AltaGas Ltd. (ALA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the AltaGas Second Quarter 2026 Financial Results Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. As a reminder, this conference call is being broadcast live on the Internet and recorded. I would now like to turn the conference call over to Aaron Swanson, Vice President, Investor Relations. Please go ahead, Mr. Swanson.

Good morning, and thank you for joining AltaGas' Second Quarter 2026 Results Conference Call. This call is being webcast, and we encourage following the law of the supporting slides that can be found on our website. Speaking this morning will be Vern Yu, President and Chief Executive Officer; and Sean Brown, Executive Vice President and Chief Financial Officer. We are also joined by Randy Toone, President of Midstream; [indiscernible], President of Utilities; and Jon Morrison, Senior Vice President of Corporate Development and Investor Relations. We will refer to forward-looking information on today's call. This information is subject to certain risks and uncertainties and as outlined in the forward-looking information disclosure on Slide 2 in the presentation. Prepared remarks will be followed by a question-and-answer session. I'll now turn the call over to Vernon.

Thanks, Aaron. Good morning. I'm going to start by reviewing highlights from the quarter, including our strong financial and operating performance. Then I'll walk through progress on our growth projects in Midstream and Utilities. I'll finish by reviewing the state of the global LPG market and how that is creating growth opportunities for AltaGas. After that, Sean will cover our segmented financial results and provide more details on our increased 2026 guidance. I'd like to start by introducing [ Karen ], who is now leading our utilities business. [ Karen ] has been with AltaGas for more than a decade and is a valued member of our executive team. We're excited to have Karen step into this role, given our proven track record of operational excellence and strong financial leadership. Let's begin on Slide 4. We delivered record financial results in Q2. We reflecting strong performance from both midstream and utilities. I should note that Midstream's financial results in Q2 benefited from historically high global export spreads and physical sale premiums. We generated normalized EBITDA of $391 million and normalized EPS of $0.31. And increases of 14% and 15% over Q2 2025. Our strong first half gives us the confidence to raise our 2026 guidance. We've increased normalized EBITDA guidance by 4% to a new range of $2.0 billion to $2.1 billion and normalized EPS by 6% to a range of $2.35 to $2.60 per ship. Our balance sheet remains strong throughout the quarter with leverage closing at 4.4x, below the low end of our 4.5 to 5x target range. Operationally, we exported a record 144,000 barrels per day of LPG, a 13% increase over Q2 2024. Midstream throughput continued to grow with Montney volumes up 8% year-over-year, and we added 2 high-quality partnerships to our platform. the Groundbirch rail terminal with Tourmaline and the ACE rail terminal in Fort Saskatchewan with Keyera and CN Rail. In utilities, we continue to advance our system marization programs. Year-to-date, we have deployed over $200 million of capital and replace 21 miles of pipe. Let's move to our growth projects, starting with REEF on Slide 5. Construction on REIT continues to advance and the project is now 85% complete. Onshore execution has been strong and ahead of plan. On the uplines, all major equipment is installed, and commissioning should begin in late August. The railroad corridor is entering its final construction phase and will be completed before year-end. While onshore execution has been ahead of plan, in-water construction has proven more challenging due to maritime conditions and weather delays. Since we started in water construction at REIT in the fall of 2024 and we have lost over 450 rig days due to extreme weather, extreme ocean swells and marine mammal activity. These lost rig days significantly exceeded any normal contingency plans. As a result, onshore efficiencies are no longer expected to fully offset higher in water construction costs. We now expect REIT to come online before the end of Q1 2027 and have increased REIT's capital cost estimate by 12% to approximately $1.5 billion. With the Jetty and loading on platform now 80% complete, post in-water construction is set to be completed over the next 6 weeks. We view the revised schedule and cost is highly achievable, and we'll get into those details shortly. REEF Optimization 1 remains on schedule for an in-service date in the second half of 2027. We and we will add 30,000 barrels per day of incremental propane export capacity. We're also advancing reef optimization to with key regulatory permits secured and engineering progressing towards final Class III cost estimates before the end of the year. On Slide 6, we outlined REIT's remaining major work streams and highlight what has been completed to date. The in water works have been the most challenging, but we're almost done. All 48 of the piles for the jetty peers have been drilled and completed. Only 5 files remain to be drilled for the loading platform, and that should be completed by the end of August. All of the Jetty