MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (MD&A) dated May 1, 2019 is provided to enable readers to assess the results of operations, liquidity and capital resources of AltaGas Ltd. (AltaGas or the Corporation) as at and for the three months ended March 31, 2019. This MD&A should be read in conjunction with the accompanying unaudited condensed interim Consolidated Financial Statements and notes thereto of AltaGas as at and for the three months ended March 31, 2019 and the audited Consolidated Financial Statements and MD&A as at and for the year ended December 31, 2018.
The Consolidated Financial Statements and comparative information have been prepared in accordance with United States (U.S.) generally accepted accounting principles (U.S. GAAP) and in Canadian dollars, unless otherwise indicated. Throughout this MD&A, references to GAAP refer to U.S. GAAP and dollars refer to Canadian dollars, unless otherwise indicated.
Abbreviations, acronyms and capitalized terms used in this MD&A without express definition shall have the same meanings given to those terms in the MD&A as at and for the year ended December 31, 2018 or the Annual Information Form.
This MD&A contains forward-looking information (forward-looking statements). Words such as “may”, “can”, “would”, “could”, “should”, “will”, “intend”, “plan”, “anticipate”, “believe”, “aim”, “seek”, “propose”, “contemplate”, “estimate”, “focus”, “strive”, “forecast”, “expect”, “project”, “target”, “potential”, “objective”, “continue”, “outlook”, “vision”, “opportunity” and similar expressions suggesting future events or future performance, as they relate to the Corporation or any affiliate of the Corporation, are intended to identify forward-looking statements. In particular, this MD&A contains forward-looking statements with respect to, among other things, business objectives, expected growth, results of operations, performance, business projects and opportunities and financial results. Specifically, such forward-looking statements included in this document include, but are not limited to, statements with respect to the following: expected normalized EBITDA and expected normalized funds from operations for the full year 2019; expected 2019 asset sales of approximately $1.5 to $2.0 billion; growth levels and drivers expected in the three business segments; expectation that Utilities will have the largest contribution to EBITDA; expected in-service date for RIPET; exposure to frac spreads prior to hedging activities; exposure to propane price differential; anticipated tolling arrangements; expected net invested capital expenditures; anticipated segment allocation of capital expenditures in 2019; expected funding sources for 2019 capital expenditure program; estimated costs of growth capital projects; expected in-service dates for growth projects; expected date of regulatory approval and construction of pipeline at Aitken Creek; expected date of construction at Townsend 2B, North Pine, Mountain Valley Pipeline, MVP Southgate Project; expected timing of regulatory approvals and construction activities at Central Penn Expansion; anticipated timing of applications, hearings and decisions before Utilities regulators; expected funding sources for working capital deficiency; future changes in accounting policies; and AltaGas’ long term strategy. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events and achievements to differ materially from those expressed or implied by such statements. Such statements reflect AltaGas’ current expectations, estimates, and projections based on certain material factors and assumptions at the time the statement was made. Material assumptions include: assumptions regarding asset sales anticipated to close in 2019, the U.S/Canadian dollar exchange rate, financing initiatives, the performance of the businesses underlying each sector; impacts of the hedging program; commodity prices; weather; frac spread; access to capital; timing and receipt of regulatory approvals; timing of regulatory approvals related to Utility projects; seasonality; planned and unplanned plant outages; timing of in-service dates of new projects and acquisition and divestiture activities; taxes; operational expenses; returns on investments; dividend levels; and transaction costs.
AltaGas’ forward-looking statements are subject to certain risks and uncertainties which could cause results or events to differ from current expectations, including, without limitation: capital market and liquidity risks; general economic conditions; consumption risk; market risk; internal credit risk; foreign exchange risk; debt service risk; financing and refinancing risk; market value of common shares and other securities; variability of dividends; commitments associated with the regulatory approval of the WGL Acquisition; integration of WGL; growth strategy risk; planned asset sales in 2019; potential sale of additional shares; volume throughput; counterparty credit risk; dependence on certain partners; natural gas supply risk; operating risk; changes in laws; risk management costs and limitations; regulatory; climate change and carbon tax; construction and development; RIPET rail and marine transportation; litigation; infrastructure; cybersecurity, information and control systems risk; external stakeholder relations; composition risk; electricity and resource adequacy prices; interest rates; collateral; indigenous land and rights claims; duty to consult; underinsured and uninsured losses; weather data; service interruptions; rep agreements; Cook Inlet gas supply;
health and safety; non-controlling interests in investments; decommissioning, abandonment and reclamation costs; cost of providing retirement plan benefits; labour relations; key personnel; failure of service providers; technical systems and processes incidents; securities class action suits and derivative suits; return on investments in renewable energy projects; competition; compliance with applicable law; and the other factors discussed under the heading “Risk Factors” in the Corporation’s Annual Information Form for the year ended December 31, 2018 (AIF) and set out in AltaGas’ other continuous disclosure documents.
Many factors could cause AltaGas’ or any particular business segment’s actual results, performance or achievements to vary from those described in this MD&A, including, without limitation, those listed above and the assumptions upon which they are based proving incorrect. These factors should not be construed as exhaustive. Should one or more of these risks or uncertainties materialize, or should assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described in this MD&A as intended, planned, anticipated, believed, sought, proposed, estimated, forecasted, expected, projected or targeted and such forward-looking statements included in this MD&A, should not be unduly relied upon. The impact of any one assumption, risk, uncertainty, or other factor on a particular forward-looking statement cannot be determined with certainty because they are interdependent and AltaGas’ future decisions and actions will depend on management’s assessment of all information at the relevant time. Such statements speak only as of the date of this MD&A. AltaGas does not intend, and does not assume any obligation, to update these forward-looking statements except as required by law. The forward-looking statements contained in this MD&A are expressly qualified by these cautionary statements.
Financial outlook information contained in this MD&A about prospective financial performance, financial position, or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on AltaGas management’s (Management) assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this MD&A should not be used for purposes other than for which it is disclosed herein.
Additional information relating to AltaGas, including its quarterly and annual MD&A and Consolidated Financial Statements, Annual Information Form, and press releases are available through AltaGas’ website at www.altagas.ca or through SEDAR at www.sedar.com.
AltaGas Organization
The businesses of AltaGas are operated by AltaGas and a number of its subsidiaries including, without limitation, AltaGas Services (U.S.) Inc., AltaGas Utility Holdings (U.S.) Inc., WGL Holdings Inc. (WGL), Wrangler 1 LLC, Wrangler SPE LLC, Washington Gas Resources Corporation, WGL Energy Services, Inc. (WGL Energy Services), and SEMCO Holding Corporation; in regards to the Midstream business, AltaGas Extraction and Transmission Limited Partnership, AltaGas Pipeline Partnership, AltaGas Processing Partnership, AltaGas Northwest Processing Limited Partnership, Harmattan Gas Processing Limited Partnership, and WGL Midstream Inc. (WGL Midstream); in regards to the Power business, AltaGas Power Holdings (U.S.) Inc., WGSW, Inc., WGL Energy Systems, Inc. (WGL Energy Systems), and Blythe Energy Inc. (Blythe); and, in regards to the Utility business, Washington Gas Light Company (Washington Gas), Hampshire Gas Company, and SEMCO Energy, Inc. (SEMCO). SEMCO conducts its Michigan natural gas distribution business under the name SEMCO Energy Gas Company (SEMCO Gas), its Alaska natural gas distribution business under the name ENSTAR Natural Gas Company (ENSTAR) and its 65 percent interest in an Alaska regulated gas storage utility under the name Cook Inlet Natural Gas Storage Alaska LLC (CINGSA).
First Quarter Highlights
(Normalized EBITDA, normalized funds from operations, normalized adjusted funds from operations, normalized utility adjusted funds from operations, normalized net income, net debt, and net debt to total capitalization ratio are non-GAAP financial measures. Please see Non-GAAP Financial Measures section of this MD&A.)
· On January 31, 2019, AltaGas completed the sale of its remaining interest of approximately 55 percent in the Northwest Hydro Electric facilities in British Columbia (Northwest Hydro) for net cash proceeds of approximately $1.3 billion, resulting in a pre-tax gain of $688 million. AltaGas remains the operator of the facilities under an operating and maintenance agreement expiring January 31, 2021;
· On February 1, 2019, AltaGas completed the sale of certain non-core Midstream and Power assets in Canada. Cash proceeds for the portion of the sale that closed in the first quarter of 2019 were approximately $88 million;
· On March 21, 2019, AltaGas announced that David Cornhill, founder of AltaGas and Chairman of the Board of Directors, has elected to step down on April 1, 2019 from the Chairman position. The new Chairman, Pentti Karkkainen, has been appointed by the Board of Directors effective April 2, 2019. Mr. Cornhill will remain on the Board, ensuring an orderly transition and continuity;
· Normalized EBITDA was $466 million compared to $223 million in the first quarter of 2018;
· Cash from operations was $427 million ($1.55 per share) compared to $189 million ($1.07 per share) in the first quarter of 2018;
· Normalized funds from operations were $376 million ($1.36 per share) compared to $169 million ($0.96 per share) in the first quarter of 2018;
· Normalized adjusted funds from operations were $367 million ($1.33 per share) compared to $161 million ($0.91 per share) in the first quarter of 2018;
· Normalized utility adjusted funds from operations were $301 million ($1.09 per share) compared to $140 million ($0.79 per share) in the first quarter of 2018;
· Net income applicable to common shares was $809 million ($2.93 per share) compared to $49 million ($0.28 per share) in the first quarter of 2018;
· Normalized net income was $202 million ($0.73 per share) compared to $70 million ($0.40 per share) in the first quarter of 2018;
· Net debt was $8.4 billion as at March 31, 2019, compared to $10.1 billion at December 31, 2018; and
· Net debt-to-total capitalization ratio was 52 percent as at March 31, 2019, compared to 57 percent as at December 31, 2018.
Consolidated Financial Review
|
| Three Months Ended |
| ||
($ millions) |
| 2019 |
| 2018 |
|
Revenue |
| 1,898 |
| 878 |
|
Normalized EBITDA(1) |
| 466 |
| 223 |
|
Net income applicable to common shares |
| 809 |
| 49 |
|
Normalized net income(1) |
| 202 |
| 70 |
|
Total assets |
| 21,563 |
| 10,106 |
|
Total long-term liabilities |
| 10,374 |
| 4,631 |
|
Net additions (dispositions) of property, plant and equipment |
| (1,201 | ) | 66 |
|
Dividends declared(2) |
| 66 |
| 97 |
|
Normalized funds from operations(1) |
| 376 |
| 169 |
|
Normalized adjusted funds from operations(1) |
| 367 |
| 161 |
|
Normalized utility adjusted funds from operations(1) |
| 301 |
| 140 |
|
|
| Three Months Ended |
| ||
($ per share, except shares outstanding) |
| 2019 |
| 2018 |
|
Net income per common share - basic |
| 2.93 |
| 0.28 |
|
Net income per common share - diluted |
| 2.93 |
| 0.28 |
|
Normalized net income - basic(1) |
| 0.73 |
| 0.40 |
|
Normalized net income - diluted(1) |
| 0.73 |
| 0.40 |
|
Dividends declared(2) |
| 0.24 |
| 0.55 |
|
Normalized funds from operations(1) |
| 1.36 |
| 0.96 |
|
Normalized adjusted funds from operations(1) |
| 1.33 |
| 0.91 |
|
Normalized utility adjusted funds from operations(1) |
| 1.09 |
| 0.79 |
|
Shares outstanding - basic (millions) |
|
|
|
|
|
During the period(3) |
| 276 |
| 177 |
|
End of period |
| 276 |
| 178 |
|
(1) Non-GAAP financial measure; see discussion in Non-GAAP Financial Measures section of this MD&A.
