas represented approximately 28% of our normalized EBITDA in the quarter and grew almost 20% to $48 million of EBITDA. Gas benefited from the following items: Stronger realized frac spreads combined with higher frac-exposed volumes; contributions from our Townsend 2A and North Pine facilities; and changes in the operating structure of the Younger facility, which became effective in April 2018. These were offset by a $3 million impact to EBITDA from planned turnarounds at 3 of our extraction plants, Harmattan, JEEP and PEEP.Equity earnings from Petrogas were $1 million compared to $2 million last year due to unrealized mark-to-market losses on hedges. However, Q2 operating performance was up nicely at Petrogas versus last year. Power, which represents about 43% of our normalized EBITDA in a quarter, had normalized EBITDA of $75 million. The renewable capacity factor increased in the quarter due to higher river flow at the Northwest Hydro facilities and favorable wind conditions at Bear Mountain. Slightly higher operating expenses at Northwest Hydro were an offset. We saw a significant increase in conventional power sales year-over-year. 233 gigawatt hours were sold in the quarter, an almost 60% increase compared to the same quarter last year. This was the result of greater run time at Blythe as a result of greater operational and fuel flexibility. The contracted conventional equivalent availability factor, however, was lower in the second quarter of 2018 as a result of unplanned outages at Blythe. The May 2018 PPA expiration at Ripon also had a $1 million impact on EBITDA. Higher generation and higher power fuel prices at the Alberta peakers and cogen plants were partially offset by lower hedge gains relative to the second quarter last year in Alberta. As a result, Power's normalized Q2 EBITDA was flat versus last year, excluding the effect of foreign exchange. The impact of a stronger Canadian dollar was a $2 million reduction versus Q2 2017 in Power. Finally, the Utility segment, which currently represents 29% of total EBITDA, was $50 million in second quarter of 2018. Weather had both a positive and negative impact on the Utilities business in the quarter. Overall, however, colder weather in Michigan and, to a lesser extent, Alberta, resulted in increased natural gas deliveries. Continued customer growth, higher rates and rate-based expansion were also positives for our Utilities in the quarter. Despite this, Utilities did decline in EBITDA by $5 million. Onetime impacts at SEMCO in Q2 2017 of $4 million as well as the $4 million impact of U.S. tax reform and higher expenses and, finally, the $2 million impact from the stronger Canadian dollar in the second quarter, all drove the slight reduction in Utilities' EBITDA. Before I turn to funds from operation, I wanted to mention how WGL will be reflected in our financials starting this quarter, Q3. WGL's activities will continue to be carried out through 3 business segments: Gas, Power and Utilities. These businesses will be reflected in each of the respective AltaGas segments. AltaGas' normalized funds from operations were at $121 million, or $0.67 per share, down slightly from last year's $123 million or $0.72 per share. In the second quarter of 2018, we received $3 million in preferred share dividends and $1 million in common share dividends from Petrogas, which were both unchanged from the same quarter last year. Normalized net income in the second quarter of 2018 decreased $23 million or $0.13 per share versus $28 million or $0.17 per share in Q2 2017. Key drivers were higher interest, depreciation and amortization expense and preferred share dividends, partially offset by lower income tax expense and the previously mentioned factors that impacted normalized EBITDA. There were several normalizing adjustments for the quarter, as you typically see, and you could find those in our disclosure that we released this morning. For the second quarter of 2018, income tax expense was $2 million compared to $8 million in the same quarter of the previous year. Income tax decreased mainly due to the reduction in the U.S. federal tax rate from 35% to 21% under U.S. tax reform. Invested capital net of dispositions in the second quarter of 2018 was $119 million compared to $122 million last year. This includes maintenance capital in the quarter of $17 million, split $10 million in the Gas segment, mainly the turnarounds I referred to, and $7 million in the Power segment, mainly due to some enhancements we made to improve productivity factors at Northwest Hydro. AltaGas' balance sheet ended the second quarter in a strong position with debt to capital at 33%. This low level reflects the successful closing of 35% interest in the Northwest Hydro facilities for $922 million on June 22 and it positions AltaGas well on a combined basis for WGL for the balance of the year. Turning to just some brief comments for WGL around its recently filed U.S. GAAP Q3 financials for June 30. The fiscal third quarter is typically -- and I'm talking about WGL's fiscal third quarter. It's typically a lower one relative to other quarters of the year due to the seasonality of the main Utilities business. Now within WGL utilities, there was a small EBIT impact of USD 6.4 million from lower tax rates under U.S. tax reform as well as lower unrealized mark-to-market valuations and higher operating costs. Retail energy marketing EBIT at WGL was up for the quarter, while the commercial energy systems power business at WGL was roughly similar to last year. Midstream EBIT was down as higher realized transportation margins and pipeline investment earnings were offset by lower unrealized mark-to-market valuations and realized storage margins. So in total for WGL in the quarter, the EBIT was USD 9 million versus USD 36 million last year, but for the first 9 months of WGL's 2018 fiscal year, EBIT was USD 307 million versus USD 352 million last year. And net income, however, was up. It was USD 225 million versus USD 189 million last year, with some benefit due to the lower effective federal income tax rate. In terms of the WGL acquisition itself, we are as excited and confident about the WGL business and the power of the combination today as we were when we first announced it in January of 2017. It's the very nature of heavily regulated businesses that it can take some time to receive all the required regulatory and other approvals to close a transaction. Now from the time we announced the acquisition of WGL to close, it was a 17-month very rigorous and complex process, as you know. The team navigated this process extremely well. There were many people across the entire organization that were completely focused on this, and they made the acquisition a reality. And there were many more that also worked tirelessly to keep AltaGas moving forward and continue to build a strong foundation for growth. And grow we have. In 2010, just for perspective, AltaGas had an enterprise value of about $3 billion and assets of about $3 billion as well. Today, AltaGas is around $17 billion in terms of enterprise value and about $23 billion in assets, respectively. As we look forward as a company, we have a clear trajectory, and we believe our next big milestone is $30 billion in assets, with continued growth in per share metrics to support that. Now the next steps at WGL are for us to delivery on our commitments, complete the integration activities, achieve synergy targets and invest in compelling opportunities. WGL management remains in place. A new board of Washington Gas, the regulated utility, has been constituted and is already met. The board has local and independent directors. We are working hard to ensure that the transition and integration activities are seamless to the business. To enable this, there are executives at both an AltaGas corporate level as well as the WGL level that are charged with delivering on these initiatives. All right. So I'm just going to turn to the 2018 outlook. And following the close of the WGL transaction in early July, our guidance, as David said, remains unchanged. We expect 2018 normalized EBITDA to increase approximately 25% to 30% and normalized funds from operations to increase approximately 15% to 20% on a full year basis. We anticipate approximately 40% of normalized EBITDA will be generated from our Utilities, 35% from our Power segment, and approximately 25% from our Gas segment. The weighting for Gas is expected to increase in future years with currently planned and expected future new Gas infrastructure that we build. Gas EBITDA in 2018 will benefit from WGL's growing pipeline investments, including Stonewall, which is already in service; and Central Penn, which is expected online in Q3 this year. The Gas segment is also benefiting from the full year of contributions from the Townsend 2A and North Pine facilities. Higher frac-exposed volumes of 10,300 barrels per day, with hedges in place for approximately 75% of exposed volumes at very attractive levels of $33 per barrel, excluding basis differentials will also have a positive impact. 