trusses that span 1.2 kilometers have been installed. The transition platform has been delivered and set Fabrication of the main loading platform is complete and is about ready to be loaded for an August delivery. The mooring system fabrication is nearing completion, and is set to be delivered in November and installed in December. With the aging water phase of construction, the most complex and challenging part of REIT nearing completion, we're highly confident that we'll be able to meet our revised cost estimate and schedule. Slide 6 shows how the platform and mooring system will be installed on the jetty which is a low-risk installation and part of our modular design. Turning to Slide 7. You will see the progress on onshore construction activity. All modules have been received and all equipment has been set. Mechanical completion is now 90%, and we expect to commence upland commissioning by the end of August. The rail loop and utility corridor are now 70% finished and are on track to be completed by mid-November. Slide 8 shows the progress on our other growth projects. At RIPET, our methanol removal project remains on track for completion by year-end. Our Dimsdale storage expansions are now more than 50% complete, with pipeline tie-ins completed. We're on track to start the drilling of the injection wells in the third quarter. Phase 1 will add 6 Bcf of storage by year-end 2026 and Phase 2 will add another 30 Bcf of storage by mid-2027. At the Mountain Valley Pipeline, Southgate construction is underway. Pipeline welding began in early July, and the project is on track to be in service by year-end 2026 ahead of schedule. MVP boot continues to advance through its regulatory steps and is expected to be in service by the middle of [indiscernible]. During the quarter, we reached a positive FID on a debottlenecking project at Townsend which will add 6,000 barrels per day of fractionation to posit within utilities have more than 5,000 miles of pre-1970s pipe that needs to be replaced to enhance safety and reliability. To support that, we have USD 1.5 billion of modernization programs approved by regulators across our 4 jurisdictions. Modernization capital, system expansion and customer adds are expected to drive 10% rate base growth in 2026. This rate base will improve the safety and reliability of our system, every mile we replace reduces the risk of leaks and safety incidents, service disruptions and operating costs for our customers. Despite these large increases in rate base, we have been able to keep customer bill increases around 4% per year based on operating cost savings from these modernization investments another on cost management initiative. Demand for natural gas across the U.S. continues to rise, driven by heightened commercial and industrial activity. data center and large load development and ongoing population growth. The mid-Atlantic sits in the center of this expansion. For example, PJM data center load is forecast to increase by fourfold over the next 8 years. Turning to Slide 9, I want to touch on the disruption in the Middle East and what this means for the global LPG market and our global export business. LPG exports through the Strato farmers are more than 70% below pre-conflict levels. Since their disruption began, more than 160 million barrels of LPGs have been displaced from global trace. That had tightened market balances and reinforce the value of stable Canadian LPG supply. We're seeing very strong demand across our traditional markets in Japan and South Korea and growing demand from China. We're also seeing incremental demand from other Asian markets that have historically relied in Middle Eastern supply. Given the favorable market dynamics, we continue to advance Rett and see the need for additional rephase every 2 to 3 years to meet the market demand in Western Canada. We're also seeing significant interest from China for Canadian ethane exports as a way to diversify its long-term ethane needs. Today, roughly 500,000 barrels a day of ethane is left in the natural gas stream in Western Canada, while age and demand keeps growing. We're actively, we're working through the complexity of connecting these markets as we see this as another opportunity to provide Canadian energy to the best global markets. Finally, let me close on the progress we've made on our strategic priorities in 2026. AltaGas' future is very bright. We've executed consistently growing, derisking and strengthening the enterprise through the first half of the year. In the second quarter, we delivered record volumes from our global export platform and higher throughput across our midstream value chain. We continue to actively manage risk through hedging, commercial contracting and diversifying our downstream markets. We're advancing multiple rate cases in our utilities to earn appropriate returns on our capital investments and minimize rate lag. Our balance sheet is strong, with leverage below our target range, which has allowed us to advance multiple projects that will drive long-term growth. Taken together, we're extending our competitive advantages, improving the quality and visibility of our cash flows and creating a longer runway for disciplined expansion across AltaGas. I'll now turn it over to Sean to walk through our segmented results and increase 2026 guidance.