(2) Dividends declared per common share per month: $0.1825 beginning on November 27, 2017, and $0.08 beginning on December 27, 2018.
(3) Weighted average.
Three Months Ended March 31
Normalized EBITDA for the first quarter of 2019 was $466 million, compared to $223 million for the same quarter in 2018. Factors positively impacting normalized EBITDA included contributions from WGL, higher equity earnings from Petrogas Energy Corp. (Petrogas), equity income from the investment in AltaGas Canada Inc. (ACI), and the impact of the stronger U.S. dollar on reported results from U.S. assets. These were partially offset by the impact of the initial public offering (IPO) of ACI in 2018, the impact of the sale of the San Joaquin facilities in the fourth quarter of 2018, the impact of the sale of non-core Midstream and Power assets in February 2019, and higher expenses related to employee incentive plans as a result of the increasing share price during the first quarter of 2019. For the three months ended March 31, 2019, the average Canadian/U.S. dollar exchange rate increased to 1.33 from an average of 1.26 in the same quarter of 2018, resulting in an increase in normalized EBITDA of approximately $5 million.
Normalized funds from operations for the first quarter of 2019 were $376 million ($1.36 per share), compared to $169 million ($0.96 per share) for the same quarter in 2018. The increase was mainly due to the same drivers as normalized EBITDA, partially offset by higher interest expense. In the first quarter of 2019, AltaGas received $3 million of dividend income from the Petrogas Preferred Shares (2018 - $3 million) and $1 million of common share dividends from Petrogas (2018 - $1 million).
Normalized adjusted funds from operations (AFFO) for the first quarter of 2019 were $367 million ($1.33 per share), compared to $161 million ($0.91 per share) for the same quarter in 2018. The increase was mainly due to the same drivers as normalized funds from operations and higher cash received from non-controlling interests, partially offset by higher Midstream and Power maintenance capital. In the first quarter of 2019, AltaGas paid $17 million of preferred share dividends (2018 - $16 million).
Normalized utility adjusted funds from operations (UAFFO) for the first quarter of 2019 were $301 million ($1.09 per share), compared to $140 million ($0.79 per share) for the same quarter in 2018. The increase was due to the same drivers as normalized adjusted funds from operations partially offset by higher utility depreciation.
Operating and administrative expenses for the first quarter of 2019 were $350 million, compared to $141 million for the same quarter in 2018. The increase was mainly due to the addition of WGL’s operating and administrative expenses, partially offset by the impact of the ACI IPO in 2018. Depreciation and amortization expense for the first quarter of 2019 was $118 million, compared to $73 million for the same quarter in 2018. The increase was mainly due to depreciation and amortization expense on assets acquired in the acquisition of WGL (the WGL Acquisition), partially offset by the impact of asset sales completed in 2018 and the first quarter of 2019. Interest expense for the first quarter of 2019 was $93 million, compared to $43 million for the same quarter in 2018. The increase was predominantly due to interest on debt assumed in the WGL Acquisition and higher average debt balances.
AltaGas recorded income tax expense of $127 million for the first quarter of 2019 compared to $18 million in the same quarter of 2018. The increase in tax expense was mainly due to tax on the sale of the remaining interest in the Northwest Hydro facilities and tax on WGL’s earnings, partially offset by a tax recovery due to a one-time unitary tax rate adjustment related to the WGL Acquisition.
Net income applicable to common shares for the first quarter of 2019 was $809 million ($2.93 per share), compared to $49 million ($0.28 per share) for the same quarter in 2018. The increase was mainly due to the gain on the sale of AltaGas’ remaining interest in the Northwest Hydro facilities, the same previously referenced factors impacting normalized EBITDA, and higher unrealized gains on risk management contracts, partially offset by higher income tax expense, higher interest expense, and higher depreciation and amortization expense.
Normalized net income was $202 million ($0.73 per share) for the first quarter of 2019, compared to normalized net income of $70 million ($0.40 per share) reported for the same quarter in 2018. The increase was mainly due to the same previously referenced factors impacting normalized EBITDA, partially offset by higher income tax expense, higher interest expense, and higher depreciation and amortization expense. Normalizing items in the first quarter of 2019 reduced normalized net income by $607 million ($2.20 per share) and included after-tax amounts related to gains on sale of assets, change in fair value of natural gas optimization inventory, merger commitment cost recovery due to a change in timing related to certain WGL merger commitments, transaction costs related to acquisitions and dispositions, unrealized gains on risk management contracts, and gains on investments. Normalizing items in the first quarter of 2018 increased normalized net income by $21 million ($0.12 per share) and included after-tax amounts related to losses on investments, transaction costs on acquisitions, financing costs associated with the bridge facility for the WGL Acquisition of $4 million, unrealized gains on risk management contracts, and gain on sale of certain non-core Midstream assets. Please refer to the Non-GAAP Financial Measures section of this MD&A for further details on normalization adjustments.
2019 Outlook
With 2019 being the first full year of operations including WGL, AltaGas expects to achieve consolidated normalized EBITDA of approximately $1.2 to $1.3 billion, and normalized funds from operations of approximately $850 to $950 million. This range is net of asset sales which have closed or are anticipated to close in 2019, including the remaining 55 percent interest in the Northwest Hydro facilities which closed in January 2019 and additional expected 2019 asset sales of approximately $1.5 to $2.0 billion.
Growth is expected in 2019 in the Utilities and Midstream segments, and in the Power segment excluding the impact of asset sales. The Utilities segment is expected to have the largest contribution to EBITDA, followed by the Midstream and Power segments. Specifically for Utilities, a full year of WGL results will be the largest contributor to growth, along with new capital and rate base growth. Growth in the Midstream segment will largely be driven by a full year of WGL results and Ridley Island Propane Export Terminal (RIPET) coming into service, with the first scheduled ship expected in the second quarter of 2019. Recent agreements with Kelt, Black Swan and other producers will see increased use of AltaGas’ integrated infrastructure in Northeastern British Columbia, including the North Pine facility (North Pine). In addition, 2019 will be the first full year of operations for the Central Penn Pipeline and AltaGas’ first full year of results from the Stonewall Gas Gathering System (Stonewall). Finally, the Power segment is expected to be impacted by the non-core power sales completed in 2018, as well as the sale of the remaining 55 percent interest in the Northwest Hydro facilities which was completed in January 2019. This will be partially offset by a full year of contributions from WGL’s existing contracted renewable power business and power marketing business.
The overall forecasted normalized EBITDA and funds from operations include assumptions around asset sales anticipated to close in 2019, the U.S./Canadian dollar exchange rate, and other financing initiatives. Within each segment, the performance of the underlying businesses has the potential to vary. Any variance from AltaGas’ current assumptions could impact the forecasted normalized EBITDA and funds from operations.
AltaGas estimates an average of approximately 10,000 Bbls/d will be exposed to frac spreads prior to hedging activities. For 2019, AltaGas has frac hedges in place for approximately 6,200 Bbls/d at an average price of approximately $40/Bbl excluding basis differentials. Once RIPET is in service, AltaGas will be exposed to the propane price differential between Mont Belvieu and Far East Index for contracts not under tolling arrangements. AltaGas has an active hedging program in place to manage this differential. AltaGas plans to manage the facility such that a majority of annual capacity will be underpinned by tolling arrangements, and expects to reach this objective over the next several years.
Sensitivity Analysis
AltaGas’ financial performance is affected by factors such as changes in commodity prices, exchange rates and weather. The following table illustrates the approximate effect of these key variables on AltaGas’ expected normalized EBITDA for 2019:
Factor |
| Increase or |
| Approximate impact |
Natural gas liquids fractionation spread (1) |
| $1/Bbl |
| 1 |
Degree day variance from normal - U.S. utilities (2) |
| 5 percent |
| 5 |
Change in CAD per US$ exchange rate |
| 0.05 |
| 35 |
FG&P and extraction inlet volumes |
| 10 percent |
| 13 |
RIPET Propane Far East Index to Mont Belvieu spread (3) |
| US$0.02/gal |
| 5 |
(1) Based on approximately 60 percent of frac spread exposed NGL volumes being hedged.
(2) Degree days — U.S. utilities relate to SEMCO Gas, ENSTAR, and Washington Gas service areas. For U.S. utilities, degree days are a measure of coldness determined daily as the numbers of degrees the average temperature during the day in question is below 65 degrees Fahrenheit. Degree days for a particular period are the average of degree days during the prior 15 years for SEMCO Gas, during the prior 10 years for ENSTAR, and during the prior 30 years for Washington Gas.
(3) Assumes RIPET in-service date of early in the second quarter of 2019. The impact on EBITDA due to changes in the spread will vary and will be mitigated through an active hedging program.
Growth Capital
Based on projects currently under review, development or construction, AltaGas expects net invested capital expenditures of approximately $1.3 billion in 2019. The focused and strategic approach to capital expenditures in 2019 will target projects that provide ongoing growth potential, favorable risk profiles, and the strongest risk-adjusted returns with immediate payback, as
AltaGas continues to strengthen its balance sheet. The Utilities segment is expected to account for approximately 60 to 65 percent of total capital expenditures, while the Midstream segment is expected to account for approximately 35 to 40 percent and the Power segment is expected to account for the remainder. Midstream and Power maintenance capital is expected to be approximately $30 to $40 million of the total capital expenditures in 2019. The majority of AltaGas’ capital expenditures for the Utilities segment will focus on accelerated pipe replacement programs in Virginia, Maryland, the District of Columbia and Michigan, new customer additions, and the construction of the Marquette Connector Pipeline. In the Midstream segment, capital expenditures are anticipated to primarily relate to the completion of RIPET, the Townsend expansion, the Aitken Creek integrated development project, the second train of North Pine, and WGL’s investments in the Mountain Valley gas pipeline development and Central Penn Pipeline expansion. The Power segment continues to pursue a capital-light strategy with expenditures focused on selected smaller investments in distributed generation and potential energy storage projects across the United States. The Corporation continues to focus on enhancing productivity and streamlining businesses.
AltaGas’ 2019 committed capital program is expected to be funded through internally-generated cash flow, asset sales, the Dividend Reinvestment and Optional Cash Purchase Plan (DRIP), proceeds from hybrid securities and preferred share offerings, and normal course borrowings on existing committed credit facilities.
Growth Capital Project Updates
The following table summarizes the status of AltaGas’ significant growth projects. A full description of each project is provided in the MD&A for the year ended December 31, 2018.