2018 EBITDA in our Power segment will benefit from the higher expected earnings from the Northwest Hydro facilities due to price increases as well as efficiency improvements; higher volumes at Blythe as a result of increased run time and higher power prices in Alberta as well as, finally, WGL's growing distributed generation assets across 20 U.S. states. While the PPA for Ripon expired in Q2 this year, it impacts 2018 EBITDA by CAD 7 million. It will be partially offset with new resource adequacy contracts that it has been rewarded with and which are in place until the end of this year, and are expected to be renewed on an ongoing basis. 2018 EBITDA from Utilities will be driven by colder weather experienced year-to-date, combined with rate base and customer growth as well as the addition of WGL's growing utility business. Just a reminder, with approximately 60% of our 2018 EBITDA being U.S.-dollar-based, I want to provide you a quick sensitivity on FX. For every $0.05 change in the Canadian to U.S. dollar exchange rate, there's a corresponding CAD 16 million impact on second half 2018 EBITDA, which represents less than 2% of our total expected EBITDA. Now turning to 2018 capital expenditures. On a combined basis, we expect total capital in the range of CAD 1 billion to CAD 1.3 billion, again, unchanged from previous guidance. Our capital allocation reflects the growth opportunities we see in our business, with Gas driving a lot of the growth over the next few years, followed by Utilities. Gas will account for 40% to 45% of the total 2018 capital. Utilities will be 45% to 50%, with Power, mainly selected energy storage and renewables, being the balance. The largest Gas investments include construction of RIPET, investments in Central Penn and Mountain Valley, combined with Gas capital for new tie-ins and expected new projects over the near and medium term. We expect both maintaining and significantly growing utility rate base and are executing on track of utility accelerated pipeline replacement programs in each of Virginia, Maryland, D.C. and Michigan will all be big contributors. And we're also working through preconstruction design engineering and right-of-way procurement for the Marquette Connector Pipeline. Finally, we will continue to invest in a distributed generation suite of projects across the United States and selectively consider energy storage opportunities. Gas and Power maintenance capital for full year 2018 is expected to be approximately $25 million to $35 million, pretty consistent with where we've been in the past. 2018 capital program is expected to be funded through internally generated cash flow, the dividend reinvestment plan and normal course borrowings.Switching to the funding strategy now. During the second quarter, AltaGas made material progress on its asset monetization plans to align with the long-term vision for the business as well as to advance the financing plans with respect to the WGL acquisition. The WGL acquisition was financed with: One, net proceeds of approximately $2.3 billion from the sale of subscription receipts; two, gross proceeds of approximately CAD 922 million from the sale of a 35% minority interest in Northwest British Columbia Hydro Facilities; and three, from a USD 2.3 billion draw on a fully committed acquisition credit facility. Consistent with what we have said previously, AltaGas expects to expeditiously repay the funds drawn on the bridge facility through the monetization of certain assets as well as with the proceeds of term debt and hybrid securities offerings. The sale of a minority interest in the Northwest BC Hydro, while retaining operatorship, which was completed at a 2017 EBITDA multiple of 27x with implied total value for that particular asset over $2.6 billion was a very significant first step for us. To facilitate potential securities offerings, a USD 2 billion final short-form base shelf prospectus for the issuance of both debt securities, including hybrids and preferred shares, was filed in June. Certain assets are currently under review for potential divestiture over the next several months, and we expect the remaining assets to reflect AltaGas' long-term vision for the business. As David mentioned, we cannot look at the asset sales in isolation simply as a vehicle to raise capital to fund the WGL acquisition. They need to align with the future vision we have for AltaGas in terms of long-term growth, asset mix, profitability and risk-adjusted returns. We remain comfortable with our plan to raise in total over $2 billion through the monetization process. And with the certainty of WGL closing now behind us, we are able to finally move more expeditiously. We are taking a thoughtful approach to ensure that we achieve both appropriate value for the assets that are monetized as well as to position AltaGas to lead in the new energy economy. I'm getting close to my finishing comments here. The WGL transaction in terms of balance sheet and financial strength remains highly accretive to both FFO per share and earnings per share accretion beginning in the first full year of 2019. With the close of the transaction and following the completion of our funding strategy, our balance sheet metrics will significantly improve. In 2019, we expect our FFO to debt, calculated based on S&P's definition, to move towards the mid-teens level, and net debt to EBITDA to trend down towards 5x, again, consistent with what we've been seeing. We remain committed to maintaining strong access to capital and to our investment-grade credit ratings. On a combined basis, approximately 85% of our total EBITDA will be underpinned by contracts or regulated assets with no direct commodity price or volume exposure. So in closing, before I pass it over to Adrian, I wanted to emphasize some key points: Our business is performing as expected, and our outlook for 2018 remains strong; AltaGas' significant investment opportunities, particularly in gas and U.S. utilities over the near and midterm; WGL's business is performing well and in line with our expectations; the transaction itself remains highly accretive to AltaGas for both FFO per share and earnings per share in 2019. We will reshape our business through the asset monetization process, which supports the completion of our funding. As noted, the asset sales steps continue to progress, and we look to focus on selling assets, with the remaining assets being the foundation for our next phase of growth. Reshaping our business is one part of the puzzle. We are also optimizing our operating businesses to enhance long-term value creation as well. We're committed to maintaining a strong balance sheet and improving our credit metrics. And finally, we expect to continue to have a visible dividend growth while being mindful of our payout ratio as well as balancing dividend growth with investment in the meaningful growth opportunities we have in our businesses. And so with that, I'll turn it back -- turn it over to Adrian.