Thanks, Vern. And good morning, everyone. As mentioned, we are very pleased with our record second quarter performance. The continued execution across our platform has enabled us to increase our guidance and positions us to deliver over 10% year-over-year EBITDA growth. For today's call, I'll start by walking through our segmented financial results, and then I'll discuss our updated 2026 guidance and capital budget and closes our balance sheet strength and investment proposition. Turning to Slide 12. In the quarter, the utility segment delivered normalized EBITDA of $142 million a 6% increase year-over-year. This increase was driven by higher revenue from continued system modernization investments, new rates in D.C. and interim rates in Virginia, as well as stronger retail performance. Compared to the same quarter last year, results were partially offset by higher G&A expenses and lower asset optimization activity at Washington Gas. From a capital perspective, during the quarter, we deployed approximately $240 million in the Utility segment, including $130 million toward modernization programs, on new growth initiatives and $86 million on system betterment programs. Of note, our modernization spending has resulted in us replacing over 20 miles of vulnerable pipe year-to-date. These investments are focused on delivering long-term safety and reliability, while extending our network to serve our expanding customer base. In addition, in June, we officially kicked off construction of the Kia Connector pipeline. The majority of the materials are now on site with pipe welding, bending and placement ongoing. We continue to expect construction to be completed by year-end 2026. We are also making solid progress on our 2 data center pipeline connection projects in Virginia and Maryland, both of which remain on schedule for completion in the fourth quarter of 2026. Though individually not material in size, these projects underscore the increasing importance of our gas utility infrastructure and enabling reliable energy delivery for large load customers. Looking forward, we continue to see a robust pipeline of opportunities with sustained interest from data center and large load industrial customers seeking reliable, scalable and cost-effective energy solutions. Turning to Slide 13. We highlight our ongoing regulatory initiatives. This week, we received a final order in Maryland, where the commission approved USD 38 million in new revenue including certain costs currently recovered through the Stride surcharge based on an allowed ROE of 9.4%. Active rate cases in Virginia and Michigan are ongoing. In Virginia, interim rates remain in effect with WGL seeking USD 65 million of incremental revenue, net of a USD 39 million ARP surcharge. In Michigan, we are seeking new rates and an extension to the modernization program, requesting USD 61 million in revenue and USD 284 million of proposed spending for Michigan's modernization programs through 2031. We expect final orders in Virginia by the end of Q3 and in Michigan before year-end. Late in the second quarter, the Public Service Commission of DC approved a 6-month USD 18 million extension of the existing project type 2 modernization program through the end of 2026. This came after our USD 150 million District safe ARP program was approved, but subsequently reopened as the commission determined a further hearing was necessary. The hearing was held this week, and we expect resolution by the fourth quarter. Importantly, our utilities investments are expected to drive 8% long-term rate base growth through 2030, supporting stable cash flows earnings growth, dividend durability and shareholder value. Turning to Slide 14. The strength in our midstream business continued, delivering $285 million of normalized EBITDA, and up 33% year-over-year and above our expectations. The segment's outperformance was driven by our export platform, which exported record volumes and delivered strong merchant margins. The segment also benefited from continued strong performance across the balance of our midstream assets, particularly in the Montney, where producer activity remains strong and continues to drive basin growth. From an operational perspective, we exported a record 144,000 barrels a day of LPGs across 23 VLGCs at our Ferndale and RIPET terminals, with volumes up 13% year-over-year. Strong terminal execution and logistics supported record Ferndale exports of nearly 60,000 barrels a day, driven by improved rail switching efficiency, along with higher rail, refinery and trucking volumes. RIPET exported roughly 84,000 barrels a day of propane and continue to operate near capacity. In the rest of our midstream platform, GMP utilization remained strong in the quarter, although margins were tempered by lower realized frac spreads due to the impact of hedging. Ormat was offline for 32 days for planned maintenance. Excluding the impact of the Harmattan turnaround, throughput volumes were 9% higher year-over-year. Money growth remained a key