AltaGas Ltd. (ALA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the AltaGas Third Quarter 2026 Financial Results Conference Call. My name is Joanna, and I will be your operator for today's call. [Operator Instructions] As a reminder, this call is being broadcasted live on the Internet and recorded. I would now like to turn the conference call over to Eric Swanson, Vice President, Investor Relations. Please go ahead, Mr. Swanson.

Good morning, and thank you for joining AltaGas' Third Quarter 2026 Results Conference Call. This call is being webcast, and we encourage following along 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're also joined by Randy Toone, President of Midstream; Crean Bushfield, President of Utilities; and John 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 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 Vern.

Thanks, Aaron, and good morning, everyone. I'll start by reviewing our Q3 results, provide an update on construction progress at Reef and our other growth projects. After that, we'll review the current state of global LPG markets. I'll then review recent regulatory outcomes at our utilities and wrap up by reviewing our 2026 strategic priorities. Sean will cover our quarterly results, discuss our 2026 guidance and close with an update on our leverage and capital plans. Let's start on Slide 4. In Q3, we generated normalized EBITDA of $389 million, which is 45% higher than Q3 2025. In Q3, normalized EPS came in at $0.29 compared to $0.04 last year. Our record third quarter results were driven by our Midstream segment, which continues to benefit from strong operational performance and global LPG tailwinds. Based on our year-to-date performance and our outlook for Q4 and we expect to be towards the high end of our recently increased 2026 guidance range for both EBITDA and EPS. We exported a record 147,000 barrels per day of LPGs to Asia off the West Coast, loading 24 VLGCs. Midstream throughput continues to grow with Montney processing up over 20% year-over-year, driven by the addition of Pipestone 2 and higher throughput at our Townsend facility. We recently took delivery of our fourth VLGC time charter in Japan and have executed agreements for two more vessels with deliveries anticipated in 2027 and 2029. These additional vessels mitigate us from uncertainties with global shipping rates. In utilities, we finalized rate case settlements in Michigan and Virginia, which will add USD 68 million in revenues. We're also expanding our footprint with an agreement to acquire roughly USD 20 million of rate base in Michigan's Upper Peninsula. Let's turn to Slide 5. In Prince Rupert Reef continues to progress with the highest risk work now complete. I'm happy to share that the project is now 90% complete and moving into commissioning. We remain on track for an in-service date in the first quarter of next year. Brief Optimization 1 remains on schedule for an in-service date in the second half of 2027 and we continue to advance the 60,000 barrel a day reef optimization two project, which we expect to FID before the end of this year. Slide 6 highlights progress on the jetty. All of the piles and platforms have now been installed. This means the most complex phase of the in-water construction has been completed. In September, we completed installation of the [indiscernible] loading platform and loading [indiscernible] these last major work stream is the installation of the VLGC mooring system. The suction anchors will be installed this quarter with the balance of the mooring system scheduled to be completed in early 2027. Mechanical completion of our RIPET methanol removal project is only weeks away, and commissioning is now 25% complete. The project will enhance our propane specs, and it will all be done by year-end. We continue to make good progress on our [indiscernible] storage expansions. Once complete, these expansions will add 36 Bcf of natural gas storage in the Alberta Mont. The pipeline for Phase 1 expansion has now been finished, and the Phase 1 facilities are more than 80% complete which puts us on track for a Q4 2026 in servicing. For Phase 2, the facility is 40% complete, and the drilling program is now over 50% complete with the wells expected to be done in early 2027. Turning to Slide 8. I want to provide an update on the conflict in the Middle East and its impact on the global LPG market. LPG export volumes through the Strait of Hormuz remain more than 70% below pre-conflict levels with less than one ship exiting the street each day. Since