[Adrian P. Chapman, President & CEO]

Thank you, Tim. This is my first quarterly call with AltaGas. And I, along with all WGL employees, am very excited to now be part of the AltaGas team. As Tim mentioned, we firmly believe that as a combined entity, we are much stronger together. I'm going to just touch briefly on the regulatory updates that we've had over the last few months before passing the call over to Randy. In second quarter, WGL filed 2 applications in Maryland. The first filed on May 15 was with respect to an increase in base rates for natural gas service to support natural gas safety, reliability and service enhancements. This was the first rate increase request in 5 years. This rate application is expected to generate USD 41 million in additional revenue comprised of an increase in base rates of USD 56 million, with an offset of USD 50 million in annual surcharges currently paid by customers for our accelerated pipe replacement program in Maryland. We expect to have an order on this application no later than December 15, with new rates taking effect January 1, 2019. In mid-June, Washington Gas made an additional filing in Maryland with respect to the second phase of its accelerated pipe replacement initiative known as STRIDE, or Strategic Infrastructure Development and Enhancement. The company's STRIDE II application requests approximately USD 394 million in accelerated pipeline replacements for 2019 through 2023. STRIDE expenditures are collected via a monthly surcharge at the same time the eligible infrastructure replacement is made. A prehearing conference was held on July 25, 2018. A decision is expected by mid December 2018, which should allow for implementation of the new STRIDE II surcharge as STRIDE I expenditures are rolled into base rates as a result of the rate case decision. And finally, yesterday, Washington Gas filed a rate application in Virginia to increase its base rates for natural gas service. This base rate increase, if granted, would be approximately USD 38 million. USD 15 million in this amount relates to costs being collected through the monthly SAVE initiative, which stands for Steps to Achieve (sic) [ Advance ] Virginia's Energy plan, and represents surcharges for accelerated pipeline replacement. This increase would enable Washington Gas to earn its allowed return and reflects the increased cost for operations and maintenance as well as plant and service since the last base rate proceeding. It's important to note that the rate case filings are normal-course applications that reflect the utilities' needs to maintain safe, reliable and cost-effective energy for their customers and are not related to the recently closed acquisition. Turning to our utility business as a whole. AltaGas now has a total rate base in its regulated utilities for approximately $5 billion. Serving approximately 1.8 million customers, our utilities across North America deliver safe, reliable and clean natural gas to homes and businesses in 8 jurisdictions. We have multiple opportunities to grow our rate base with approved system betterment across our utilities as well as accelerated pipe replacement programs in Virginia, Maryland and Washington, D.C. We expect to be able to grow our rate base to approximately $7 billion by the end of 2021. The regulatory activity and rate case applications in both Virginia and Maryland will support that growth as well. With that, let me turn the call over to Randy.