Project |
| AltaGas’ |
| Estimated |
| Expenditures |
| Status |
| Expected |
Midstream Projects |
|
|
|
|
|
|
|
|
|
|
Ridley Island Propane Export Terminal |
| 70% |
| $283 million (net of partner recoveries) |
| $223 million (net of partner recoveries) |
| The majority of the construction and commissioning activities were completed in the first quarter of 2019. The operational phase has commenced with the introduction of propane feedstock and the first cargo is expected in the second quarter of 2019. |
| Q2 2019 |
Aitken Creek Development |
| 50% |
| $230 million |
| $137 million |
| AltaGas acquired 50 percent ownership in the Aitken Creek North gas plant in the fourth quarter of 2018. Black Swan is progressing construction of the second plant (Nig Creek) which is also 50 percent owned by AltaGas and is expected to be on stream in the fourth quarter of 2019. AltaGas is constructing a natural gas liquids (NGL) pipeline from the Aitken Creek facilities to connect to the Townsend Complex. AltaGas expects to have regulatory approval and begin construction activities in the second quarter of 2019. |
| Q4 2019 |
Townsend 2B including Inga Gas Gathering Pipeline |
| 100% |
| $180 million |
| $27 million |
| Detailed design is well underway. All long lead equipment has been ordered and certain fabrication is in progress. Construction activities are expected to commence in the second quarter of 2019. |
| Q4 2019 |
North Pine |
| 100% |
| $58 million |
| $nil |
| Detailed design is well underway. All major long lead equipment has been ordered. Construction activities are expected to commence in the third quarter of 2019. |
| Q1 2020 |
Mountain Valley Pipeline |
| 10% |
| US$350 million |
| US$301 million |
| Construction is underway. However, there are several pending regulatory and legal challenges that must be resolved before the project can be completed. As at March 31, 2019, approximately 80 percent of the project is complete, which includes construction of three compressor stations and related facilities. |
| Although completion in 2019 is unlikely, target in-service date remains Q4 2019. |
Project |
| AltaGas’ |
| Estimated |
| Expenditures |
| Status |
| Expected |
Midstream Projects, continued | ||||||||||
MVP Southgate Project |
| 5% |
| US$20 million |
| US$1 million |
| Construction is expected to begin late in the first quarter of 2020. Expenditures to date relate to land surveys, land acquisitions, and obtaining permits and regulatory approvals. |
| Late 2020 |
Central Penn Expansion (Leidy South) |
| 22% |
| US$50 million |
| Less than US$1 million |
| Regulatory approvals are expected in the fourth quarter of 2020 with construction anticipated to begin in early 2021. |
| Q4 2021 |
Utility Projects |
|
|
|
|
|
|
|
|
|
|
Accelerated Utility Pipe Replacement Programs — District of Columbia |
| 100% |
| Estimated US$305 million over the five year period from October 2019 to December 2024, plus additional expenditures in subsequent periods. |
| $nil(3)(4) |
| Washington Gas has submitted an application for the second phase of PROJECTpipes to the Public Service Commission of the District of Columbia (PSC of DC). A decision is expected by late September 2019. |
| Individual assets are placed into service throughout the program. |
Accelerated Utility Pipe Replacement Programs — Maryland |
| 100% |
| Estimated US$350 million over the five year period from January 2019 to December 2023, plus additional expenditures in subsequent periods. |
| US$7 million(3) |
| The second phase of the accelerated utility pipe replacement programs in Maryland (STRIDE 2.0) began in January 2019. |
| Individual assets are placed into service throughout the program. |
Accelerated Utility Pipe Replacement Programs — Virginia |
| 100% |
| Estimated US$500 million over the five year period from January 2018 to December 2022, plus additional expenditures in subsequent periods. |
| US$94 million(3) |
| The second phase of the accelerated pipe replacement programs in Virginia (SAVE 2.0) began in January 2018. |
| Individual assets are placed into service throughout the program. |
Accelerated Mains Replacement Programs — Michigan |
| 100% |
| Estimated US$50 million over five year period from 2015 to 2020. |
| US$31 million(3) |
| The third phase of the Accelerated Mains Replacement Program (MRP3) in Michigan expires in May 2020. SEMCO’s May 2019 rate case will include a new five year plan beyond 2020, similar to the current spend of approximately US$10 million annually. A decision is expected in Q3 2019. |
| Individual assets are placed into service throughout the program. |
Marquette Connector Pipeline |
| 100% |
| US$154 million |
| US$17 million |
| Right-of-way (ROW) acquisitions continue with approximately 91 percent of total ROW secured. Additionally, land clearing began in the first quarter of 2019 with 90 percent of trees felled along the pipeline route. |
| Late Q4 2019 |
Power Projects |
|
|
|
|
|
|
|
|
|
|
Distributed Generation Investments - SFGF II, LLC (SFGF II) |
| 65% |
| US$95 million by the end of the commitment period. |
| US$84 million |
| SFGF II was formed to acquire, own and operate distributed generation solar projects. The commitment period for SFGF II ends on September 30, 2019. |
| Q3 2019 |
(1) | These amounts are estimates and are subject to change based on various factors. Where appropriate, the amounts reflect AltaGas’ share of the various projects. |
(2) | Expenditures to date reflect total cumulative expenditures incurred from inception of the projects to March 31, 2019. For WGL projects, this also includes any expenditures prior to the close of the WGL Acquisition on July 6, 2018. |
(3) | The utility accelerated replacement programs are long-term projects with multiple phases for which expenditures are approved by the regulators and managed in five year increments.Expenditures to date only include amounts for the current programs described above, and exclude any expenditures made under prior increments of the programs. Actual regulatory filings may differ from reported amounts. |
(4) | Program is expected to commence in October 2019. |
Non-GAAP Financial Measures
This MD&A contains references to certain financial measures used by AltaGas that do not have a standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other entities. Readers are cautioned that these non-GAAP measures should not be construed as alternatives to other measures of financial performance calculated in accordance with GAAP. The non-GAAP measures and their reconciliation to GAAP financial measures are shown below. These non-GAAP measures provide additional information that management believes is meaningful in describing AltaGas’ operational performance, liquidity and capacity to fund dividends, capital expenditures, and other investing activities. The specific rationale for, and incremental information associated with, each non-GAAP measure is discussed below.
References to normalized EBITDA, normalized net income, normalized funds from operations, normalized adjusted funds from operations, normalized utility adjusted funds from operations, net debt, and net debt to total capitalization throughout this MD&A have the meanings as set out in this section.
Normalized EBITDA
|
| Three Months Ended |
| ||||
($ millions) |
| 2019 |
| 2018 |
| ||
Normalized EBITDA |
| $ | 466 |
| $ | 223 |
|
Add (deduct): |
|
|
|
|
| ||
Transaction costs related to acquisitions and dispositions |
| (12 | ) | (11 | ) | ||
Merger commitment cost recovery |
| 5 |
| — |
| ||
Unrealized gains on risk management contracts |
| 29 |
| 1 |
| ||
Changes in fair value of natural gas optimization inventory |
| (6 | ) | — |
| ||
Non-controlling interest related to HLBV investments |
| (5 | ) | — |
| ||
Gains (losses) on investments |
| 1 |
| (9 | ) | ||
Gain on sale of assets |
| 686 |
| 1 |
| ||
Investment tax credits related to distributed generation assets |
| (2 | ) | — |
| ||
Accretion expenses |
| (2 | ) | (3 | ) | ||
EBITDA |
| $ | 1,160 |
| $ | 202 |
|
Add (deduct): |
|
|
|
|
| ||
Depreciation and amortization |
| (118 | ) | (73 | ) | ||
Interest expense |
| (93 | ) | (43 | ) | ||
Income tax expense |
| (127 | ) | (18 | ) | ||
Net income after taxes (GAAP financial measure) |
| $ | 822 |
| $ | 68 |
|
EBITDA is a measure of AltaGas’ operating profitability prior to how business activities are financed, assets are amortized, or earnings are taxed. EBITDA is calculated from the Consolidated Statements of Income using net income adjusted for pre-tax depreciation and amortization, interest expense, and income tax expense.
Normalized EBITDA includes additional adjustments for unrealized gains on risk management contracts, gains (losses) on investments, transaction costs related to acquisitions and dispositions, merger commitment cost recovery due to a change in timing related to certain WGL merger commitments, gains on the sale of assets, accretion expenses related to asset retirement obligations, distributed generation asset related investment tax credits, non-controlling interest of certain investments to which Hypothetical Liquidation at Book Value (HLBV) accounting is applied, and changes in fair value of natural gas optimization inventory. AltaGas presents normalized EBITDA as a supplemental measure. Normalized EBITDA is frequently used by analysts and investors in the evaluation of entities within the industry as it excludes items that can vary substantially between entities depending on the accounting policies chosen, the book value of assets and the capital structure.
Normalized Net Income
|
| Three Months Ended |
| ||||
($ millions) |
| 2019 |
| 2018 |
| ||
Normalized net income |
| $ | 202 |
| $ | 70 |
|
Add (deduct) after-tax: |
|
|
|
|
| ||
Transaction costs related to acquisitions and dispositions |
| (10 | ) | (9 | ) | ||
Merger commitment cost recovery |
| 5 |
| — |
| ||
Unrealized gains on risk management contracts |
| 22 |
| — |
| ||
Changes in fair value of natural gas optimization inventory |
| (4 | ) | — |
| ||
Gains (losses) on investments |
| 1 |
| (9 | ) | ||
Gain on sale of assets |
| 593 |
| 1 |
| ||
Financing costs associated with the bridge facility |
| — |
| (4 | ) | ||
Net income applicable to common shares (GAAP financial measure) |
| $ | 809 |
| $ | 49 |
|
Normalized net income represents net income applicable to common shares adjusted for the after-tax impact of unrealized gains on risk management contracts, gains (losses) on investments, transaction costs related to acquisitions and dispositions, merger commitment cost recovery due to a change in timing related to certain WGL merger commitments, gains on the sale of assets, financing costs associated with the bridge facility for the WGL Acquisition, and changes in fair value of natural gas optimization inventory. This measure is presented in order to enhance the comparability of AltaGas’ earnings, as it reflects the underlying performance of AltaGas’ business activities.