driver supported by our strategic footprint across liquid-rich areas of the basin and continued producer activity. In the Alberta Montney, our Pipestone complex continued to perform well. averaging roughly 90% utilization through the quarter as area volumes continue to increase. In Northeast BC, strong volumes continued across our Montney assets with North mine throughput up 23% year-over-year, continuing to operate near its 25,000 barrel a day capacity. But looking across our system, the underlying growth we are seeing reinforces the value of our Northeast BC liquids expansion projects, which are designed to unlock additional value from Townsend and North Pine while deepening our strategic producer relationships. Looking ahead, we are well hedged for the balance of 2026 and have derisked much of our Q4 exposure. With approximately 91% of expected remaining 2026 global export volumes, either tolled or financially hedged with an average FEI to North America spread of approximately U.S. $2.81 per barrel on non-toll volumes, while 9% of volumes remain open to market pricing. In addition, our entire 2026 Baltic freight exposure is hedged through a combination of time charters, financial instruments and tolling arrangements. We also continue to manage frac fed exposure and had 84% of expected volumes hedged at an average price of $22 a barrel. -- post the discussion on our financial results. The Corporate and Other segment was lower year-over-year, primarily due to higher employee incentive costs tied to our rising share price. Turning to Slide 15. Year-to-date, -- we have seen outperformance from both business segments with significant strength in our LPG export business driving an increase to our guidance. We have raised our EBITDA guidance to a range of $2 billion to $2.1 billion, representing a 4% increase over the original guidance midpoint and 10% growth year-over-year. At the same time, we are raising our EPS guidance to a range of $2.35 to $2.60 per share, a 6% increase over the original guidance bit point and 11% above last year's levels. Additionally, as outperformance is more weighted to our midstream business, we've adjusted our estimated year-end 2026 segment EBITDA mix with midstream now expected to contribute approximately half of normalized EBITDA, resulting in a range of 48% to 52% for both segments. As shown on Slide 16, also increased our 2026 capital budget, which now sits at $1.8 billion, up from $1.7 billion previously. This increase reflects higher capital expenditures to the construction of Reed as well as capital associated with the positive FIDs of the Northeast D.C. liquids expansion project and the Groundbirch Rail Terminal. 1% of 2026 capital is now expected to be allocated to the utility segment, 36% to the midstream segment, with the balance to the corporate segment. Utility capital is primarily directed towards modernization and system betterment initiatives, which are expected to drive 10% year-over-year rate base growth. Midstream Capital remains focused on Reef, including Optune, Dimsdale and our new Northeast DC project announcements, all of which underpinned the segment's robust growth outlook. As shown on Slide 17, our $1.8 billion capital program remains well within our investment capacity. Our relatively low dividend payout ratio, along with our strong business performance, has allowed us to increase our 2020 fixed capital program while remaining within our debt target ranges and deliver on our 5% to 7% EBITDA and EPS CAGR. Looking forward, our capital allocation priorities remain the same as we look to cover maintenance spending and advance key growth projects that position the business to deliver on its long-term growth guidance. As shown on Slide 18, we exited the quarter with a trailing 12-month adjusted net debt to normalized EBITDA ratio of 4.4x, honestly below our target range. With the increase in shape of our 2026 capital program and considering the seasonality of our business, we expect our leverage metric to trend towards the midpoint of our 4.5 to 5x target range as we progress through the year. On Slide 19, we highlight AltaGas' consistent track record of delivering per share growth in earnings, EBITDA and dividends, which has translated into sustained share price outperformance. The updated 2026 expectations have driven an increase to our 5-year EPS CAGR to 8% and our 5-year EBITDA CAGR to 7% from 6% previously. Our investment proposition, which has remained the same as highlighted on Slide 20, a resilient, low-risk infrastructure platform underpins stable and growing cash flows, and a diversified business mix that provides earnings visibility and capital allocation flexibility. Visible organic growth opportunities position the company to grow earnings and cash flow per share while maintaining financial flexibility and drive sustainable dividend growth. With that, I'll turn the call back to the operator and open the line for questions. Operator, we're ready for questions, if there's any in the queue.