[Randy W. Toone, Executive Vice President of Gas]

Thank you, Adrian. Tim discussed our capital program in his comments, but I'm going to speak to a few of the key projects and initiatives in the Gas segment that are capital funding and support the long-term vision of the company. Our key projects remain on track, including RIPET, Central Penn Pipeline and Mountain Valley Pipeline. Approximately 40% of the capital expenditures in AltaGas' plan through 2021 are allocated towards Gas. AltaGas continues to be well-positioned to actively participate in energy export projects on both coasts of North America and has a presence in the 2 most prolific gas plays, the Montney and the Marcellus. With the start-up of Cove Point, we are currently supplying gas for LNG exports off the East Coast. And with Ferndale, we are currently exporting propane and butane up the west. We have spoken about our excitements around the RIPET project, which is expected to be the first propane export terminal on Canada's West Coast. Construction of RIPET is progressing safely, on time and on budget. It is a $450 million to $500 million project that expects to ship 1.2 million tons per year of propane to Asia. That is equivalent to 40,000 barrels a day. The competitive advantage over the Gulf Coast is clear, with only 10 days of shipping time to Asia compared to 25. The LPG storage tank, rail and marine infrastructure and the balance of plant construction remains on track to meet the expected commercial operation date of the first quarter of 2019. We have approximately 75% of the supply secured and line of sight to have it fully contracted by COD. Asian propane prices are currently at a significant premium to North America, which makes RIPET an attractive market. On a broad industry basis, and very good for AltaGas, the NEB approval of the TransCanada north Montney expansion has provided producers with much-needed natural gas egress capacity, allowing them to move ahead with their growth plans. With our strategic infrastructure in Northeast B.C, we start to see ourselves being well-positioned to be part of that growth. AltaGas provides a unique value proposition with our low-cost processing and access to export markets, which is gaining traction with producers. This is evidenced with the recently announced Townsend expansion with Kelt Exploration. We are also in advance discussions with other producers in the Montney who are looking to AltaGas to provide a fully integrated, customer-focused midstream solution, which provides increased value for their products. Our Central Penn project is a new 185-mile pipeline through Pennsylvania. WGL midstream owns an indirect 21% of Central Penn, which will have the capacity to transport and deliver up to 1.7 Bcf per day of natural gas from the northeastern Marcellus-producing area to markets in the mid-Atlantic and southeastern regions of the United States. The Central Penn project is an integral part of the larger Atlantic Sunrise project operated by Williams through Transco. The Atlantic Sunrise project is designed to supply enough natural gas to meet the daily needs of more than 7 million American homes in the region. Currently, Central Penn is under construction and is expected to be placed into service in the third quarter of 2018. The total cost of this project, for our interest, is USD 450 million. And to date, as of June 30, we've spent USD 415 million. In summary, these are just a few examples of the opportunities we have in gas over the years to come. And with that, let me turn the call back over to David.

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Thank you, Randy. I will now make a couple comments -- additional comments on asset monetization and funding strategy. In order to complete the financing of WGL, maintain a strong balance sheet and provide us with greater financial flexibilities enable us to pursue many opportunities we have at AltaGas, we are currently working on monetizing several of our assets. In terms of next steps, we continue to advance discussion on monetizing AltaGas' assets. While we can't discuss this in any amount or detail, I'd like to tell you that we are focused not only on achieving the amount of capital that is needed to be raised, but we are also very mindful of what the remaining assets look like and how it fit -- how they fit into the future of AltaGas. We have grown from being small to big, from Canadian to North American, from a few jurisdictions to many. It is from this large base as a large and leading player in clean energy infrastructure in North America that we will reshape the company and optimize our asset base. This will maintain, and in fact, even strengthen our position as we move forward to our next stage of growth. We are looking to balance the investment in growth opportunities we have with growth in our dividend. We expect to have visible dividend growth while being mindful of the appropriate dividend payout ratios and investment opportunities we have ahead of us. In terms of financial outlook for 2018, as I said, it remains unchanged. Looking to 2019 and beyond, we see growth focused in our gas and utility businesses. Our Gas business have -- in our Gas business, there are macro business factors that give us confidence in growth opportunities, but there is TransCanada and North Montney enhanced activity around LNG and Kitimat and our RIPET project coming on stream. We see growing traction, and we are perfectly positioned to take advantage of these opportunities. An example is the announced LOI, and we have several more opportunities coming down the road. There are also many prospects for the -- we see result of the expansion of the Marcellus gas production we see continually growing. We have interest in 4 pipelines in the basin and looking for more opportunities here. In our U.S. utilities businesses, we also see significant growth in the next few years. Our U.S. utilities are in high-growth areas, which will require significant capital expenditures to support customer additions, general system betterment and acceleration of accelerated replacement programs. In closing, our vision for our business, our asset sales strategy and our capital investments are linked and aligned. As we reshape AltaGas, our focus in investments will be -- our focus and investments will be in gas and U.S. utilities. We are excited about the future of the reshaped business. We have a lot of room for growth, while continuing to have a low-risk contracted assets with very little commodity exposure. We are well-positioned to take advantage of the structural changes in the market and increased requirements for investment in the new energy economy. And finally, we will continue to make the right decisions for the long term. Long-term sustainability and value creation has always been a core of how we operate. Before I turn it back to Jess, I want to mention, as usual, we have members of our senior leadership team here to answer any questions you may have. I will be turning to them to answer the detail operations -- detailed questions on our operations as they are the experts and they live and breathe the business daily. Now I'll pass it over to Jess.

