Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the AltaGas Second Quarter 2020 Financial Results Conference Call. My name is Chris, and I'll be your operator for today's call. All lines have been placed on mute to prevent any background noise.
As a reminder, this conference call is being broadcast live on the Internet and recorded. I would now like to turn the conference call over to Adam McKnight, Director of Investor Relations. Please go ahead, Mr. McKnight.
Thanks, Chris. Good morning, everyone. Thank you for joining us today for the AltaGas Q2 2020 financial results conference call. Speaking on the call this morning will be Randy Crawford, President and Chief Executive Officer James Harmelis, Executive Vice President and Chief Financial Officer. We're also joined here this morning by Randy Toon, Executive Vice President and President of our Midstream Business Blue Jenkins, Executive Vice President and President of our Utilities Business and Washington Gas and new to the team, John Morrison, Senior Vice President, Investor Relations and Corporate Development.
As always, today's prepared remarks will be followed by an analyst question and answer period. I'll remind everyone that the Investor Relations team will be available after the call for any follow-up or detailed modeling questions. We'll proceed on the basis that everyone has taken the opportunity to view the press release, that we issued earlier today. And I'll also remind everyone that we will refer to forward looking information on today's call. This information is subject to the risks and as outlined in the forward looking information disclosure on Slide 2 of our presentation, which can be found on our website and more fully within our public disclosure filings on the EDGAR or SEDAR system.
As for the structure of the call, we'll start with Randy Crawford to review some strategic and other focus points, followed by James Harbilas on the financial results and outlook. Then we'll turn it over for a healthy Q and A session. With that, I'll now turn the call over to Randy Crawford.
Thank you, Adam, and good morning, everyone. AltaGas delivered strong second quarter results and continued to perform well both financially and operationally, while managing the ongoing impacts of COVID-nineteen pandemic. Despite the challenges created by the pandemic, our 2nd quarter normalized EBITDA adjusted for prior year sales, asset sales increased by more than 13% versus the prior year comparable quarter and we are well positioned to meet our overall objectives for the year. We continue to be pleased with the resilience and durability that our Midstream and Utility businesses have exhibited. We believe this is a testament to our diversified platform and our purposeful actions that we have taken over the past 18 months to focus the company, de risk the platform and reduce financial leverage.
I am proud of the fact that our dedicated workforce has been able to maintain safe and reliable operations, continue to deliver critical energy to our customers and honor our social and moral contract with the communities we serve. This feat was only possible through their tireless efforts, adaptability and our valued vendor partners. Our people are the heart of this company and their spirit and resilience ensures my confidence that we will continue to execute and maintain our commitment to safety and operational excellence. At AltaGas, we have an unwavering commitment to our core values. It's our approach to governance and oversight combined with how we invest in and support our people, our customers, our communities and the environment that will allow us to build both a a sustainable and financial successful future.
We are committed to diversity and inclusion. Diverse and inclusive teams are better positioned to deliver more positive business results for the communities that we serve. Our commitment to having a diverse workforce and inclusive culture is not new and our diversity metrics reflect the communities we serve. We remain committed to continue our efforts to build more diverse and inclusive teams going forward. Our utility businesses continued its strong execution during the quarter.
Our focus on operational excellence at WGL continues to progress well with the year to date operating income up nearly 10% versus the prior year comparable period. Our transmission and distribution systems continue to operate in line with our high reliability standards. This strong execution is a result of the capital investments we have made over the past few years through our accelerated pipeline replacement program and our renewed focus on operational excellence to enhance our customer value proposition, provide outstanding customer service and clean energy solutions. We remain committed to continue our history of proven energy innovation and focus on environmental, social and governance issues or ESG. Both Baltic Gas and Washington Gas have excelled in bringing new clean energy sources to customers.