Normalized Funds from Operations, AFFO and UAFFO
|
| Three Months Ended |
| ||||
($ millions) |
| 2019 |
| 2018 |
| ||
Normalized utility adjusted funds from operations |
| $ | 301 |
| $ | 140 |
|
Add (deduct): |
|
|
|
|
| ||
Utility depreciation and amortization |
| 66 |
| 21 |
| ||
Normalized adjusted funds from operations |
| $ | 367 |
| $ | 161 |
|
Add (deduct): |
|
|
|
|
| ||
Cash received from non-controlling interests |
| (16 | ) | (13 | ) | ||
Midstream and Power maintenance capital |
| 8 |
| 5 |
| ||
Preferred dividends paid |
| 17 |
| 16 |
| ||
Normalized funds from operations |
| $ | 376 |
| $ | 169 |
|
Add (deduct): |
|
|
|
|
| ||
Transaction and financing costs related to acquisitions and dispositions |
| (12 | ) | (13 | ) | ||
Merger commitment cost recovery |
| 5 |
| — |
| ||
Funds from operations |
| 369 |
| 156 |
| ||
Add (deduct): |
|
|
|
|
| ||
Net change in operating assets and liabilities |
| 63 |
| 34 |
| ||
Asset retirement obligations settled |
| (5 | ) | (1 | ) | ||
Cash from operations (GAAP financial measure) |
| $ | 427 |
| $ | 189 |
|
Normalized funds from operations, normalized adjusted funds from operations, and normalized utility adjusted funds from operations are used to assist management and investors in analyzing the liquidity of the Corporation. Normalized funds from operations is calculated based on cash from operations and adjusted for changes in operating assets and liabilities in the period and non-operating related expenses (net of current taxes) such as transaction and financing costs related to acquisitions and merger commitments. Normalized adjusted funds from operations is based on normalized funds from operations, further adjusted to remove the impact of cash transactions with non-controlling interests, Midstream and Power maintenance capital, and preferred share dividends paid. Normalized utility adjusted funds from operations is based on normalized adjusted funds from operations, further adjusted for Utility segment depreciation and amortization.
Funds from operations are calculated from the Consolidated Statement of Cash Flows and are defined as cash from operations before net changes in operating assets and liabilities and expenditures incurred to settle asset retirement obligations. Management uses this measure to understand the ability to generate funds for capital investments, debt repayment, dividend payments and other investing activities.
Funds from operations, normalized funds from operations, normalized adjusted funds from operations, and normalized utility adjusted funds from operations as presented should not be viewed as an alternative to cash from operations or other cash flow measures calculated in accordance with GAAP.
Net Debt and Net Debt to Total Capitalization
Net debt and net debt to total capitalization are used by the Corporation to monitor its capital structure and financing requirements. It is also used as a measure of the Corporation’s overall financial strength. Net debt is defined as short-term debt, plus current and long-term portions of long-term debt, less cash and cash equivalents. Total capitalization is defined as net debt plus shareholders’ equity and non-controlling interests. Additional information regarding these non-GAAP measures can be found under the Capital Resources section of this MD&A.
Results of Operations by Reporting Segment
Normalized EBITDA (1) |
| Three Months Ended |
| ||||
($ millions) |
| 2019 |
| 2018 |
| ||
Utilities |
| $ | 341 |
| $ | 112 |
|
Midstream |
| 107 |
| 71 |
| ||
Power |
| 27 |
| 41 |
| ||
Sub-total: Operating Segments |
| 475 |
| 224 |
| ||
Corporate |
| (9 | ) | (1 | ) | ||
|
| $ | 466 |
| $ | 223 |
|
(1) Non-GAAP financial measure; See discussion in Non-GAAP Financial Measures section of this MD&A.
Revenue |
| Three Months Ended |
| ||||
($ millions) |
| 2019 |
| 2018 |
| ||
Utilities |
| $ | 1,107 |
| $ | 422 |
|
Midstream |
| 451 |
| 371 |
| ||
Power |
| 359 |
| 148 |
| ||
Sub-total: Operating Segments |
| 1,917 |
| 941 |
| ||
Corporate |
| — |
| (1 | ) | ||
Intersegment eliminations |
| (19 | ) | (62 | ) | ||
|
| $ | 1,898 |
| $ | 878 |
|
Utilities
Operating Statistics
|
| Three Months Ended |
| ||
|
| 2019 |
| 2018 |
|
U.S. Utilities |
|
|
|
|
|
Natural gas deliveries - end-use (Bcf)(1) |
| 75.4 |
| 31.0 |
|
Natural gas deliveries - transportation (Bcf)(1) |
| 47.6 |
| 13.4 |
|
Service sites (2) |
| 1,647,461 |
| 582,871 |
|
Degree day variance from normal - SEMCO Gas (%) (3) |
| 5.7 |
| 3.0 |
|
Degree day variance from normal - ENSTAR (%) (3) |
| (9.4 | ) | (1.7 | ) |
Degree day variance from normal - Washington Gas (%) (3) (4) |
| (1.1 | ) | — |
|
(1) Bcf is one billion cubic feet.
(2) Service sites reflect all of the service sites of the U.S. utilities, including transportation and non-regulated business lines. Service sites at March 31, 2018 also include service sites of the Canadian utilities, which were included in the ACI IPO in October 2018.
(3) A degree day for U.S. utilities is a measure of coldness determined daily as the number of degrees the average temperature during the day in question is below 65 degrees Fahrenheit. Degree days for a particular period are determined by adding the degree days incurred during each day of the period. Normal degree days for a particular period are the average of degree days during the prior 15 years for SEMCO Gas, during the prior 10 years for ENSTAR, and during the prior 30 years for Washington Gas.
(4) In certain of Washington Gas’ jurisdictions (Virginia and Maryland) there are billing mechanisms in place which are designed to eliminate the effects of variance in customer usage caused by weather and other factors such as conservation. In the District of Columbia, there is no weather normalization billing mechanism nor does Washington Gas hedge to offset the effects of weather. As a result, colder or warmer weather will result in variances to financial results.
During the first quarter of 2019, AltaGas’ Utilities segment experienced colder weather at SEMCO and warmer weather at ENSTAR compared to the same quarter of 2018. Washington Gas experienced warmer than normal weather. The 2019 increase in customers and transportation represents the addition of Washington Gas natural gas deliveries.
Service sites increased by approximately 1.1 million sites in 2019 compared to 2018 due to the addition of Washington Gas customers and growth in customer base, partially offset by service sites relating to the Canadian utilities which were included in the ACI IPO in the fourth quarter of 2018.
Three Months Ended March 31
The Utilities segment reported normalized EBITDA of $341 million during the three months ended March 31, 2019, compared to $112 million in the same quarter of 2018. The increase was mainly due to WGL earnings of $254 million, equity earnings from ACI, the favorable impact of the stronger U.S. dollar, and colder weather in Michigan. The increase was partially offset by the impact of the ACI IPO in 2018, the 2019 revenue impact related to the federal tax reduction at the U.S. utilities, and warmer weather in Alaska.
Rate Case Updates
On May 15, 2018, Washington Gas filed an application with the Maryland Public Service Commission (PSC of MD) to increase its base rates for natural gas service for approximately US$56 million including approximately US$15 million in annual surcharges currently paid by customers for system upgrades. On December 11, 2018, the PSC of MD approved US$29 million in new revenues and increased the return on equity to 9.7 percent. The difference between the net amount requested of US$41 million and the amount approved of US$29 million was due to the disallowance of certain items. On January 10, 2019, Washington Gas requested a rehearing, alleging two errors in the agency’s final order. The expected timing of an order from the PSC of MD on this appeal is not yet known.
On June 15, 2018, Washington Gas filed an application with the PSC of MD for approval of the second phase of its accelerated natural gas pipeline initiative. The application requested approval of approximately US$394 million in accelerated infrastructure replacements for the 2019 to 2023 period. On December 11, 2018, the PSC of MD approved a US$350 million five-year program.
On January 9, 2019, Washington Gas applied to supplement its 2019 project list with an additional annual spend of approximately US$65 million. On January 25, 2019, the PSC of MD approved the 2019 revised project list and affirmed the annual spend of approximately US$65 million.
On April 22, 2019, Washington Gas filed an application with the PSC of MD to increase base rates and charges for natural gas service for its Maryland customers. The change in proposed rates and charges includes an increase in base rates of approximately US$36 million, partially offset by a reduction of approximately US$5 million in surcharges currently paid by customers for system upgrades.
On July 31, 2018, Washington Gas filed an application with the Virginia State Corporation Commission (SCC of VA) to increase its base rates for natural gas service. This base rate increase, if granted, would be approximately US$38 million, of which approximately US$15 million relates to costs being collected through the monthly SAVE surcharges for accelerated pipeline replacement. The new interim rates are effective, subject to refund, in January 2019. Hearings are scheduled for late April and early May 2019 with a decision expected in late 2019.
On August 31, 2018, Washington Gas filed the 2019 SAVE capital expenditure application with the SCC of VA seeking approval for approximately US$70 million of SAVE capital expenditures in 2019. The SAVE application for 2019 was approved and implemented beginning January 2019.
On December 7, 2018, Washington Gas filed an application with the PSC of DC for the phase 2 PROJECTpipes program requesting approval of approximately US$305 million in accelerated infrastructure replacement in the District of Columbia during the 2019 to 2024 period. A decision is expected in late September 2019.
In April 2018, CINGSA filed a request for an advanced ruling on a redundancy project for approximately US$41 million of capital expenditures and an annual revenue requirement of approximately US$6 million. Reply testimony was filed in September 2018 and a hearing occurred in October 2018. In February 2019, the Regulatory Commission of Alaska issued an order denying the petition in part and closing the docket.
The CINGSA rate case was filed in April 2018 based on a 2017 historical test year, reducing rates by US$4 million due to a lower rate base, lower returns on equity (ROE) and lower federal income tax. The rate case hearing is scheduled for May 2019 with a decision expected in the third quarter of 2019.
Midstream
Operating Statistics
|
| Three Months Ended |
| ||
|
| 2019 |
| 2018 |
|
Extraction inlet gas processed (Mmcf/d)(1) |
| 977 |
| 1,086 |
|
FG&P inlet gas processed (Mmcf/d)(1) |
| 504 |
| 467 |
|
Total inlet gas processed (Mmcf/d)(1) |
| 1,481 |
| 1,553 |
|
Extraction ethane volumes (Bbls/d)(1) |
| 23,431 |
| 31,222 |
|
Extraction NGL volumes (Bbls/d)(1) (2) |
| 38,901 |
| 43,564 |
|
Total extraction volumes (Bbls/d)(1) (3) |
| 62,332 |
| 74,786 |
|
Frac spread - realized ($/Bbl)(1) (4) |
| 16.84 |
| 19.01 |
|
Frac spread - average spot price ($/Bbl)(1) (5) |
| 11.79 |
| 22.25 |
|
Natural gas optimization inventory (Bcf) |
| 13.2 |
| — |
|
WGL retail energy marketing - gas sales volumes (Mmcf) |
| 27,411 |
| — |
|
(1) Average for the period.
(2) NGL volumes refer to propane, butane, and condensate.
(3) Includes Harmattan NGL processed on behalf of customers.
(4) Realized frac spread or NGL margin, expressed in dollars per barrel of NGL, is derived from sales recorded by the segment during the period for frac exposed volumes plus the settlement value of frac hedges settled in the period less extraction premiums, divided by the total frac exposed volumes produced during the period.
(5) Average spot frac spread or NGL margin, expressed in dollars per barrel of NGL, is indicative of the average sales price that AltaGas receives for propane, butane and condensate less extraction premiums, divided by the respective frac exposed volumes for the period.
Inlet gas volumes processed at the extraction facilities for the three months ended March 31, 2019 decreased by 109 Mmcf/d, compared to the same period in 2018. The decrease was primarily due to operational issues upstream at the Younger facility (Younger) and reduced ownership of this facility effective April 2018. Inlet gas volumes processed at the field gathering and processing (FG&P) facilities for the three months ended March 31, 2019 increased by 37 Mmcf/d primarily due to the recently acquired Aitken Creek North facility and additional third party volumes received at the Townsend facilities, partially offset by the disposition of certain non-core facilities in 2018 and early 2019.