[Jess Nieukerk, Senior Director of Investor Relations]

Thank you, David. Operator, we will now take questions from the investment community, please.

[Operator]

[Operator Instructions] Your first question comes from Rob Hope with Scotiabank.

[Robert Hope, Analyst]

Yes. Appreciate all the color and commentary on the kind of outlook for the asset base of AltaGas. I did notice specifically you mentioned clean energy as well as U.S. utilities. Could we imply that your conventional generation assets are once again being considered as an asset monetization candidate? And then I guess, secondly, do conventional generation assets have a home in AltaGas longer term?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

I'm not going to speak specifically to any one asset with respect to our asset monetization, but I think what we want to emphasize that where we see the growth and returns going forward are in our gas and U.S. utility operations. And we see that's where our focus will be over the near term, so we won't exclude it. We haven't excluded anything, but clearly, we're focused on moving forward in those areas.

[Robert Hope, Analyst]

All right. And then if we look into 2019 and beyond, just funding your organic growth program, can you give us some thoughts on how you look to fund the program longer term? And could we see potential further asset monetization to be on that $2 billion to help you get down to that 5x debt to EBITDA in 2019?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

We're -- what we're doing actually, Phil and I have only been in the seat a week, so you might want to give us a little time, but we're meeting next week with the executive team on that. We have a lot of growth opportunities that the businesses executives have moved forward. We'll look at that. And clearly, if we sell assets to invest in higher-return assets, I think that's prudent for our shareholders and our bondholders.

[Robert Hope, Analyst]

All right. And then just in terms of the dividend. You mentioned balance and growth in dividend. Do you have an altered view on payout ratio moving forward? Or is it just what the optimal use of capital is and whether or not you're getting properly valued for kind of the dividend outlook that you've presented?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Yes. As you know, I hold a fair number of shares. I think sustainable dividend and growing dividends we think is important. And sustainable, first; growing dividends, second. And we will work hard to do that. We think that we've got it balanced, dividend growth with value creation for the shareholder. And it's a balancing activity, and we'll continue to make recommendations to the board on that balance.

[Operator]

Your next question comes from Ben Pham with BMO.

[Benjamin Pham, Analyst]

I wanted to follow up on Rob's questions about asset sales. And it looks like, based on your commentary, you absolutely want to keep U.S. utilities, just pick it up, and then you want to also keep a lot of your gas midstream assets. It leaves really a broader remaining portfolio that could be sold. If that's the case then, just looking at the recent valuations, Canadian utilities, conventional power, it looks like it's probably more accretive to issue AltaGas equity here than sell those assets. So I'm just listening to Tim's commentary, it seems like -- are you maybe comfortable with that because it achieves reshaping longer term and you might get a bit of a benefit in the valuation pro forma? Is that a correct statement?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Well, I would say if we sold 35% of Northwest hydro, we think, in the long term, best interest of the company. We'll look at all -- we've looked at every asset in the company, analyzed it. So what we're now doing is what's best that fits with the long-term growth strategy and base for the company, and that's how we're prioritizing what assets we sell. I think selling the assets isn't the end. The endgame is building a strong company to grow over the next 5 years, so that's where our focus on the asset monetization.

[Benjamin Pham, Analyst]

Okay, totally makes sense. And then maybe any sense on -- I know you got some debt and [ preps ] to do left on [indiscernible] WGL journey. Any sense of timing on that?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

No, not really. At this point. Did I answer that correctly? Could you repeat that? I think I understood it. But can you just repeat your question, so I don't miss...

[Benjamin Pham, Analyst]

Yes, absolutely. There's from -- maybe I'm missing it, but I think there were some preps debt left to do on the WGL side of things.

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Are you referring to the -- what we've said that we will do with the hybrids and preferreds?