Of note, WGL has filed with the Washington DC Commission our plan to deliver our commitment to help Washington DC and our world to meet future climate goals. The plan builds on the foundation of key ESG elements we have been focused on for more than 25 years. Through collaboration with the district to implement the steps toward decarbonization, it provides us the opportunity to continue to leverage our resilient, fast and established energy delivery and storage system to reduce emissions while providing affordable and reliable energy. Our plan promotes customer energy efficiency and savings, builds and maintains a modern infrastructure for today and the future, and introduces carbon free fuels such as renewable natural gas and hydrogen. This includes investing in and piloting some of these emerging technologies and will maintain and enhance the region's position as responsible climate leaders.
Our Midstream segment continues to leverage our unique structural advantage to export cleaner energy to Asia and expand our footprint in Northeast BC. RIPET celebrated its 1st year anniversary of being operational in the quarter and had another strong performance with the terminal contributing $30,000,000 in normalized EBITDA. In Q2, we reported nearly 42,000 barrels a day of Canadian propane to Asia. Spread across 7 ships. We were also very close to loading an 8 ship at the end of June, but that was pushed to July 1 July 2 and will now be captured in the Q3.
With strong execution from the Midstream team and the work we are doing with our strategic partners to bring operations and logistics together, we remain confident that we will be able to hit our 50,000 barrels a day export target before year end. This business is well positioned to continue to deliver ongoing financial performance with approximately 70% of our midstream normalized EBITDA being underpinned by take or pay and fee for service agreements. In addition, 86% of RIPET's 2020 expected export volumes are underpinned by tolling agreements or hedge price contracts. We were also pleased to see the transaction announced last week where kelp exploration, one of our high quality customers in Northeastern BC sold its Inge assets to ConocoPhillips for more than $500,000,000 We look forward to working with ConocoPhillips as the company expands its presence in the region. The transaction validates our thesis behind building a leading midstream presence in Northeastern BC and further positions us to lean on recent CapEx deployments, including the North Pine and Townsend expansions that came online in the quarter, as well as RIPET to deliver stable results.
We're excited about the opportunity to expand our LPG export footprint and midstream presence through our acquisition of an increased ownership of PetroGas, Confident that this transaction will create value for our shareholders and customers. It will expand our midstream value proposition. Through the increase of additional assets at Ferndale and Port Saskatchewan. We will continue to advance our strategic goal towards operating a fully integrated logistics network that underpins our position as a leading midstream company. We continue to focus on operational excellence business model, improving our financial returns and driving value within our existing core assets.
We are building a resilient business that is focused on creating durable and expanding earnings. There is simply no better way to generate value for our shareholders than improving the return on capital that has already been deployed and ensuring a return above our cost of capital on all new organic investment. We are immensely proud of what we have accomplished in the past 18 months. There is more good work left to be done and we look forward to continuing that work. We believe there's a uniqueness in a diversified model.
We have the opportunity for industry leading rate base growth at our utilities. We are positioned to be able to internally fund the growth of our utilities rate base and reduce debt through the significant excess free cash flow coming from our strong and growing midstream business and redeploy a portion of those funds into our profitable investment in our rate base growth at our utility operations. Having the ability to operate a self funding model with the opportunity to profitably execute on one of the highest rate base growth in the industry is a rarity and we're excited for the opportunity. We remain committed to continue adding shareholder value. Our actions will follow the well defined strategy that we've laid out.
The journey to achieving operational excellence is continuous and we are relentlessly evaluating what other levers we may pull with a driven and creative team that is focused on continuous improvement. Overall, we are pleased with the progress we've made so far in 2020. Heading into the second half of the year, we believe we are well positioned to achieve the previously disclosed full year expectations and are well positioned for profitable earnings growth into the future. In summary, we are pleased with the 2nd quarter operating and financial results and the ongoing resiliency of the platform. We firmly believe our utilities in our utilities infrastructure investment program.
It continues our commitment to improve safety and provide reliable value to our customers and positions us to create a more carbon neutral environment. We have the unique opportunity to grow our midstream business through our strategic footprint in Northeast BC and our ability to increase the export of Canadian propane to Asia. Our recent investments in Townsend, North Pine and RIPET position us to capture significant free cash flow that will provide us the opportunity to grow our utilities rate base, reduce debt and increase dividends. And with that, I will turn the discussion over to James.