the disruption began, we estimate that more than 240 million barrels of LPG supplies have lost. This has resulted in very high Asian LPG prices. with recent pricing approaching peak pricing. As the situation drags on, we've seen a significant increase in long-term export spreads. For the second half of 2027, export spreads have increased by more than $5 per barrel compared to 3 months ago. The conflict has also driven spot shipping rates to triple since early 2026. While shipping rates are expected to stabilize in 2027, subject to Middle East supply returning to normal, our tolling contracts and our time charters isolate alpha gas on these abnormally high shipping rates. Finally, the disruption in Middle Eastern supply has highlighted the value of Canadian LPG exports with global buyers placing a premium on security and reliability. Slide 9 highlights why we are bullish on LPG supply growth in Western Canada. As Canada expands its access to global energy markets, we're seeing major LNG and crude oil pipeline projects advancing, driven by LNG projects and growing in-basin demand, Canadian gas supplies positioned to grow over 35% or 8 Bcf a day by 2035. We anticipate much of this growth will be in the liquids-rich Montney. This, in turn, will drive higher LPG supply. We estimate that 8 Bcf per day of gas will add about 280,000 barrels per day of propane and butane, and all of these barrels will need to be exported to premium markets in Asia. In addition to natural gas egress, nearly 1 million barrels a day of sanctioned crude oil expansion projects are slated to come online by 2029. The crude oil outlook is even stronger if we include unsanctioned projects, which would add a further 2.4 million barrels per day of crude oil egress. This growth will be filled by oil sands production, increasing domestic demand for both gas and condensate, further supporting LPG supply growth in the basin. Slide 10 show how we plan to connect this growing LPG supply to global markets. When Reef comes online, you will add 56,000 barrels a day of export capacity. The dock, the rail loop and utility quarter have been prebuilt to accommodate Reis's ultimate capacity of 500,000 barrels per day. When Reef and OPI and two are online, our global export capacity will grow by over 185,000 barrels a day to over 300,000 barrels per day by the end of this decade. Additional crude and natural gas egress will drive even more LPG supply growth. creating additional phases of rev expansion, which Reef can accommodate well into the 2030. We are also excited about the long-term potential of ethane exports. Here, we have the opportunity to connect the oversupplied Canadian ethane market with strong petrochemical demand in Asia. This capacity can be added to REIT, and we are currently targeting to have an initial 60,000 barrels per day of ethane export capacity online in the early 2030s. Let's move over to our utilities. We've been very active with our regulatory filings, and we have recently had some constructive rate case outcomes, which ensures that we will make the appropriate returns on our rate base investments. Across D.C., Maryland, Michigan and Virginia, we have received approval for USD 115 million of incremental revenue. with an average allowed ROE of 9.67% across these jurisdictions. We also have USD 1 billion of approved modernization rate riders that provide predictable recovery that allows us to continue to make investments that enhance the safety and reliability of our system. Our utilities will continue to focus on maintaining strong cost and capital discipline to support customer affordability. We will also continue to file regular rate cases to ensure inflation and non-modernization capital investments do not result in material ROE led. Finally, I'll close on Slide 12 with the progress we've made on our 2026 priorities. We continue to deliver on our strategic priorities by growing, derisking and strengthening the enterprise. We're optimizing our assets by delivering record global export volumes, seeing higher throughputs across our midstream assets and regularly filing rate cases in our utilities. At the same time, we're making great progress on our growth projects. We've been very disciplined in how we allocate capital and we're only investing in the best projects. Taken together, we've extended our competitive advantages, improve the quality and visibility of our cash flows while creating a long runway for industry-leading shareholder returns. I'll now turn it over to Sean to walk through our results and outlook.