[Benjamin Pham, Analyst]

Yes, yes.

[David Wallace Cornhill, Founder, Chairman & Interim Co]

That's part of our overall funding, and we're looking at options around that as well as asset monetization.

[Benjamin Pham, Analyst]

Okay. All right. And if I can squeeze one in. I'm not sure if index changes. Anything you can comment on that with investors changes? Or...

[David Wallace Cornhill, Founder, Chairman & Interim Co]

I'm not aware of anything, but Tim might be able to add to it.

[Timothy William Watson, Executive VP & CFO]

Well, you're probably -- to be honest, you and your team are probably closer to the machinations of index shifts here. I think you would have seen a couple of weeks ago, that there were some 2 or 3 indices, I think, we had adjustments given the important closure of the transaction and the change in our overall size of the company. But I don't think -- I think those were one-off, onetime events from a volume perspective. And since then, you've seen a pretty normal trading period.

[Operator]

Your next question comes from Linda Ezergailis with TD Securities.

[Linda Ezergailis, Research Analyst]

I realize it's early days in terms of your acquisition of WGL. But can you give us a sense of kind of your draft timelines of integration process, both operationally as well as realizing synergies, at this point looking forward?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

I'll jump to the first. I guess I'd just like to say how I'm impressed with the acquisition and what I've seen from the teams of both AltaGas and WGL put their shoulder to the wheel to work together. And Adrian was up at AltaGas' board meeting last week and made a very strong presentation to our board. So I would -- from a cultural perspective and working and cooperating, I haven't seen -- couldn't ask for a better outcome from the acquisition. I think that's something that we felt from day 1, and I'm very impressed with the WGL team as well as the team here in Calgary. Timeline, and that is way out of my depth, and I'm looking -- Tim will make a couple comments.

[Timothy William Watson, Executive VP & CFO]

Let me make a couple quick comments and others if - roundtable, feel free as well. Linda, I guess both companies have created a Joint Integration Committee of the boards consisting of board members from each company. So you can see from a top-down level, there is significant focus on this. As I said earlier, I think, in my comments, there's the executive sponsorship set out here for achieving the integration objectives. And so if there is tasks have been assigned, we've got Internal Planning Committees and things like that. We've got integrated functional teams that involve both AltaGas and WGL people. Those teams have completed all the day 1 integration tasks that we've been planning for the past year, frankly. We're well into Phase 2 in terms of the integration tasks over the next 6 months or so through year-end, and we're feeling very comfortable. And again, just emphasize our key objectives from an integration standpoint are combining -- are achieving our combined growth targets and optimizing our base business and delivering on our merger commitments and our merger-related savings.

[Linda Ezergailis, Research Analyst]

And after Phase 2 year-end, is that the end of your operational integration? Or is there more after Phase 2? And is that both operational and financial in terms of synergies? Or can you comment on that?

[Timothy William Watson, Executive VP & CFO]

It continues, I mean, because a key part of the transaction for us is achieving growth targets, and growth targets will go -- if you can see from the trajectories of the businesses, will go well beyond the end of this year.

[Linda Ezergailis, Research Analyst]

So that would be like a Phase 3 and more related to growth?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

I think we get -- after the Phase 2, we'll get to normal business operations and how you optimize a business. And just on that, Adrian is going to be heading up our U.S. utility. So U.S. utility integration is -- will be underway as well.

[Linda Ezergailis, Research Analyst]

And just as a -- separately going back to your Canadian AltaGas operations. We've seen some green shoots and momentum on LNG exports in B.C. Can you comment on the potential to maybe reinvigorate your offshore LNG initiative that was shelved a few years ago and what that might take in terms of industry fundamentals or other attributes to become -- come to the forefront again?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Well, I think, first, is our liquids export from propane export terminal is really energizing producers and looking more to export opportunities, I think the discussion around LNG at Kitimat also. I can tell you that Asian buyers are looking very favorably to Canada for energy, and so I would -- and our partners [indiscernible] who are still working with us to pursue opportunities long term on LNG, so we still see that. But as we had said a long time ago, LPG was a -- we thought would be more -- be the first off the gate for us due to much simpler process to get barrels to Tidewater.

[Linda Ezergailis, Research Analyst]

Okay. And maybe just one final small operational question. Can you comment on how your operations at Younger have changed with the change in operatorship? And is that -- I believe it was a positive effect in the quarter. And will that be systemically positive and consistent going forward? And then also, if you have available the magnitude of the amount of the onetime payment from the new operator to AltaGas, that would be appreciated as well.

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Randy and Tim?

[Randy W. Toone, Executive Vice President of Gas]

Yes. So with the -- there was a 20-year contract that changed come April 1, and that changed the ownership and then that kind of provided [ Pomona ] to be the operator. So of course, we would prefer to be operator, but we're comfortable with [ Pomona ] being the operator. We can't get into all the details of the onetime payment because there's a couple due there, but it was approximately $4 million in total.