Thank you, Randy, and good morning, everyone. Looking at the financial highlights of the Q2, our diversified platform continued to provide predictable and reliable performance. Within the midstream segment, we realized continued strong operations at RIPET, including record export volumes in the quarter, which aided by contributions from the Townsend 2B and North Pine expansions. Within our Utility segment, results reflected the normal seasonal slowdown in energy demand that is associated with the spring summer months. Positively, we realized growth across each of our regulated utilities driven by 2019 rate cases and continued utilities driven by 2019 rate cases and continued spending in our accelerated replacement programs.
The most significant headwind in the quarter was lower margins within our retail business, which was underpinned by COVID-nineteen impacts and pressures on some of our commercial and industrial customers. The business unit is a small component of our platform, representing approximately 3% of 2020 estimated EBITDA. Normalized EBITDA came in at $206,000,000 for the quarter, slightly below Q2 2019 levels of $211,000,000 Excluding lost EBITDA of approximately $29,000,000 associated with the non core asset sales, our remaining businesses grew by approximately 13% year over year. Normalized net income for the Q2 was $17,000,000 or $0.06 per share, up considerably from $1,000,000 in Q2 2019. Overall, lower interest and depreciation and amortization expenses were partially offset by higher income taxes.
Interest expense was down approximately $12,000,000 year over year on lower debt balances as a result of the deleveraging work we completed over the past year combined with lower interest rates on refinancings. Depreciation and amortization expense was lower by approximately $14,000,000 year over year, primarily due to asset sales and a one time adjustment related to the termination of a natural gas contract for purchase commitments in the U. S. Midstream business. Finally, income taxes were higher by $10,000,000 largely due to higher earnings in the quarter.
Normalized funds from operation were up approximately 18% year over year to $141,000,000 or $0.51 per share due to lower current interest expense and lower current income tax expense. During the quarter, we successfully refinanced all our remaining 2020 maturities through 2 debt financings. This included SEMCO completing a private placement of US450 $1,000,000 of first mortgage bonds on April 21 and AltaGas closing a $500,000,000 issue of senior unsecured notes on June 10. These tuitions combined with lower interest rates are expected to result in interest expense savings of approximately $9,000,000 in 2020 and roughly $14,000,000 on an annualized basis. We also continue to make progress on our strategy to focus the business.
In June, we entered into a stock purchase agreement with Clarion Energy to sell US47 million dollars less than for gross proceeds of US47 $1,000,000 less closing working capital adjustments. Although the transaction was smaller in scale compared to past Normalized EBITDA within the utility segment was $80,000,000 for the quarter, slightly below Q2 2019. As I previously mentioned, growth at our regulated utilities was driven by our 2019 settled rate cases, ARP spending and strong operational execution, which was partially overshadowed by COVID-nineteen related impacts, including lower margins in our retail business. As a reminder, approximately 70% of our regulated utilities earnings are protected through decoupling and fixed billing charges. And all the jurisdictions where we operate have approved the creation of regulatory assets to allow for the recovery of incremental costs related to COVID-nineteen.
We are tracking these costs and our lost revenue due to the pandemic, and we will continue to work with our regulators on the definitions and treatment of recoverable impacts within those regulatory assets. We anticipate that a portion of our COVID-nineteen related impacts within our regulated utilities will be recoverable down the road. However, there will be a timing lag associated with these recaptures. At the regulated utilities, WGL's normalized EBITDA was approximately $44,000,000 for the 2nd quarter, up $3,000,000 year over year on higher revenue from the Maryland and Virginia rate cases and higher accelerated pipe replacement program spending. This growth was partially offset by the cancellation of late fees and service charges revenue due to regulatory orders that suspended this activity in our jurisdictions as a result of COVID-nineteen.