Thanks, Vern, and good morning, everyone. As Vern noted, we are very pleased with our record third quarter performance, delivering normalized EBITDA of $389 million, a 45% increase over the third quarter of last year. For today's call, I'll focus on our segmented financial results, discuss our balance sheet strength, 2026 outlook and finish with our investment proposition. Turning to Slide 13. Our midstream business continues to exceed expectations, delivering $337 million of normalized EBITDA, an increase of 65% year-over-year. This sale performance was driven by the global exports platform, which delivered record export volumes and strong margins. From an operational perspective, we exported a record 147,000 barrels a day of LPGs across 24 VLGCs. During the quarter, we shipped an average of 89,000 barrels a day at RIPET across 14 ships and 58,000 barrels a day across 10 ships at Ferndale. In total, export volume grew 11% year-over-year. We also saw continued strength across the balance of our asset portfolio with total volume growth of 12% led by our Montney assets. Plant utilizations remain strong with notable year-over-year throughput increases of 11% in the Gathering and Processing segment and 40% within extraction, while the fractionation in liquids handling segment benefited from strong margins during the quarter. Our strategic footprint in the liquids-rich Montney continues to drive performance, supported by strong producer activity and basin growth. In the Alberta Montney, extraction volumes at our Pipestone complex increased by nearly 3x year-over-year, owing largely to the addition of Pipestone 2. The Pipestone complex had 94% utilization during the quarter as producers fill or exceed their take-or-pay commitments. In Northeast B.C., North Pine continued to operate near its 25,000 barrel a day frac capacity. Across our system, underlying basin growth and constructive egress dynamics continue to reinforce the value of our midstream platform, while our expansion projects position us to support further growth. In terms of risk management, of AltaGas' remaining 2026 global export volumes are either told or financially hedged. With an average FEI to North America spread of approximately USD 23 per barrel on non-tolled volumes. We've also substantially hedged all our 2026 Baltic freight exposure through a combination of time charters, financial instruments and tolling arrangements, which has been positive on the back of the spike in freight costs. We continue to manage frac spread exposure and have 86% of expected volumes hedged at an average price of approximately USD 24 per barrel. Separately, we are managing through a labor strength at Trigon Pacific terminals, which began on October 2. Trigon provides rail logistics and birthing services for RIPET. And to date, we have seen no material impact to our operations. Following a Canada Industrial Relations Board ruling over the past 48 hours, we now expect some impact in the coming period. We are actively mitigating that impact and continue to expect results towards the upper end of our recently increased guidance ranges, including any potential financial impacts. Turning to utilities on Slide 14. The segment delivered results consistent with expectations, typical of summer seasonality. Normalized EBITDA of $66 million was relatively in line with the same quarter last year. A stronger contribution from asset modernization and asset optimization activity was largely offset by increased O&M and G&A costs, including the impact of our rising stock price on incentive plans. During the quarter, we deployed approximately $370 million in the segment, including $120 million towards modernization programs, $30 million on new growth initiatives and $220 million on system betterment programs. These investments are focused on delivering long-term safety and reliability while extending our network to serve our expanding customer base. Additionally, the team continues to progress construction of the [indiscernible] Connector pipeline, which now offsets 85% complete and remains on budget and schedule for completion by year-end 2026. The pipeline will increase the reliability for 14,000 SEMCO customers in Michigan's Upper Peninsula. We also recently announced the acquisition of 5,800 customers and approximately USD 20 million of rate base in Michigan's Upper Peninsula. This transaction marks an important milestone for SEMCO expanding its service territory, while reinforcing its commitment to delivering safe, reliable service to customers with the transaction expected to close in the second half of 2027. Lastly, on the regulatory front, the team was pleased to receive final orders for rate cases in Virginia and Michigan. In Virginia, WGL received approval for a total annual revenue increase of $74 million including $39 million previously recovered through a rate rider and a 15 basis point increase to the midpoint of the allowed ROE to 9.8%. In Michigan, SEMCO received approval for an annual revenue increase of $33 million and an allowed ROE of 9.85%. The Michigan modernization programs were also extended through 2031 and supporting $271 million of additional capital over the next 5 years. We view these outcomes constructively. They will add $68 million to revenue next year and reflect the continued execution of our regulatory strategy. For clarity, for the discussion around the rate case outcomes, all figures I noted are in U.S. dollars. Looking ahead in utilities, our growth outlook remains strong. We continue to prioritize capital towards our accelerated pipe replacement programs and new customer connections, while we advanced data centers and large load industrial opportunities. Finally, results in our Corporate and Other segment declined year-over-year, primarily reflecting higher employee incentive costs due to strong performance across the business and share price strength, while financial performance at late was consistent with the same quarter last year. Turning to Slide 15. We are pleased to be tracking towards the upper end of our recently increased 2026 guidance ranges of $2 billion to $2.1 billion in normalized EBITDA and $2.35 to $2.60 in normalized EPS, primarily reflecting sustained strength in the LPG export market. Looking forward, we expect LPG spreads and margins to remain supportive. That being said, we are mindful of a few potential headwinds, including the potential impact from lower throughput volumes due to the Trigon strike, the impact in El Nino weather pattern could have at our utilities and higher incentive costs linked to share price strength. With that said, reflective of these factors, we still expect to land towards the upper end of our guidance ranges. From a capital perspective, there are no major changes to our outlook. As shown on Slide 16, we continue to expect capital investment of approximately $1.8 billion with roughly a 60% allocation to utilities and the remainder to the midstream and corporate segments. As shown on Slide 17, we exited the quarter with a trailing 12-month adjusted net debt to normalized EBITDA ratio of 4.3x, including 50% debt treatment for preferred shares and hybrids which is down meaningfully from year-end 2025 and modestly below our 4.5x to 5x target leverage range. On Slide 18, we highlight AltaGas's established track record of delivering growth in EBITDA, earnings and dividends, while driving meaningful per share value creation including an average annual TSR of 26% over the past 5 years. I want to conclude with our investment proposition, which is shown on Slide 19. The AltaGas has a resilient, low-risk infrastructure platform that underpins stable and growing cash flows. The diversification of our business provides strong earnings visibility and capital allocation flexibility. Our visible organic growth opportunities position us to grow earnings and cash flow per share while maintaining financial flexibility and supporting sustainable dividend growth. With that, I'll turn the call back to the operator to begin the Q&A.