Average ethane volumes for the three months ended March 31, 2019 decreased by 7,791 Bbls/d, while average NGL volumes decreased by 4,663 Bbls/d compared to the same period in 2018. Lower ethane volumes were a result of rejecting production at Younger due to uneconomic pricing and lower production at Edmonton Ethane Extraction Plant (EEEP) and Harmattan, partially offset by higher ethane production at Pembina Empress Extraction Plant (PEEP) and Joffre Ethane Extraction Plant (JEEP). Lower NGL volumes were a result of a lower ownership interest at Younger and lower volumes at Harmattan, EEEP and Gordondale, partially offset by additional volumes available from the Townsend facilities.
With the addition of WGL, for the three months ended March 31, 2019, U.S. retail sales volumes were 27,411 Mmcf and natural gas optimization inventory was 13.2 Bcf.
Three Months Ended March 31
The Midstream segment reported normalized EBITDA of $107 million in the first quarter of 2019, compared to $71 million in the same quarter of 2018. The increase was mainly due to contributions from WGL Midstream assets of $35 million, higher equity earnings from Petrogas, and the acquisition of 50 percent ownership in Black Swan’s Aitken Creek North gas facility in the fourth quarter of 2018, partly offset by lower frac exposed volumes at Younger due to operational issues upstream and reduced ownership, the sale of non-core Midstream processing facilities, lower NGL marketing margins, and lower frac spreads. During the first quarter of 2019, AltaGas recorded equity earnings of $22 million from Petrogas, compared to $10 million in the same quarter of 2018. The increase in equity earnings from Petrogas was mainly due to higher pricing and activity levels.
During the first quarter of 2019, AltaGas hedged approximately 6,228 Bbls/d of NGL volumes at an average price of $40/Bbl excluding basis differentials. During the first quarter of 2018, AltaGas hedged 7,500 Bbls/d of NGL volumes at an average price of $33/Bbl, excluding basis differentials. The average indicative spot NGL frac spread for the first quarter of 2019 was approximately $12/Bbl, compared to $22/Bbl in the same quarter of 2018 inclusive of basis differentials. The realized frac spread of approximately $17/Bbl in the first quarter of 2019 (2018 - $19/Bbl) was lower than the same quarter in 2018 due to lower realized frac spreads partially offset by higher frac hedge gains.
During the first quarter of 2019, AltaGas recognized a pre-tax gain of $5 million on the sale of remaining non-core Midstream processing facilities, while in the first quarter of 2018, AltaGas recognized a pre-tax gain of $1 million on the sale of a non-core Midstream processing facility.
Power
Operating Statistics
|
| Three Months Ended |
| ||
|
| 2019 |
| 2018 |
|
Renewable power sold (GWh) |
| 141 |
| 126 |
|
Conventional power sold (GWh) |
| 263 |
| 842 |
|
Renewable capacity factor (%) |
| 12.2 |
| 8.1 |
|
Contracted conventional equivalent availability factor (%) (1) |
| 43.2 |
| 94.5 |
|
WGL retail energy marketing - electricity sales volumes (GWh) |
| 3,080 |
| — |
|
(1) Calculated as the availability factor contracted under long-term tolling arrangements adjusted for occasions where partial or excess capacity payments have been added or deducted.
During the first quarter of 2019, the volume of renewable power sold increased by 15 GWh and the volume of conventional power sold decreased by 579 GWh compared to the same quarter in 2018. The increase in renewable volumes was due to the addition of WGL power generation, partially offset by the October 2018 sale of the Bear Mountain wind facility to ACI and the January 2019 sale of the Northwest Hydro facilities. The decrease in conventional volumes sold was due to the November 2018 sale of the San Joaquin facilities and a longer planned outage at the Blythe facility.
The renewable capacity factor is higher for the three months ended March 31, 2019 due to the addition of WGL power generation, partially offset by the sale of the Bear Mountain wind facility.
The contracted conventional equivalent availability factor was lower for the three months ended March 31, 2019 as a result of the longer planned outage at Blythe.
For the three months ended March 31, 2019, U.S. retail sales volumes were 3,080 GWh.
Three Months Ended March 31
The Power segment reported normalized EBITDA of $27 million during the three months ended March 31, 2019, compared to $41 million in the same period of 2018. Normalized EBITDA decreased primarily as a result of asset sales, including the San Joaquin facilities in November 2018, the ACI IPO in October 2018, and non-core Canadian Power assets in February 2019, as well as the extended planned spring outage at the Blythe facility in the first quarter of 2019. These decreases were partially offset by earnings from WGL’s Power assets of $14 million.
During the first quarter of 2019, AltaGas recognized a pre-tax gain of $688 million on the sale of the remaining interest in the Northwest Hydro facilities. In addition, during the first quarter of 2019, the sale of Canadian non-core Power assets was completed resulting in a pre-tax loss of $6 million, and the sale of a WGL Energy Systems financing receivable was completed resulting in a pre-tax loss of $1 million.
Corporate
Three Months Ended March 31
In the Corporate segment, normalized EBITDA for the first quarter of 2019 was a loss of $9 million, compared to a loss of $1 million in the same quarter of 2018. The increased loss was mainly due to higher expenses related to employee incentive plans as a result of the increasing share price during the first quarter of 2019 and higher information technology related costs.
Invested Capital
|
| Three Months Ended |
| |||||||||||||
($ millions) |
| Utilities |
| Midstream |
| Power |
| Corporate |
| Total |
| |||||
Invested capital: |
|
|
|
|
|
|
|
|
|
|
| |||||
Property, plant and equipment |
| $ | 140 |
| $ | 74 |
| $ | 13 |
| $ | 1 |
| $ | 228 |
|
Intangible assets |
| — |
| 1 |
| — |
| 3 |
| 4 |
| |||||
Long-term investments |
| — |
| 85 |
| — |
| — |
| 85 |
| |||||
Contributions from non-controlling interest |
| — |
| (16 | ) | — |
| — |
| (16 | ) | |||||
Invested capital |
| 140 |
| 144 |
| 13 |
| 4 |
| 301 |
| |||||
Disposals: |
|
|
|
|
|
|
|
|
|
|
| |||||
Property, plant and equipment |
| — |
| (88 | ) | (1,341 | ) | — |
| (1,429 | ) | |||||
Net invested capital |
| $ | 140 |
| $ | 56 |
| $ | (1,328 | ) | $ | 4 |
| $ | (1,128 | ) |
|
| Three Months Ended |
| |||||||||||||
($ millions) |
| Utilities |
| Midstream |
| Power |
| Corporate |
| Total |
| |||||
Invested capital: |
|
|
|
|
|
|
|
|
|
|
| |||||
Property, plant and equipment |
| $ | 17 |
| $ | 54 |
| $ | 4 |
| $ | — |
| $ | 75 |
|
Intangible assets |
| — |
| 1 |
| — |
| 1 |
| 2 |
| |||||
Long-term investments |
| — |
| 19 |
| — |
| — |
| 19 |
| |||||
Contributions from non-controlling interest |
| — |
| (14 | ) | — |
| — |
| (14 | ) | |||||
Invested capital |
| 17 |
| 60 |
| 4 |
| 1 |
| 82 |
| |||||
Disposals: |
|
|
|
|
|
|
|
|
|
|
| |||||
Property, plant and equipment |
| — |
| (7 | ) | (2 | ) | — |
| (9 | ) | |||||
Net invested capital |
| $ | 17 |
| $ | 53 |
| $ | 2 |
| $ | 1 |
| $ | 73 |
|
During the first quarter of 2019, AltaGas’ invested capital was $301 million, compared to $82 million in the same quarter of 2018. The increase in invested capital was primarily due to higher additions to property, plant and equipment and contributions to WGL’s investments in the Central Penn and Mountain Valley pipelines, partially offset by higher contributions from non-controlling interest (representing Vopak Development Canada Inc.’s share of construction costs related to RIPET).
The increase in additions to property, plant and equipment in the first quarter of 2019 was mainly due to capital expenditures related to system betterment and accelerated pipeline replacement programs at Washington Gas, construction costs at RIPET, Townsend 2B and capital expenditures related to WGL’s distributed generation projects.
The invested capital in the first quarter of 2019 included maintenance capital of $1 million (2018 - $3 million) in the Midstream segment and $7 million (2018 - $2 million) in the Power segment. The decrease in maintenance capital for the Midstream segment was primarily due to reduced turnaround expenditures. The increase in maintenance capital for the Power segment was primarily due to planned turnaround maintenance capital at the Blythe facility.
Risk Management
AltaGas is exposed to various market risks in the normal course of operations that could impact earnings and cash flows. AltaGas enters into physical and financial derivative contracts to manage exposure to fluctuations in commodity prices and foreign exchange rates, as well as to optimize certain owned and managed natural gas assets. The Board of Directors of AltaGas has established a risk management policy for the Corporation establishing AltaGas’ risk management control framework. Derivative instruments are governed under, and subject to, this policy. As at March 31, 2019 and December 31, 2018, the fair values of the Corporation’s derivatives were as follows:
($ millions) |
| March 31, |
| December 31, |
| ||
Natural gas |
| $ | (94 | ) | $ | (137 | ) |
NGL frac spread |
| 7 |
| 16 |
| ||
Power |
| (6 | ) | (9 | ) | ||
Foreign exchange |
| — |
| (1 | ) | ||
Net derivative liability |
| $ | (93 | ) | $ | (131 | ) |
Summary of Risk Management Contracts
Type |
| First Quarter Highlights |
Commodity Price Contracts |
| · The average indicative spot NGL frac spread for the three months ended March 31, 2019 was approximately $12/Bbl (2018 — $22/Bbl), inclusive of basis differentials. The average NGL frac spread realized by AltaGas (based on average spot price and realized hedge price inclusive of basis differentials) for the three months ended March 31, 2019 was approximately $17/Bbl inclusive of basis differentials (2018 - $19/Bbl). · For 2019, AltaGas currently has frac hedges in place to hedge approximately 6,200 Bbls/d out of a total of approximately 10,000 Bbls/d at an average price of $40/Bbl, excluding basis differentials. |
|
|
|
Foreign Exchange Contracts |
| · As at March 31, 2019, management has designated US$1.2 billion of outstanding U.S. dollar denominated long-term debt to hedge against the currency translation effect of its foreign investments (December 31, 2018 - US$1.5 billion). · For the three months ended March 31, 2019, AltaGas incurred after-tax unrealized gains of $39 million arising from the translation of debt in other comprehensive income (2018 - $nil). |
|
|
|
Weather Instruments |
| · For the three months ended March 31, 2019, pre-tax gains of less than $1 million (2018 - $nil) were recorded related to heating degree day (HDD) and cooling degree day (CDD) instruments. |
The Effects of Derivative Instruments on the Consolidated Statements of Income
The following table presents the unrealized gains (losses) on derivative instruments as recorded in the Corporation’s Consolidated Statements of Income:
|
| Three Months Ended |
| ||||
($ millions) |
| 2019 |
| 2018 |
| ||
Natural gas |
| $ | 12 |
| $ | (6 | ) |
NGL frac spread |
| (11 | ) | 11 |
| ||
Power |
| 5 |
| (3 | ) | ||
Foreign exchange |
| 1 |
| (1 | ) | ||
|
| $ | 7 |
| $ | 1 |
|
Please refer to Note 22 of the 2018 Annual Consolidated Financial Statements and Note 12 of the unaudited condensed interim Consolidated Financial Statements as at and for the three months ended March 31, 2019 for further details regarding AltaGas’ risk management activities.