We also experienced less usage for C and I customers in certain jurisdictions that don't benefit from decoupling. In Michigan, SEMCO contributed $21,000,000 to normalized EBITDA in the 2nd quarter, up $3,000,000 year over year. Higher rates associated with the 2019 rate case and colder weather were partially offset by lower customer usage. NSTAR and Singhsa contributed $17,000,000 of normalized EBITDA for the quarter, which was in line with last year and our expectations. Lastly, in the Utilities segment, normalized EBITDA from the Retail business was lower by $7,000,000 year over year, primarily due to lower margins associated with COVID-nineteen.
This is where we saw some of the largest impact of the pandemic, but we do not expect this to result in any long term or lasting impacts on the platform. All in all, we are pleased with the performance of utilities business and the stability that it continues to demonstrate. Looking ahead to the remainder of the year, we believe the largest of COVID-nineteen related impacts within our regulated utilities platform are behind us, but we caveat that by acknowledging that we are living in uncertain times as a result of the pandemic that change from week to week. Within the retail business, things have started to improve and the 3rd and 4th quarters are expected to exhibit performance that is pushing back towards more traditional operating patterns. Within the Midstream segment, 2nd quarter normalized EBITDA was $111,000,000 up approximately 9% over Q2 2019.
Factoring in lost EBITDA of approximately $14,000,000 associated with RIPET generated approximately
$
RIPET generated approximately $30,000,000 of normalized EBITDA in the second quarter on exports of nearly 40 2,000 barrels per day spread across 7 ships. This equates to a blended EBITDA margin of approximately $8 per barrel. Approximately 30,000 barrels of RIFET's 2nd quarter export volumes were hedged at an average FEI to Mont Belvieu spread of approximately US9 dollars per barrel. Fractionation and liquids handling volumes increased in the Q2 due to the North Pine expansion and the Townsend deep cut facility that were brought into service earlier this year. Growth was partially offset by lower volumes at Hermaton due to reduced upstream activities and shut ins that were associated with low commodity prices.
Positively, we have seen much of those volumes come back in recent weeks as shut ins have been brought back online. Gas processing volumes were modestly lower in the second quarter versus the same quarter last year. New volumes at the Knig Creek and Townsend Deep Cut facilities and higher interruptible volumes at Gordondale were more than offset by lower volumes at Blair Creek and the Townsend Shallowcut facilities as well as lower volumes at the extraction facilities due to reduced upstream activity. We have seen volumes improve at our facilities to start Q3. During the Q2, we recorded equity earnings of $7,000,000 from Petrogas compared to $11,000,000 in the same quarter of 2019.
The decrease was due to the slowdown in industry activity related to COVID-nineteen, lower export volumes and lower commodity prices and realized margins. Positively, demand for North American propane in Asia remains strong and this should drive improvements at petrogas in the second half of
the year. Overall,
our Midstream business continues to deliver strong results despite the economic challenges that the entire industry is facing. We continue to see healthy throughput volumes at our facilities, which we believe is a function of the quality and location of our assets as well as AltaGas being partnered with high quality clients and operating an integrated value chain that links our customers to premium export markets in Asia. We remain on track to hit our 50,000 barrel per day export target by year end with over 85% of RIPET's expected 2020 export volumes either operating under tolling agreements or hedged. As such, we continue to expect strong and predictable results from RIPET through the second half of the year. Volumes have been constructive through the first half of twenty twenty and we are optimistic that the recent momentum in crude and NGL pricing will help mitigate what could have been more pronounced upstream spending declines over the next 12 to 18 months.
In the second half of the year, we anticipate that processing volumes will improve towards the levels that we were expecting earlier in the year, which we have seen play out in recent weeks, with much of this production linked to our recent facility expansions and the associated ramp up in customer throughput at these facilities. We have hedges in place for approximately 100% of our frac exposed NGL volumes at a blended rate of $29 per barrel. Our $900,000,000 2020 capital program remains unchanged with approximately 75% to 80% directed towards the utility business. Roughly 80% of that utility's CapEx is being targeted to accelerated replacement programs, while maintenance spending is largely being calibrated to match depreciation. Most of our 2020 midstream CapEx spending has already been deployed on the Townsend and North Pine expansions, which are both now in service contributing to stable operations and earnings.