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

Can you maybe dive a little bit deeper into the Trigon impact, just given the recent ruling, is the expectation that you'll still be able to load ships during the work stoppage or does the guidance assume that the strike continues for an extended period of time with limited volumes there?

Rob, it's Vern here. The strike at Trigon started October 2, and it's been ongoing for almost a month. We've been working very collaboratively with Trigon where the contingency plans were put into place that allowed us to effectively operate at planned throughputs. For about 48 hours ago, we got a ruling from the Canadian Industrial Relations Board that our mitigation actions needed to change. We're obviously very disappointed about this ruling because we don't believe that the ruling takes into account all case law in Canada and we're going to vigorously take all legal actions we can to reverse its decision. But in the interim, we're going to operate under modified mitigation plans, which will slow down our ability to load vessels at planned throughputs. So at this time, it's a little unclear on how much that's going to impact throughput. But I think we've taken a relatively conservative view on that, and we'll have to see how that plays out. But this gets to a bigger issue. I think that the federal government is trying to deal with in its proposed Bill C 39, where labor actions are creating choke points for the Canadian economy, and we need to have a better method of how the government can help labor and companies deal with these actions. So obviously, we're extremely disappointed about how a third-party service providers, labor disputes are impacting our throughput we'll do everything we can to maximize the volumes that we can move through the system. And I think we've put in a fairly healthy contingency in our outlook.

All right. I appreciate that. And maybe taking a look still on global exports, but a little bit longer. Can you maybe provide a little bit of incremental thoughts on how you're thinking about hedging 2027. Just given the Trigon outage, the potential or the planned in-service in a couple of facilities as well as kind of where you're seeing mobile characterized as attractive spreads. Both on the LPG side as well as the transit side as well.

Well, maybe I'll make one quick comment. So these labor disputes have historically on the -- historically, the relatively short lived. And when you get to a 1-month disruption, you're approaching the median, and I think the worst-case scenario we've ever seen is a couple of months. So we don't expect that this is going to impact 2027. But I'll pass it over to Sean to give you more color on how we're thinking about it in '27.

Yes. Thanks, Vern, and thanks, Rob. Yes, I mean, our approach to '27 hasn't really changed to what historically we have done. I mean, at a very high level, we are about 60% tolled -- as we get to the NGL bid season. Our target is to be 80% told or financially hedged for the remainder of the year, and that won't change as we move into '27. We think that is fundamental to the investment proposition here as we think about it. If you start to think about '27, we actually have started to hedge some of that Q1 exposure in advance of that. I think curve remains heavily backwardated, but we are seeing liquidity into that Q1. As we sit here today, we're actually about 75% hedged and/or tooled for that Q1 period at what we would view as being relatively attractive rates. So in all, really no change in how we're going to approach our sort of tolling/hedging philosophy or practice as we move into '27 here.

Next question comes from Patrick Kenny with National Bank Capital Markets.

Thank you. Vern, I wanted to get your thoughts on the change in government in B.C. What this could mean for potentially flexing your capital plan in the province going forward? And any specific projects that you might be able to either rekindle or bring forward based on the new Premier's platform?

Well, obviously, there's been a massive change in the political environment in BC, and we believe that's extremely constructive. I think the premier designate as indicated they this government wants to double LNG by 2032, I think, and then triple it by 2035 that's in line with our kind of our house view on how we see natural gas ramping up and obviously, that provides a lot more liquids for us to export. So I think we'll see -- obviously, we talked about in the call script about how we expect more phases of reef to follow OPT 2. This is also helpful towards our ethane project. And then finally, I think as we see more and more LNG demand, we might see an acceleration of our investments in Northeast B.C. both at North Pine and Townsend and our ability just to continue to add a phase of reef every couple of years post Ott. So it's extremely exciting.