Liquidity
As a result of certain commitments made to the PSC of DC, the PSC of MD, and the SCC of VA in respect of the WGL Acquisition, Washington Gas is subject to certain restrictions when paying dividends to AltaGas. However, AltaGas does not expect that this will have an impact on AltaGas’ ability to meet its obligations.
|
| Three Months Ended |
| ||||
($ millions) |
| 2019 |
| 2018 |
| ||
Cash from operations |
| $ | 427 |
| $ | 189 |
|
Investing activities |
| 1,180 |
| (89 | ) | ||
Financing activities |
| (1,627 | ) | (34 | ) | ||
Increase (decrease) in cash and cash equivalents |
| $ | (20 | ) | $ | 66 |
|
Cash from Operations
Cash from operations increased by $238 million for the three months ended March 31, 2019 compared to the same period in 2018, primarily due to higher net income after taxes and a favorable variance in the net change in operating assets and liabilities. The majority of the variance in net change in operating assets and liabilities was due to increased cash flows from changes in inventory due to seasonality at the Utilities, increased cash flows from changes in accounts receivable due to the lower price of gas and asset sales completed in the first quarter of 2019, partially offset by decreased cash flows from accounts payable and accrued liabilities due to lower rates and volumes at the Utilities and as a result of asset sales completed in the first quarter of 2019.
Working Capital
($ millions except current ratio) |
| March 31, |
| December 31, |
| ||
Current assets |
| $ | 2,036 |
| $ | 4,033 |
|
Current liabilities |
| 3,413 |
| 4,102 |
| ||
Working deficiency |
| $ | (1,377 | ) | $ | (69 | ) |
Working capital ratio (1) |
| 0.60 |
| 0.98 |
|
(1) Calculated as current assets divided by current liabilities.
The decrease in the working capital ratio was primarily due to decreases in assets held for sale, inventory and accounts receivable, partially offset by decreases in accounts payable and accrued liabilities, short-term debt and liabilities associated with assets held for sale. AltaGas’ working capital will fluctuate in the normal course of business. The working capital deficiency is expected to be funded using cash flow from operations, proceeds from asset sales, and available credit facilities as required.
Investing Activities
Cash from investing activities for the three months ended March 31, 2019 was $1.2 billion, compared to cash used in investing activities of $89 million in the same period in 2018. Investing activities for the three months ended March 31, 2019 primarily included proceeds of $1.4 billion from asset sales completed in the first quarter of 2019 (including the Northwest Hydro facilities and non-core Canadian Midstream and Power assets) and proceeds of $74 million from the sale of a WGL Energy Systems financing receivable, partially offset by expenditures of approximately $237 million for property, plant, and equipment and intangible assets, and approximately $85 million of contributions to equity investments. Investing activities for the three months ended March 31, 2018 primarily included expenditures of approximately $84 million for property, plant, and equipment and intangible assets, and approximately $19 million of contributions to AltaGas’ equity investments, partially offset by cash proceeds of approximately $9 million for asset dispositions and $5 million for the disposition of an investment.
Financing Activities
Cash used in financing activities for the three months ended March 31, 2019 was $1.6 billion, compared to cash used in financing activities of $34 million in the same period in 2018. Financing activities for the three months ended March 31, 2019 were primarily comprised of net repayments of short and long-term debt of $1.4 billion, net repayments under bankers’ acceptances of $0.7
billion, and dividends of $83 million, partially offset by draws on credit facilities of $0.6 billion, contributions from non-controlling interests of $17 million, and net proceeds from the issuance of common shares of $10 million (mainly from common shares issued through the DRIP). Financing activities for the three months ended March 31, 2018 were primarily comprised of net repayments of short and long-term debt of $248 million and dividends of $113 million, partially offset by borrowings under the credit facilities of $248 million, net proceeds from the issuance of common shares of $66 million (mainly from common shares issued through the DRIP), and contributions from non-controlling interests of $13 million. Total dividends paid to common and preferred shareholders of AltaGas for the three months ended March 31, 2019 were $83 million (2018 - $113 million), of which $10 million was reinvested through the DRIP (2018 - $66 million). The decrease in dividends paid was due to the reduction in dividends on common shares declared in the fourth quarter of 2018, partially offset by more common shares outstanding.
Capital Resources
AltaGas’ objective for managing capital is to maintain its investment grade credit ratings, ensure adequate liquidity, optimize the profitability of its existing assets and grow its energy infrastructure to create long-term value and enhance returns for its investors. AltaGas’ capital structure is comprised of shareholders’ equity (including non-controlling interests), short-term and long-term debt (including the current portion) less cash and cash equivalents.
The use of debt or equity funding is based on AltaGas’ capital structure, which is determined by considering the norms and risks associated with operations and cash flow stability and sustainability.
($ millions) |
| March 31, |
| December 31, |
| ||
Short-term debt |
| $ | 1,027 |
| $ | 1,210 |
|
Current portion of long-term debt |
| 948 |
| 890 |
| ||
Long-term debt(1) |
| 6,492 |
| 8,067 |
| ||
Total debt |
| 8,467 |
| 10,167 |
| ||
Less: cash and cash equivalents |
| (109 | ) | (102 | ) | ||
Net debt |
| $ | 8,358 |
| $ | 10,065 |
|
Shareholders’ equity |
| 7,634 |
| 7,020 |
| ||
Non-controlling interests |
| 143 |
| 621 |
| ||
Total capitalization |
| $ | 16,135 |
| $ | 17,706 |
|
|
|
|
|
|
| ||
Net debt-to-total capitalization (%) |
| 52 |
| 57 |
|
(1) Net of debt issuance costs of $34 million as at March 31, 2019 (December 31, 2018 - $35 million).
As at March 31, 2019, AltaGas’ total debt primarily consisted of outstanding MTNs of $2.6 billion (December 31, 2018 - $2.7 billion), WGL and Washington Gas long-term debt of $2.6 billion, reflecting fair value adjustments on acquisition (December 31, 2018 - $2.7 billion), SEMCO long-term debt of $482 million (December 31, 2018 - $496 million), and $1.8 billion drawn under the bank credit facilities (December 31, 2018 - $3.0 billion) and short-term debt of $1.0 billion (December 31, 2018 - $1.2 billion). In addition, AltaGas had $283 million of letters of credit (December 31, 2018 - $271 million) outstanding.
As at March 31, 2019, AltaGas’ total market capitalization was approximately $4.9 billion based on approximately 275.9 million common shares outstanding and a closing trading price on March 31, 2019 of $17.59 per common share.
AltaGas’ earnings interest coverage for the rolling 12 months ended March 31, 2019 was 1.4 times (12 months ended March 31, 2018 — 1.3 times).
|
|
|
| Drawn at |
| Drawn at |
| |||
Credit Facilities ($ millions) |
| Borrowing |
| March 31, |
| December 31, |
| |||
AltaGas unsecured demand credit facilities (1) (2) |
| $ | 337 |
| $ | 174 |
| $ | 153 |
|
AltaGas unsecured extendible revolving letter of credit facilities (1) (2) |
| 551 |
| 101 |
| 117 |
| |||
AltaGas unsecured revolving credit facilities (1) (2) |
| 3,404 |
| 1,411 |
| 2,890 |
| |||
AltaGas bridge facility (1) (3) |
| — |
| — |
| 113 |
| |||
AltaGas unsecured term credit facility (1) (2) |
| 401 |
| 401 |
| — |
| |||
SEMCO Energy US$200 million unsecured credit facilities (1) (2) |
| 267 |
| 9 |
| 1 |
| |||
WGL US$650 million unsecured revolving credit facility (2) |
| 869 |
| — |
| — |
| |||
Washington Gas US$350 million unsecured revolving credit facility (2) (4) |
| 468 |
| — |
| — |
| |||
|
| $ | 6,297 |
| $ | 2,096 |
| $ | 3,274 |
|
(1) Amount drawn at March 31, 2019 converted at the month-end rate of 1 U.S. dollar = 1.3363 Canadian dollar (December 31, 2018 - 1 U.S. dollar = 1.3642 Canadian dollar).
(2) All US$ borrowing capacity was converted at the March 31, 2019 U.S./Canadian dollar month-end exchange rate.
(3) The remaining balance on the bridge facility was paid in full on February 1, 2019.
(4) Washington Gas has the right to request additional borrowings of up to US$100 million with the bank’s approval, for a total of US$450 million.
WGL and Washington Gas use short-term debt in the form of commercial paper or unsecured short-term bank loans to fund seasonal cash requirements. Revolving committed credit facilities are maintained in an amount equal to or greater than the expected maximum commercial paper position. At March 31, 2019, commercial paper outstanding totaled US$719 million for WGL and Washington Gas (December 31, 2018 - US$840 million).
All of the borrowing facilities have covenants customary for these types of facilities, which must be met at each quarter end. AltaGas and its subsidiaries have been in compliance with all financial covenants each quarter since the establishment of the facilities.
The following table summarizes the Corporation’s primary financial covenants as defined by the credit facility agreements:
Ratios |
| Debt covenant |
| As at |
|
Bank debt-to-capitalization(1) |
| not greater than 65 percent |
| 51.4 | % |
Bank EBITDA-to-interest expense (1) (2) |
| not less than 2.5x |
| 3.1 |
|
Bank debt-to-capitalization (SEMCO)(3) |
| not greater than 60 percent |
| 35.5 | % |
Bank EBITDA-to-interest expense (SEMCO)(3) |
| not less than 2.25x |
| 7.2 |
|
Bank debt-to-capitalization (WGL)(4) |
| not greater than 65 percent |
| 56.4 | % |
Bank debt-to-capitalization (Washington Gas)(4) |
| not greater than 65 percent |
| 43.7 | % |
(1) Calculated in accordance with the Corporation’s US$1.2 billion credit facility agreement, which is available on SEDAR at www.sedar.com. The covenants are equivalent and applicable to all the Corporation’s committed credit facilities.
(2) Estimated, subject to final adjustments.
(3) Bank EBITDA-to-interest expense (SEMCO) and Bank debt-to-capitalization (SEMCO) are calculated based on SEMCO’s consolidated financial statements and are calculated similar to Bank debt-to-capitalization and Bank EBITDA-to-interest expense.
(4) WGL’s bank debt-to-capitalization ratio is calculated based on WGL’s consolidated financial statements.