We ended the 2nd quarter with $6,800,000,000 in net debt, down from 7 $200,000,000 at the end of 2019. Our self funded 2020 capital plan remains unchanged with the only item that could materially alter that spend profile being the Petrogas transaction where we continue to work through the valuation process. As we have said in the past, although our funding plan is not dependent on any further asset sales, we will continue to look at non core divestitures opportunistically as the market moves back to a more normal state in an effort to continue to strengthen the balance sheet. The largest remaining non core assets in our portfolio includes our 10% interest in the Mountain Valley Pipeline and our approximate 5,000 Megawatt Blythe natural gas fired power generation asset in Southern California. And while the total cost estimates on the Mountain Valley Pipeline have seen cost escalation in recent years, we remind investors that our capital commitment for our 10% stake has been capped at US352 $1,000,000 with no more cash to be deployed on our part, which makes our ownership stake a unique asset.
The project is currently 92% complete with only the Appalachian Trail Crossings remaining, while 2 recent favorable Supreme Court rulings have significantly derisked the project leading to revised in service date of early 2021. As we have said in the past, continue to maintain significant financial flexibility with AltaGas' excess liquidity expected to exceed $4,000,000,000 at 2020 year end. In summary, we're happy with how our Midstream and Utilities businesses have performed through the first half of the year with only marginal impacts associated with the global pandemic. And while the macro set is naturally opaque and we continue to monitor COVID closely, we are pleased with the resilience and durability of the platform experienced to date. We also believe that similar high level trends should be exhibited in the back half of the year and as such we are reiterating 2020 guidance and expect to land in the range of normalized EBITDA of $1,275,000,000 to $1,325,000,000 and normalized EPS
of $1.20 to $1.30 per share. And with that, we'd like
to turn it over to the operator for the Q and A session.
Thank you. Ladies and gentlemen, we will now conduct the analysis question and answer session. Our first question comes from Rob Hope with Scotiabank. Your line is open.
Afternoon, everyone, or morning, if you're on the West. Thanks for taking the question. First one's on RIPET. So we saw a ship kind of slip into July, but your July volumes have been quite strong. As you look into August September and I guess the balance of the year, is it are you targeting kind of that 2 to 3 a month to get to the 50,000 barrels a day for the rest of the year?
And if so, kind of what are your key constraints right now there?
Thank you, Rob. Thanks for the question and good morning and afternoon to you as well. I think good morning. Look, we've experienced increasing Canadian demand and access to our unique capability and the team is doing an excellent job in demodlenecking. So I'm very optimistic about where we're headed.
But I'm going to let Randy go through and answer a little bit more detail about some of the actions we're taking to drive increased throughput and meet the demand of our customers. Randy?
Thanks, Randy. So we the 8th ship did go into Q3 and if that ship was loaded at the end of Q2, we would have been closer to that 50,000 barrel bid level. So the goal is to do 8 ships a quarter. And with this ship going into Q3, the goal would be to do 9 ships in Q3. But we do have the supply and now it's just optimizing logistics to make it work.
All right. That's helpful. And then turning over to the utilities, how are you balancing your cost containment initiatives in a COVID world? And I guess secondly, there is, do you think you could get resolution on cost recovery on some of these COVID costs by the end of the year?
Well, Rob, I think that, I think as James had said, with particular these costs, we're coming into our kind of off peak periods and we think most of this is behind us. So again, we've got a filing in August to update Maryland on the cost structures that were and some of the questions. So I think there hasn't been a formal way of proceeding to recover these costs, but we've had pretty clean orders on the deferral and we're working through the timing of the recovery mechanisms. But overall, not overly material clearly as to where we are now. On your second question, in terms of how we what I would say about the our operational effectiveness journey, if you will, that we have created we've got a really creative team that's focused on the continuous improvement.