[Timothy William Watson, Executive VP & CFO]

And it does give us a bit more control probably, I think, on the liquids side, which is going to fit nicely with our RIPET project, too.

[Operator]

Your next question comes from Robert Kwan with RBC Capital Markets.

[Robert Michael Kwan, Analyst]

Now that you've closed WGL and maybe the spotlight of other stakeholders listening in has gone away, can you talk about are there any changes in how you're seeing the opportunities with the WGL assets? Has anything new come up since the original messaging? Or on the other side of that, any opportunities that you were particularly enthusiastic about out of the gate have maybe gone to the back burner?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Answering the last question first, nothing that we've seen has gone to the back burner. I would say that in the presentation last week, I think the growth opportunities with respect to WGL, both that we're seeing from new customer adds and replacement and betterment, I think is slightly better than, at least, the board level felt. And so I would say we're quite optimistic with respect to that part.

[Robert Michael Kwan, Analyst]

Okay. And then turning to financing. One of the earlier questions around how you might be thinking about using common equity, and, yes, the valuation today might point to equity issuance over asset sales, but you've also expressed being optimistic around the long-term growth. And so kind of with that, does it factor into the thinking that even though the valuation multiples might point to issuing equity today, you are effectively diluting future growth on a per-share basis? Does that factor in materially into your thought process?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

That's clearly a factor in our thought process. We will look at all factors and I think coming back to long-term sustainability and growth in shareholder value and stakeholder value growth, and value factors in. So I guess what I would say is that we're seeing more growth than we anticipated or growth opportunities, and we're sitting down as a team and seeing how we prioritize that -- those growth opportunities, but it's far stronger, especially since the last call, I would say, that we're seeing across the board.

[Robert Michael Kwan, Analyst]

Okay, understood. And if I can maybe just finish, I think this would be a question for Adrian. You outlined this in Maryland and Virginia, your applications for base rate increases, and it sounded like there are some existing surcharges that are in place right now. So if that's correct and you look at the net amounts, is that pure regulatory lag? Or are some of what's in the base rate increases also against projected costs?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Adrian?

[Adrian P. Chapman, President & CEO]

Thank you, David. So as I went through each of those, part of each of those cases is to roll in the surcharge recovery that we have built up as we made replacement investments in the previously approved programs. And so if one looked at the Maryland numbers that I gave, the overall increase was going to be in U.S. dollars, $56 million. We netted in $50 million of the surcharges that were giving us concurrent recovery and very timely recovery. And so that recovery will continue as part of that $56 million. The net, the $41 million in Maryland in U.S. dollars would then reflect non-revenue-producing capital investment that we've made over the last 5 years. An example of that would be our new billing system, SAP billing system that we put in place last year and any O&M increases that we've accrued. So that is -- that's -- at least, that piece of the revenue puzzle right there.

[Robert Michael Kwan, Analyst]

Okay. And would that be similar for Virginia as well?

[Adrian P. Chapman, President & CEO]

And so in Virginia, the numbers that I used, we had an overall increase of USD 38 million. And in that $38 million, there was $15 million of surcharge recovery that got transferred in. So that surcharge recovery was current recovery on the planned investment that we had made since the last rate case that gets rolled into rate, so we continue to get that recovery. The net of that, just under USD 23 million, is to reflect non-revenue-producing planned investment since the last case and any O&M increase.

[Robert Michael Kwan, Analyst]

Got it. So both net numbers are pure regulatory lag, or put differently, would drop right to the bottom line, if approved and full. Is that correct?

[Adrian P. Chapman, President & CEO]

That's correct, yes.

[Operator]

Your next question comes from Robert Catellier with CIBC Capital Markets.

[Robert Catellier]

I just wanted to probe a little bit deeper in a couple of areas. First of all, with respect to the dividend growth outlook, what has to happen in terms of executing the funding plan or other objectives to reset the visible dividend growth rate? And what has to happen to achieve a dividend growth rate that was within the balance of the previous 8% to 10% guidance?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

What we are doing is -- first, remember that 8% to 10% guidance was a lifetime ago, 17 months. The market has moved. We're looking to balance our growth activities and maximize the value of our resources and allocate properly. So at this point, we're resetting a far more bullish growth forecast in Gas than we had seen 17 months ago. And so we're looking to how to best invest our financial resources and how to provide the maximum return to shareholders, both in the dividend and share appreciation basis. So that's where we are. You must remember 17 months of regulatory process that we've been in and so the world has changed from that, and we're reevaluating where that is. We still see growth of dividends important, and we will continue to work on sustainability and growth of dividends going forward.

[Robert Catellier]

And so just with respect to timing, David, new policy?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Our next board meeting -- official board meeting is at the end of Q3.

[Timothy William Watson, Executive VP & CFO]

And remember, Robert, we -- just similar to last year, we went through Q3 and provided updated dividend guidance at that time.