[Operator Instructions] Your first question comes from the line of Rob Hope from Scotia Bank.

I want to dive a little bit deeper into the potential for further producer partnerships up in Northeast BC. Are you having conversations up there to support incremental infrastructure build that could be a header in essence for your global export business?

Rob, it's Vern. I'll start that off and then hand it over to Randy. I think in Northeast BC, we're in a great position. I think as you know, it's sometimes challenging to build infrastructure up there. given the precedence with the First Nation. So the good news is we're well situated with our Townsend and North Pine assets to add significantly more volumes up there. And obviously, we've sized up our rail facility to -- at North Pine to handle unit trains -- this new partnership with Tourmaline gives us a second and significant loading opportunity where if other volumes come in we're able to capture those as well. So I'll turn it over to Randy. He can just fill in a little bit more color.

Yes. Thanks, Vern. I would just add that we do think that LNG Canada Phase 2 is likely going to be FID here soon. And also the federal government has been very supportive of other LNG projects. And so that's just going to add more supply in the Montney, and we think that our assets are well positioned to take advantage of that.

Appreciate that. And then maybe just moving over to the global export business. I understand that pricing is volatile, but we are hearing about physical premiums to the posted FEI pricing. Can you speak to how you're benefiting from this dynamic? And do you realize that even when you do hedge relative to FEI as well as moving forward, how it is informing kind of your hedging profile?

I think the way to characterize that, Rob, is with this massive disruption in global supply and demand remaining relatively constant is the fact that often times, people are not want to show their physical sales on the index. So that's why there's particularly a disconnect between a physical sale and the index. So going forward, on our merchant capacity, we're able to capture the actual physical sale premium over FEI, and we're seeing that continue as we work through this situation.

Your next question comes from the line of Patrick Kenny from National Bank Capital Markets.

Maybe just on the new tolling agreement with Tourmaline. Just wanted to get your initial thoughts here on their 1-year pause on growth spending and any read-through to perhaps any broader temporary slowdown in activity across Northeast BC? And I guess what that could mean timing-wise for some of your unsanctioned growth opportunities, whether it's ODI or further upsizing it North Pine, Pipestone or Diversa?

Patrick, it's Randy. Yes, we totally understand why Tomlin wanted to pick a pause given where the natural gas prices are. But when you look at what their Phase II expansions that was Conroy and Dohan that's really not kind of feeding our existing infrastructure. So it doesn't change our plans. Obviously, we want to see that development and we know it will be developed, but it doesn't impact our long-term plans.

Yes. And, I'd just jumping in here. I think, obviously, we're seeing heightened activity from other producers, which is really driving the towns and debottlenecking that we announced today. And I think the demand we're seeing on -- for OCI is extremely high, Patrick. We expect to be concluded on commercial negotiations on incremental tolling arrangements within the next couple of months here.

Okay. That's great. I appreciate that. And then I guess, Vern, as you think about your portfolio of tolling contracts, you've had good uptake from midstream peers, as well as upstream customers and now you're seeing increased demand from China. I guess as you think about maximizing realized margins going forward, how are you thinking about the right mix in terms of customer type and maybe an update on where you're at today versus your longer-term target?

Sure. Patrick, we're still targeting to be 60% told on a long-term basis. So as we bring OTIF later this year, we're still wanting to have at least 60% of the total export capacity under tolling agreements. We're starting to see early signs of Asian demand for more Canadian product. We're in active discussions on all kinds of supply arrangements between Japan, Korea, China and other jurisdictions. So the disruption we're seeing in the Middle East, obviously, is highlighting how important it is to have a secure and reliable supply in Canada obviously a great place for that. So as we approach the end of the decade and have 300,000 barrels a day of export capacity, we think there's going to be very high demand for tolling contracts and we'll see that play out over the next couple of months.

And I guess as you look to potentially add ethane exports to the franchise, can you provide just a bit more color on maybe how those discussions are progressing to secure the offtake contracts and also along the value chain, how you're thinking about sourcing the ethane and securing the rail logistics and whatnot?