And I think they've done an excellent job. But it does require the ability to identify new technologies and take cost out over time. And we don't I don't want to estimate that requires in terms of culture and focus to implement these new technologies and take cost out over time. But so there's work to do, but Blue has pulled together a team that is coming up with so many creative and great ideas. So our discipline is there.
It's our creativity, our innovation commitment and we are going to improve those costs, improve service and create value to our customers. I think that working with our customers, the commissions, I think we're going to be able to meet our targets of reaching our allowed return into 2021.
All right. Appreciate the color. Thank you.
Our next question is from Jeremy Tonet with JPMorgan. Your line is open.
Hi. This is Joe on for Jeremy. Wanted to start out with the ConocoPhillips, Kelk acquisition and what that means for you guys. So are you have you had any discussions with Conoco yet? And if are you just thinking that increases volumes to your gas plants or allows for potential expansions longer term?
I think obviously the transaction hasn't been closed and so we have not had a great deal of detailed discussions. But clearly ConocoPhillips has a joining acreage in the region. We have had discussions with them and we're excited about them coming in. I think as I said in my we've got we've got firm commitments that we had previously had from Kelp and Conoco will step in those shoes. So we're excited about that.
It's difficult to predict how quickly volumes will come on with the environment, increased volumes that is, but over time we're very excited about it.
Thanks. That's helpful. And then maybe could you also just update us on if you've had any recent discussions on selling the MVP stake and the HCP cancellation, if you think that could potentially garner any interest there either for someone to acquire the stake or getting additional commitments?
Yes. Good question. I mean, look, I've been consistently said that we believe strongly in the Mountain Valley Pipeline project that there is an absolute essential need for that project. James mentioned in his prepared remarks that we're pleased with the Supreme Court's ruling regarding the Appalachian Trail authorization. And we expect the issuance of some revised biological opinion shortly.
So again, so assuming the timing resolution of those outstanding permits, I think that it's targeted to be in full in service during 20 21. So from our perspective, the asset is clearly being de risked. We've defined it as non core and we will work through the year to see if at the end of the day we could get full value for that. I mean, I've said previously that we positioned our company to if we are going to monetize our non core assets, we are not going to be taking below market value for those assets. So we're well positioned to do that.
But clearly, as you point out, the recent order and the importance of MVP to the marketplace has certainly increased and just underscores the value, quite frankly, of pipelines that are in the ground. As we look at it, that's I think that clearly demonstrates even if you think about it, the value of our export facilities, it's very hard to replicate those assets. And we feel the same way with the completion of MVP. Thank
you. That's good to hear.
Our next question comes from Robert Catellier with CIBC Capital Markets. Your line is open.
Primarily follow-up questions here, but I think I heard you say effectively you don't expect any significant impact on your earnings at the utilities from some of the accruing you're going to do for cost related to COVID. But then there's the question of the recovery period and so the impact on cash flow. Can you just give a comment on what impact you think it might have on cash flow or credit metrics? It sounds like it wasn't material from your previous comments.
No. Since we get out of the Q1, right, which is our seasonally high quarter from a revenue perspective, and we're in our off peak season. So I'll let James talk about that, but relatively minor, but I think he laid out the specific numbers.
James, do you want
to go over those quickly?
Yes, Rob, it's James. With respect to COVID impact, I guess it's important for us to break it out into 2 categories, right? I mean, we did touch on the fact that there were certain regulatory orders that suspended the charging of late fees and service charges, and that was about $7,000,000 to $8,000,000 of revenue impact and we're tracking those and we'll bring those forward for consideration by the regulators in the future. And then we had obviously some bad debts and other direct costs in operations that totaled about $5,000,000 that we put into a regulatory asset account that we're going to bring forward for future collection and consideration from the regulators. In terms of your broader question on the impact to AR or a slowdown in collections, perhaps we've seen a working capital unwind in Q1 and Q2.
We haven't seen a considerable deterioration in aging at this point, although that's something that we'll continue to monitor. So we haven't seen other than the usual build of some working capital to build storage at our utilities, we haven't seen a considerable deterioration in the aging of AR at this point.