[Robert Catellier]

Yes. And also, Tim, you were necessarily -- you gave a wide range of -- I think you said next several months to complete the -- to advance the asset sales. Wondering if you could maybe tighten that range up a bit or give us a little bit more clarity. And specifically, how much do you expect to accomplish in 2018? In other words, is it possible that we hit the entire asset sale program announced within the second half of 2018?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

It's David. We will -- clearly, that's the marching orders that we are working to, to have it done in 2018.

[Robert Catellier]

Okay. And then my last question was on Mountain Valley Pipeline. It's had some, I guess, some setback in the regulatory front when a little bit of a movement in its in service date. I'm wondering if the cost from that project is at risk. And if the spending increases, what it means to returns if it eats into the expected returns.

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Well, I clearly can't answer. Either Tim or Adrian. Tim?

[Timothy William Watson, Executive VP & CFO]

Yes. I'll start, and then, Adrian, please jump in or correct me as you see fit. We do not see the material impact from the quarter delay from Q4 2019 into Q1 '20 -- from Q4 2018 into Q1 2019. We do not expect a material impact on returns from our investments in Mountain Valley. And, Adrian, I don't know if you have any other -- other than that.

[Adrian P. Chapman, President & CEO]

No. I think any anticipated increase in costs that may arise is already embedded in the plan that we had booked forward.

[Timothy William Watson, Executive VP & CFO]

And I guess you should look for the operator to take a lead in terms of any announcement on that project. We did -- and we did, Robert. We did state right in the MD&A that the capital we expect and how much we incurred to date, so it'll give you a much clearer picture.

[Operator]

[Operator Instructions] Your next question comes from Patrick Kenny with National Bank Financial.

[Patrick Kenny, Research Analyst]

Just on the rate base guidance for utilities growing to $7 billion by 2021, it looks to be down from $8 billion in your June presentation. Just wondering does that now reflect an expectation of selling down $1 billion worth of rate base? Or has the standalone growth outlook for that segment been revised down?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

I'll let Tim...

[Timothy William Watson, Executive VP & CFO]

Yes. I'll start, and others jump in if you want. There's no really consistency on that, Patrick. The previous number, which showed going from $5 billion to $8 billion, would have been on a, call it, gross basis before depreciation or I think it's probably better to show it on a net basis. So therefore the $5 billion to $7 billion is on a net basis, which picks up both growth as well as your standard depreciation over time, simple as that.

[Patrick Kenny, Research Analyst]

Okay. Got it. And then just on the funding, so given the U.S. hybrid market can be somewhat fickle. If that market is not open to you in the back half of the year, would you look to backfill the $800 million or so with perhaps tapping the Canadian term debt or preferred share markets? Just want to get your thoughts on what a plan B might look like to fully pay down the bridge outside of additional asset sales or issuing more equity.

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Well, I think we've got a plan to -- on asset monetization well above our target. We'd look at those. We've got several other contingencies, some that we've talked about. But I think we expect it to be there. But that's why we've got more than enough opportunities to meet our funding requirements to our bridge so we don't have to rely on the [ size ] of one thing.

[Patrick Kenny, Research Analyst]

And, Dave, you might -- it might have been touched on in the past. But given the desire here to realign the asset base, can you confirm that you'll be maintaining your 65% ownership of Northwest hydro? Or is selling down to 49% maybe still on the table at this point given the price that you were able to achieve on the 35% sale?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

We will maintain majority interest in that facility, and we don't anticipate independent sales of that asset at this time.

[Operator]

Your next question comes from Elias Foscolos with Industrial Alliance.

[Elias A. Foscolos, Equity Research Analyst]

I've got a question that's related more to the CEO search. Given that the search will probably take a 3- to 6-month process, I think it was pretty clear in the call. But I want to confirm that the hybrid financing and asset monetization will be on track regardless of a new CEO, and I'm going to add the caveat, given that new CEOs tend to have their own flavor and like to put their own stamp on things.

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Yes. We'll have a clear -- our mandate -- Phil and my mandate is to have the company ready for the new CEO. We'll be -- we won't -- we're not holding back. We're moving forward with our strategy, and that new CEO will know what that strategy is from the board going forward, so it would be totally clear.

[Elias A. Foscolos, Equity Research Analyst]

Okay. And one more question related to the CEO. Would you have some sort of bend towards a CEO that understands the current asset base, which will tend to be more American or will be focused more on sort of the growth or you're open to anything -- where the assets would grow, which would be maybe gas-related?

[David Wallace Cornhill, Founder, Chairman & Interim Co]

Well, I think we've got a strategy and good near-term growth. We'll clearly look for a CEO maybe like [ Fred Kay ] said, we want a CEO that knows where the puck is going to be and can provide that leadership going to the future. So that's what we're looking for in a new CEO, clearly understanding being a senior leader that can manage people and lead people and understand the businesses we're in, but we see the opportunity beyond that in clean energy infrastructure.

[Operator]

There are no further questions. At this time, I will turn the call back over to Jess Nieukerk.

[Jess Nieukerk, Senior Director of Investor Relations]

Thank you, operator. That concludes AltaGas' Second Quarter 2018 Conference Call. The Investor Relations team is available throughout the day for any other additional questions you may have. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.