Yes. Ethane is obviously, in an earlier stage than OPTI 2 and even OPTI 3. We've made great progress and 1 of the most critical elements, which is just the rail logistics. We've recently received Transport Canada approval to use a pressurized car to move ethane. So that removes a significant gating item. I think where we're at now is obviously to get a better line of sight on the capital cost involved on all the logistics from loading and then export facility wise, the dynamic is the China imports almost 100% of its ethane today from the U.S. Gulf Coast with global trade tensions, China is extremely eager to get different -- a variety of supply sources in Canada is well positioned for that. I think as we mentioned on our prepared remarks is 500,000 barrels a day of ethane in the gas stream with lots of facilities across Alberta and BC for that ethane to be railed. So we think a lot of the parts are already there. We just need to do a little bit more work on figuring out what is a competitive rate. And then with the thing, given that it's a new product with probably 1 buyer or a series of buyers in 1 location, we're going to look to target a much higher percentage of tolling on that kind of transaction.

Your next question comes from the line of Robert Catellier from CIBC.

Just wanted to clarify on the ground with rail project that there is an ability to accommodate third-party volumes, and it's not exclusive to Tourmaline?

Rob, it's Randy. Here we do have rights to participate if there's any available space. But for the first initial phase it is entirely terminaling, but we do have rights to bring in third parties if there is a capacity available, and we also do have rights to potentially participate in expansion.

Can you provide updates on -- how do we say this, the aspirational drag on LPG project. I know there's been a couple of project filings from Trigon and also your replying -- so maybe you could just summarize where we're at there and then your response. Maybe you could touch on where you see First Nations support line for your export assets versus some of the other projects?

Rob, maybe I'll just comment on Trigon, and I'll hand it over to Andy to talk about our stakeholder relations. At the end of the day, I think it's pretty clear that there's only 1 anti city on Rite Island that has the ability to develop LPG handling and export and that's us. That's been reinforced several times by the Prince rereport authority. And obviously, there's a legal court case coming up here in the spring of 2027. I think our case is extremely strong, and we are not very worried about it. And just to reiterate, we will make sure that we protect our commercial rights all the way in any possible way. And then finally, before Randy chime in, is our goal is to have all of our stakeholders aligned with us over the long term. We've done that over and over. And I think Northeast BC is a great example of how we really positive relationships with our First Nations. So with that, I'll let Randy talk about the particular situation with the math.

Yes. So we've been -- had a strong relationship with the MAP for over a decade since we've been in Prince Rupert. We see them as a long-term partner. We do think that we're making positive progress on on the issues in hand, and we think we'll have a positive outcome in the end.

Okay. And my last question is for Karen. I know it's early days as you step into the role here, but I wondered if there was any thoughts on possible changes to the regulatory strategy, especially as it relates to those building emissions performance standards or on the efforts to narrow the ROE gap.

Good morning, Rob. Thank you. So excited to be here today. Just want to say upfront, -- there really is no change in our utility strategy. The team has done a great job making improvements in the utility, and we're going to continue to build on that foundation. As we think about the regulatory strategy tied to what you were mentioning, I'm going to just maybe go right to gas fans, and we're going to continue to oppose gas expense as they limit customer choice and customer affordability. The mid-Atlantic, it needs natural gas to support reliability, long-term energy security and customer affordability and restricted policies only increase regional energy challenges -- so we're going to continue with both our legal and our advocacy strategy that supports ultimately what we're trying to earn our regulatory strategy. And at a high level, we have no change, and we're going to continue to close our ROE gap there's no change in our focus there. And we're going to continue to put safe pipe into the ground to improve the safety and security of our systems. And customer affordability is obviously top of mind. So we're going to double down on our operating costs and our capital cost efficiencies so that at the end of the day, it's more affordable for our customers.

Rob, going to add us a little bit there on the gas bands. Like if you think about it, PJM is short energy and short energy in a big way. for a county or city to think about limiting the available sources of energy and trying to shift that to the power grid is just nonsensical. -- you're making an energy shortage problem even worse. And then finally, you've seen different outcomes on a legal basis, different district courts in the U.S. This obviously is leading to the Supreme Court, and we just recently seen the DOJ and the DOE really weigh in on these items. So we're very -- we have a real positive lean that this will ultimately get resolved at the Supreme Court in a fashion that makes sense for everybody.