On September 7, 2017, a $5 billion base shelf prospectus was filed. The purpose of the base shelf prospectus is to facilitate timely offerings of certain types of future public debt and/or equity issuances during the 25-month period that the base shelf prospectus remains effective. As at March 31, 2019, approximately $4.6 billion was available under the base shelf prospectus.
On June 4, 2018, a US$2 billion preliminary short form prospectus for the issuance of both debt securities and preferred shares was filed in Alberta. AltaGas filed a final short form base shelf prospectus on June 13, 2018 both in Alberta and the U.S. This will enable AltaGas to access the U.S. capital markets during the 25-month period that the base shelf prospectus remains effective. As at March 31, 2019, US$2.0 billion was available under the base shelf prospectus.
Related Party Transactions
In the normal course of business, AltaGas transacts with its subsidiaries, affiliates and joint ventures. There were no significant changes in the nature of the related party transactions described in Note 30 of the 2018 Annual Consolidated Financial Statements.
Share Information
|
| As at April 26, 2019 |
|
Issued and outstanding |
|
|
|
Common shares |
| 276,176,432 |
|
Preferred Shares |
|
|
|
Series A |
| 5,511,220 |
|
Series B |
| 2,488,780 |
|
Series C |
| 8,000,000 |
|
Series E |
| 8,000,000 |
|
Series G |
| 8,000,000 |
|
Series I |
| 8,000,000 |
|
Series K |
| 12,000,000 |
|
Washington Gas $4.25 series |
| 150,000 |
|
Washington Gas $4.80 series |
| 70,600 |
|
Washington Gas $5.00 series |
| 60,000 |
|
Issued |
|
|
|
Share options |
| 6,371,978 |
|
Share options exercisable |
| 2,677,348 |
|
Dividends
AltaGas declares and pays a monthly dividend to its common shareholders. Dividends on preferred shares are paid quarterly. Dividends are at the discretion of the Board of Directors and dividend levels are reviewed periodically, giving consideration to the ongoing sustainable cash flow from operating activities, maintenance and growth capital expenditures, and debt repayment requirements of AltaGas.
The following table summarizes AltaGas’ dividend declaration history:
Dividends
Year ended December 31 |
|
|
|
|
| ||
($ per common share) |
| 2019 |
| 2018 |
| ||
First quarter |
| $ | 0.240000 |
| $ | 0.547500 |
|
Second quarter |
| — |
| 0.547500 |
| ||
Third quarter |
| — |
| 0.547500 |
| ||
Fourth quarter |
| — |
| 0.445000 |
| ||
Total |
| $ | 0.240000 |
| $ | 2.087500 |
|
Series A Preferred Share Dividends
Year ended December 31 |
|
|
|
|
| ||
($ per preferred share) |
| 2019 |
| 2018 |
| ||
First quarter |
| $ | 0.211250 |
| $ | 0.211250 |
|
Second quarter |
| — |
| 0.211250 |
| ||
Third quarter |
| — |
| 0.211250 |
| ||
Fourth quarter |
| — |
| 0.211250 |
| ||
Total |
| $ | 0.211250 |
| $ | 0.845000 |
|
Series B Preferred Share Dividends
Year ended December 31 |
|
|
|
|
| ||
($ per preferred share) |
| 2019 |
| 2018 |
| ||
First quarter |
| $ | 0.269380 |
| $ | 0.217600 |
|
Second quarter |
| — |
| 0.238720 |
| ||
Third quarter |
| — |
| 0.249530 |
| ||
Fourth quarter |
| — |
| 0.262770 |
| ||
Total |
| $ | 0.269380 |
| $ | 0.968620 |
|
Series C Preferred Share Dividends
Year ended December 31 |
|
|
|
|
| ||
(US$ per preferred share) |
| 2019 |
| 2018 |
| ||
First quarter |
| $ | 0.330625 |
| $ | 0.330625 |
|
Second quarter |
| — |
| 0.330625 |
| ||
Third quarter |
| — |
| 0.330625 |
| ||
Fourth quarter |
| — |
| 0.330625 |
| ||
Total |
| $ | 0.330625 |
| $ | 1.322500 |
|
Series E Preferred Share Dividends
Year ended December 31 |
|
|
|
|
| ||
($ per preferred share) |
| 2019 |
| 2018 |
| ||
First quarter |
| $ | 0.337063 |
| $ | 0.312500 |
|
Second quarter |
| — |
| 0.312500 |
| ||
Third quarter |
| — |
| 0.312500 |
| ||
Fourth quarter |
| — |
| 0.312500 |
| ||
Total |
| $ | 0.337063 |
| $ | 1.250000 |
|
Series G Preferred Share Dividends
Year ended December 31 |
|
|
|
|
| ||
($ per preferred share) |
| 2019 |
| 2018 |
| ||
First quarter |
| $ | 0.296875 |
| $ | 0.296875 |
|
Second quarter |
| — |
| 0.296875 |
| ||
Third quarter |
| — |
| 0.296875 |
| ||
Fourth quarter |
| — |
| 0.296875 |
| ||
Total |
| $ | 0.296875 |
| $ | 1.187500 |
|
Series I Preferred Share Dividends
Year ended December 31 |
|
|
|
|
| ||
($ per preferred share) |
| 2019 |
| 2018 |
| ||
First quarter |
| $ | 0.328125 |
| $ | 0.328125 |
|
Second quarter |
| — |
| 0.328125 |
| ||
Third quarter |
| — |
| 0.328125 |
| ||
Fourth quarter |
| — |
| 0.328125 |
| ||
Total |
| $ | 0.328125 |
| $ | 1.312500 |
|
Series K Preferred Share Dividends
Year ended December 31 |
|
|
|
|
| ||
($ per preferred share) |
| 2019 |
| 2018 |
| ||
First quarter |
| $ | 0.312500 |
| $ | 0.312500 |
|
Second quarter |
| — |
| 0.312500 |
| ||
Third quarter |
| — |
| 0.312500 |
| ||
Fourth quarter |
| — |
| 0.312500 |
| ||
Total |
| $ | 0.312500 |
| $ | 1.250000 |
|
In connection with the WGL Acquisition, AltaGas assumed Washington Gas’ preferred stock. Washington Gas has three series of cumulative preferred stock outstanding. Dividends declared from the period from closing of the WGL Acquisition to March 31, 2019 were as follows:
$4.25 series Preferred Share Dividends
Year ended December 31 |
|
|
|
|
| ||
(US$ per preferred share) |
| 2019 |
| 2018 |
| ||
First quarter |
| $ | 1.062500 |
| $ | — |
|
Second quarter |
| — |
| — |
| ||
Third quarter |
| — |
| 1.062500 |
| ||
Fourth quarter |
| — |
| 1.062500 |
| ||
Total |
| $ | 1.062500 |
| $ | 2.125000 |
|
$4.80 series Preferred Share Dividends
Year ended December 31 |
|
|
|
|
| ||
(US$ per preferred share) |
| 2019 |
| 2018 |
| ||
First quarter |
| $ | 1.200000 |
| $ | — |
|
Second quarter |
| — |
| — |
| ||
Third quarter |
| — |
| 1.200000 |
| ||
Fourth quarter |
| — |
| 1.200000 |
| ||
Total |
| $ | 1.200000 |
| $ | 2.400000 |
|
$5.00 series Preferred Share Dividends
Year ended December 31 |
|
|
|
|
| ||
(US$ per preferred share) |
| 2019 |
| 2018 |
| ||
First quarter |
| $ | 1.250000 |
| $ | — |
|
Second quarter |
| — |
| — |
| ||
Third quarter |
| — |
| 1.250000 |
| ||
Fourth quarter |
| — |
| 1.250000 |
| ||
Total |
| $ | 1.250000 |
| $ | 2.500000 |
|
Critical Accounting Estimates
Since a determination of the value of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of AltaGas’ Consolidated Financial Statements requires the use of estimates and assumptions that have been made using careful judgment. Other than as described below, AltaGas’ significant accounting policies have remained unchanged and are contained in the notes to the 2018 Annual Consolidated Financial Statements. Certain of these policies involve critical accounting estimates as a result of the requirement to make particularly subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions.
AltaGas’ critical accounting estimates relate to revenue recognition, financial instruments, depreciation and amortization expense, accounting for leases, asset retirement obligations and other environmental costs, asset impairment assessments, income taxes, pension plans and post-retirement benefits, regulatory assets and liabilities, and contingencies. For a full discussion of these accounting estimates, refer to the 2018 Annual Consolidated Financial Statements and MD&A and Note 2 of the unaudited condensed interim Consolidated Financial Statements as at and for the three months ended March 31, 2019.
Adoption of New Accounting Standards
Effective January 1, 2019, AltaGas adopted the following Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (ASU):
· ASU No. 2016-02 “Leases” and all related amendments (collectively “ASC 842”). AltaGas has applied ASC 842 using the modified retrospective approach as of the effective date of the new standard. Comparative information has not been restated and continues to be reported under the previous lease guidance ASC 840. AltaGas has applied the package of transition practical expedients which permitted the Corporation to not reassess (a) whether any expired or existing contracts contain leases, (b) lease classifications for any expired or existing leases, and (c) initial direct costs for any existing leases. In addition, AltaGas applied the transition practical expedient that permitted the Corporation to grandfather its accounting policy for land easements that existed as of, or expired, before January 1, 2019. The transition practical expedient to not separate lease and non-lease components for its building, office equipment, transportation equipment and vehicle leases has been elected for lessee arrangements. The transition practical expedient to not separate lease and non-lease components for its lessor arrangements related to Power assets and Midstream processing facilities has also been elected. AltaGas has applied the short term lease recognition exemption under which lease arrangements with a term of twelve months or less, including extension options that are reasonably certain of being exercised, are exempt from the recognition of a right of use asset and lease liability and recorded as an expense over the term of the lease. This exemption applies to all classes of assets.
On adoption of ASC 842, all operating leases were recognized on the balance sheet. The adoption resulted in an increase to long-term assets of approximately $181 million and an increase to long-term liabilities of approximately $171 million (net of the current portion that is recorded in current liabilities of approximately $23 million). The lease related liabilities were measured using the present value of the remaining minimum lease payments for existing leases discounted using the Corporation’s incremental borrowing rate as of January 1, 2019. For operating leases, the associated right-of-use assets were measured at the amount equal to the lease liabilities on January 1, 2019, adjusted for any prepaid or accrued lease payments and the remaining balance of any lease incentives received. The adoption of ASC 842 did not impact lessor accounting, the consolidated statement of income, or the consolidated statement of cash flow.