That's great. And then I guess specific to LNG Canada, too, now officially on its way, but still a few years out, of course, in terms of coming online. Can you just update us on how you're thinking about the cadence of adding that extra or incremental G&P capacity, frac capacity, storage and other opportunities to support what you see in terms of both gas and NGL supply growth?

Yes. So we FIDed towns in debottlenecking earlier this year that it will unlock a bunch of liquids at that facility. The LNG Canada producers are big customers for us up there. And I think that will accelerate the timing for when we see a North Pine expansion. As you recall, we have the ability to effectively double our fractionation capacity up there, given we have permits from both the First Nations and the BC provincial government. So we're extremely excited about those products.

Next question from Sam Burwell with Jefferies.

Just a follow-up on the Trigon related labor dispute. Is there any ability for you guys to reroute LPG volumes down to Ferndale and kind of maintain the overall export cadence or help ameliorate the problem?

Sam, it's Randy Toone here. Yes, we are looking at potentially redirecting some of the and some of the LGCs to Ford. But Ferndale is limited on how much capacity it can push out. So it doesn't fully offset. But we believe with the -- like a lower rate to RIPET, we'll still be able to get cargoes out there plus redirecting deferred deal. It is going to be -- it's already reflected in our outlook.

Okay. Understood. And then maybe switching gears a little bit. So I saw the small acquisition that SEMCO made from Excel I mean could we anticipate more material acquisitions within youth going forward or maybe even more broadly than that? Like how would you guys characterize the M&A opportunity set across the whole business?

I think we're excited to be able to acquire that -- those customers from Excel. We were able to do that on extremely attractive financial terms. Generally, that's not something we're able to do in the utility space where assets are trading at high multiples to rate base. So it was kind of an opportunistic situation. But if we're able to acquire additional gas utility assets at a reasonable multiple of rate base, that's something we'll definitely pursue. And then on the midstream side, we're always looking at opportunities. But anything we do needs to be on strategy needs to be financially accretive, needs to be accretive to our long-term growth profile and neutral to our credit rating. So those opportunities are going to be difficult to execute, but we for sure look at everything that comes our way.

Next question from Maurice Choy with RBC Capital Markets.

Just wanted to start by continuing discussion on the levers, Trigon. If this is not a short-lived event, are there actually force mature clauses or other clauses that protect you and your ability to meet your contractual obligations?

Maurice, it's Randy Toone here. As Vern talked about, like labor disruptions don't usually last for an extended period of time. So we believe that's the case. But obviously, we're looking at all options to make sure we -- it doesn't impact pit long term, and we don't believe it will be. And that includes looking at potentially fourth year clauses in the agreements. So.

I think it's very important. As we talk to customers and governments and everyone interested in this, the reality of the global situation is the world is extremely short LPGs right now. Obviously, Canada has been a growing supplier of these global LPGs. And we've seen extremely strong demand from our Asian customers for these LPGs. The feedback we've already seen from these customers is they're highly disappointed in Canada's ability to provide these LPGs because of this labor unrest. So this is something I believe the government is going to have to keep a keen eye on as I mentioned earlier, and this is one of the things I think the federal government is trying to deal with their proposed bill C3.

Understood. And maybe just as a quick follow-up on the guidance for the labor strikes as well as the super El Nino effects. Is there a way that you can quantify what contingencies you're reflected in these outlooks? Or put differently, what would the guidance have been if wasn't for these two elements?

Yes, I'll take that, Maurice. We're not going to give specific numbers. But I mean, as you think about the labor dispute, I think we've answered a couple of questions here. We do think that we've been somewhat conservative burn walk through sort of a typical time line for a dispute like this with more typical being a couple of weeks. As Vern said, probably the median and around close to a month, an sort of an outside case being close to 2 months. I think the way you should look at the way we've approached guidance is basically the worst case based on historical precedent or the outside case, which would be closer to a 2-month outage, which would be or not aged story 2 months with the next month having reduced volumes through the facility. But as Randy touched upon, we're doing everything we can really to try and mitigate that to make sure we can continue to get volume through. But I mean as we approached guidance, I think we would have viewed it as being relatively conservative. From an El Nino perspective, I wouldn't say there is really a big impact there. We would just highlight that as something that there's potential.

Understood. And if I could finish off with a discussion on freight rates. I wonder if you could elaborate a little bit more about the landscape for these rates comparing what you see in Prince Rupert versus, say, what you hear in the Gulf Coast? And given your 2-time charters that you're expecting in 2027, 2029, between now and then what is your exposure to spot rates?