Please also refer to Note 13 of the unaudited condensed interim Consolidated Financial Statements as at and for the three months ended March 31, 2019 for further details;
· ASU No. 2017-08 “Receivables — Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The adoption of this ASU did not have a material impact on AltaGas’ consolidated financial statements;
· ASU No. 2017-11 “Earnings per Share and Derivatives and Hedging — Distinguishing Liabilities from Equity: Accounting for Certain Financial Instruments with Down Round Features, Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception”. The amendments in this ASU simplify the accounting for certain equity-linked financial instruments and embedded features with down round features that reduce the exercise price when pricing of a future round of financing is lower. The amendments in this ASU also require entities that present EPS under ASC 260 to recognize the effect of a down round feature in a freestanding equity-classified financial instrument only when it is triggered. The adoption of this ASU did not have a material impact on AltaGas’ consolidated financial statements;
· ASU No. 2018-07 “Compensation — Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting”. The amendments in this ASU expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, with the objective of making the measurement consistent with employee share based payment awards. The adoption of this ASU did not have a material impact on AltaGas’ consolidated financial statements;
· ASU No. 2018-08 “Not-for-Profit-Entities — Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made”. The amendments in this ASU clarify whether a transfer of assets is a contribution or an exchange transaction. The adoption of this ASU did not have a material impact on AltaGas’ consolidated financial statements;
· ASU No. 2018-15 “Intangibles — Goodwill and Other — Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement (CCA) that is a Service Contract”. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The adoption of this ASU did not have a material impact on AltaGas’ consolidated financial statements; and
· ASU No. 2018-16 “Derivatives and Hedging: Inclusion of the Second Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes”. The amendments in this ASU permit the use of Overhead Index Swap (OIS) rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes. The adoption of this ASU did not have a material impact on AltaGas’ consolidated financial statements.
Future Changes in Accounting Principles
In June 2016, FASB issued ASU No. 2016-13 “Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments”. The amendments in this ASU replace the current “incurred loss” impairment methodology with an “expected loss” model for financial assets measured at amortized cost. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. AltaGas is currently assessing the impact of this ASU on its consolidated financial statements.
In August 2018, FASB issued ASU No. 2018-13 “Fair Value Measurement — Disclosure Framework: Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this ASU modify the disclosure requirements on fair value measurements. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on AltaGas’ consolidated financial statements.
In August 2018, FASB issued ASU No. 2018-14 “Compensation-Retirement Benefits-Defined Benefit Plans — General: Disclosure Framework — Changes to the Disclosure Requirements for the Defined Benefit Plans”. The amendments in this ASU modify the disclosure requirements on defined benefit pension and other postretirement plans. The amendments in this update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on AltaGas’ consolidated financial statements.
In October 2018, FASB issued ASU No. 2018-17 “Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities”. The amendments in this Update provide a private-company scope exception to the VIE guidance for certain entities and clarify that indirect interest held through related parties under common control will be considered on a proportional basis when determining whether fees paid to decision makers and service providers are variable interests. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity should apply the amendments retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on AltaGas’ consolidated financial statements.
In March 2019, FASB issued ASU No. 2019-01 “Leases: Codification Improvements”. The amendments in this ASU provide a fair value exception for lessors that are not manufacturers or dealers, clarify the presentation of principal payments received under sales-type and direct finance leases on the statements of cash flows, and clarify transition disclosure requirements for the adoption of ASC 842. The amendments on the fair value exception and on the presentation on the statement of cash flows are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendment on the transition disclosure requirement is effective upon adoption of ASC 842. The adoption of this ASU is not expected to have a material impact on AltaGas’ consolidated financial statements.
Off-Balance Sheet Arrangements
AltaGas did not enter into any material off-balance sheet arrangements during the three months ended March 31, 2019. Reference should be made to the audited Consolidated Financial Statements and MD&A as at and for the year ended December 31, 2018 for further information on off-balance sheet arrangements.
Disclosure Controls and Procedures (DCP) and Internal Control Over Financial Reporting (ICFR)
Management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining DCP and ICFR, as those terms are defined in National Instrument 52-109 “Certification of Disclosure in Issuers’ Annual and Interim Filings”. The objective of this instrument is to improve the quality, reliability, and transparency of information that is filed or submitted under securities legislation.
Management, including the Chief Executive Officer and the Chief Financial Officer, have designed, or caused to be designed under their supervision, DCP and ICFR to provide reasonable assurance that information required to be disclosed by AltaGas in its annual filings, interim filings or other reports to be filed or submitted by it under securities legislation is made known to them, is reported on a timely basis, financial reporting is reliable, and financial statements prepared for external purposes are in accordance with U.S. GAAP.
The ICFR has been designed based on the framework established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
During the first quarter of 2019, there were no changes made to AltaGas’ ICFR that materially affected, or are reasonably likely to materially effect, its ICFR.
It should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurances that any design will succeed in achieving its stated goals under all potential conditions.
Overview of the Business
AltaGas, a Canadian corporation, is a leading North American clean energy infrastructure company with strong growth opportunities and a focus on owning and operating assets to provide clean and affordable energy to its customers. The Corporation’s long-term strategy is to grow in attractive areas across its Utility and Midstream business segments seeking optimal capital deployment. In the Midstream business, the Corporation is focused on optimizing the full value chain of energy exports by providing producers with solutions, including global market access off both coasts of North America via the Corporation’s footprint in two of the most prolific gas plays — the Montney and Marcellus. To optimize capital deployment, the Corporation seeks to invest in U.S utilities located in strong growth markets with increasing capital deployment to support customer additions, system improvement and accelerated replacement programs. AltaGas has three business segments:
· Utilities, which serves approximately 1.6 million customers with a rate base of approximately US$3.7 billion through ownership of regulated natural gas distribution utilities across five jurisdictions in the United States and two regulated natural gas storage utilities in the United States, delivering clean and affordable natural gas to homes and businesses. The Utilities business also includes storage facilities and contracts for interstate natural gas transportation and storage services;
· Midstream, which includes natural gas gathering and processing, natural gas liquids (NGL) extraction and fractionation, transmission, storage, natural gas and NGL marketing, the Corporation’s 50 percent interest in AltaGas Idemitsu Joint Venture Limited Partnership (AIJVLP), an indirectly held one-third ownership investment in Petrogas Energy Corp.
(Petrogas), through which AltaGas’ interest in the Ferndale Terminal is held, an interest in four regulated pipelines in the Marcellus/Utica gas formation in the northeastern United States and WGL’s retail gas marketing business; and
· Power, which includes 1,102 MW of operational gross capacity from natural gas-fired, biomass, solar, other distributed generation and energy storage assets located in Alberta, Canada and 20 states and the District of Columbia in the United States. The Power business also includes energy efficiency contracting and WGL’s retail power marketing business.
Summary of Consolidated Results for the Eight Most Recent Quarters (1)
($ millions) |
| Q1-19 |
| Q4-18 |
| Q3-18 |
| Q2-18 |
| Q1-18 |
| Q4-17 |
| Q3-17 |
| Q2-17 |
|
Total revenue |
| 1,898 |
| 1,727 |
| 1,041 |
| 610 |
| 878 |
| 745 |
| 502 |
| 539 |
|
Normalized EBITDA(2) |
| 466 |
| 394 |
| 226 |
| 166 |
| 223 |
| 213 |
| 190 |
| 166 |
|
Net income (loss) applicable to common shares |
| 809 |
| 174 |
| (726 | ) | 1 |
| 49 |
| (11 | ) | 18 |
| (8 | ) |
($ per share) |
| Q1-19 |
| Q4-18 |
| Q3-18 |
| Q2-18 |
| Q1-18 |
| Q4-17 |
| Q3-17 |
| Q2-17 |
|
Net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 2.93 |
| 0.64 |
| (2.78 | ) | 0.01 |
| 0.28 |
| (0.06 | ) | 0.10 |
| (0.05 | ) |
Diluted |
| 2.93 |
| 0.64 |
| (2.78 | ) | 0.01 |
| 0.28 |
| (0.06 | ) | 0.10 |
| (0.05 | ) |
Dividends declared |
| 0.24 |
| 0.45 |
| 0.55 |
| 0.55 |
| 0.55 |
| 0.54 |
| 0.53 |
| 0.53 |
|
(1) Amounts may not add due to rounding.
(2) Non-GAAP financial measure. See discussion in the “Non-GAAP Financial Measures” section of this MD&A.
AltaGas’ quarter-over-quarter financial results are impacted by seasonality, fluctuations in commodity prices, weather, the U.S./Canadian dollar exchange rate, planned and unplanned plant outages, timing of in-service dates of new projects, and acquisition and divestiture activities.
Revenue for the Utilities is generally the highest in the first and fourth quarters of any given year as the majority of natural gas demand occurs during the winter heating season, which typically extends from November to March.
Other significant items that impacted quarter-over-quarter revenue during the periods noted include:
· Revenue from WGL after the acquisition closed in the third quarter of 2018;
· The weak Alberta power pool prices throughout 2017;
· The weaker U.S. dollar in the second half of 2017 and the first half of 2018 on translated results of the U.S. assets;
· The seasonally colder weather experienced at several of the utilities in the fourth quarter of 2017, throughout 2018, and the first quarter of 2019;
· The commencement of commercial operations on October 1, 2017 at Townsend 2A;
· The commencement of commercial operations at the first train of the North Pine Facility on December 1, 2017;
· Losses on risk management contracts recorded in 2017 and the first half of 2018 related to the foreign currency option contracts entered into to mitigate the foreign exchange risks associated with the cash purchase price of WGL;
· The negative impact on revenue of the Tax Cuts and Jobs Act (TCJA) at the U.S. utilities throughout 2018;
· The impact of the sale of non-core U.S. Power assets in the fourth quarter of 2018;
· The impact of the sale of the Canadian utilities to ACI in the fourth quarter of 2018; and
· The impact of the sale of the Northwest Hydro facilities and non-core Canadian Midstream and Power assets in the first quarter of 2019.
Net income (loss) applicable to common shares is also affected by non-cash items such as deferred income tax, depreciation and amortization expense, accretion expense, provisions on assets, gains or losses on long-term investments, and gains or losses on the sale of assets. In addition, net income (loss) applicable to common shares is also impacted by preferred share dividends. For these reasons, the net income (loss) may not necessarily reflect the same trends as revenue. Net income (loss) applicable to common shares during the periods noted was impacted by:
· The impact of WGL income for the period after the close of the acquisition on July 6, 2018;
· Higher depreciation and amortization expense due to new assets placed into service;
· The unrealized loss of approximately $8 million recognized upon ceasing to account for the Tidewater investment using the equity method in the second quarter of 2017;
· After-tax provisions totaling $84 million recognized in the fourth quarter of 2017 related to the Hanford and Henrietta gas-fired peaking facilities, a non-core Midstream processing facility in Alberta, and a non-core development stage peaking project in California;
· Impact of the TCJA resulting in a decrease in tax expense of approximately $34 million in the fourth quarter of 2017;
· After-tax transaction costs incurred throughout 2017 (totaling $53 million) and 2018 ($50 million) predominantly due to the WGL Acquisition;
· After-tax merger commitment costs of $135 million associated with the WGL Acquisition recorded in the second half of 2018;
· After-tax provisions of approximately $562 million recognized in 2018 primarily related to assets held for sale;
· An income tax recovery of approximately $104 million related to the Northwest Hydro facilities held for sale classification at December 31, 2018;
· The impact of the sale of non-core U.S. Power assets in the fourth quarter of 2018;
· The impact of the sale of the Canadian utilities to ACI in the fourth quarter of 2018; and
The impact of the sale of the Northwest Hydro facilities and non-core Canadian Midstream and Power assets in the first quarter of 2019.