Okay. You gave some pretty good color on your hedging position. I wondered if you could talk a little bit more about what happens beyond 2020. I don't know if you can address how much of the capacity we'll be tolling next year, how much you've hedged or how much you might have merchant risk?
Sure. Let me go ahead and address it as best I can here. So right now, we have about 30% of our 2021 volumes hedged through our tolling agreements. When we've had a recent improvement in the forward curve around Cal 21, so it's trading north of $8.80 a barrel. That's the FEI to Mount Bellevue spread.
And so we've begun to layer in hedges for our expected 2021 merchant volumes, and we would expect to be 60% to 80% hedged as we entered into 2021. Now with respect to your broader question about tolling and the derisking of the asset over the long term, it's a major driver for us. We've experienced, as I said, increased demand access, this unique capability. And I feel good about it, because we're consistently being approached by launch aggregators who want access to this unique capability. So we're not prepared to go beyond where we are today, but in terms of that guidance, but I think you can tell by my tone that we're optimistic that we'll continue to move toward a tolling arrangements over the next year.
Yes. And maybe just a little bit more color on the beyond the tolling, just the structure of the market. The spreads have come in a bit. So any update you can give us on the fundamentals and your expectations as to how they might have been impacted year to date and how they might improve going into 2021 for the Asia Fire East spread?
Sure. We continue to see some improvement in the spreads and the volumes in the basin are constructive, begin to be constructive here in the second half. And so we're expecting processing volume to improve. We're seeing strong demand at RIPA. We're seeing volumes come back.
Really at the end of the day, talked about this a great deal, but the benefits of our structural shipping advantage, and so shipping cost as margins contract go down, right. So overall margins can necessarily improve. And so we've got some shipping hedges as well. But overall, I think you've got the best market in Canada for propane. You're going to continue to see an overwhelming of the local market as a lot of the demand based projects are pushed out.
And so we're in the long run, we continue to be bullish in expanding and derisking these volumes and we continue to see robust and long term fundamentals of supply and demand imbalance in North America. So we're going to continue to lock in the spreads, but we see that continuing in the long term.
Okay. That's very helpful. Thank you.
Next question is from Patrick Kenny with National Bank Financial. Your line is open.
Yes. Good morning, guys. So clearly the energy patches entering a phase of consolidation here and you guys appear to be in a unique situation to offer customers or new customers like Conoco, some new market access opportunities. So just curious how that might play into discussions surrounding potential tuck in opportunities for additional processing capacity. And I guess boosting your proprietary access to propane closer to RIPET's full capacity.
Appreciating that balance sheet strength is priority, but again to the extent that there is a unique window of opportunity here to consolidate, just how you're thinking about potential upstream infrastructure opportunities?
Yes, that's a good question. We've continued to put a fundamental focus on improving our leverage metrics. But we see opportunities to invest in both of our businesses and we think this is an opportunistic time to capture more volumes. We're in an excellent position unique in the fact that we can offer our customers access to both domestic and international markets and the growing demand in the pet chems in Asia. So from that standpoint, in my experience, connecting producers to markets and improving their netback is a key driver in increasing volumes to your facilities, obviously.
And so we can offer our customers at this point, we have significant low cost expansion capacity at all of our facilities. And so we've certainly worked to help the producers in a variety of different ways to have them work to expand their volumes. So again, we're focusing right now on harvesting those cash flows into the year, but we can very well be opportunistic and we will be as we have further discussions and fill up the existing capacity and really add a lot of value to our customers at the end of the day. So we'll be looking for those opportunities as we go forward.
And I guess, Reddy, at a high level, from a business mix perspective, as you look to grow your midstream cash flows, especially once you close the petrogas option. Just in the context of how the market is currently valuing midstream versus utility assets, Is there any internal limit on what percentage of total EBITDA comes from midstream? Or said differently, like is there an appetite to shift your weighting more towards utilities just given the current macro backdrop?
Yes, I think that clearly with our capital spending this year into the next year with an 8% to 10% rate base growth, you're going to continue to see our utility EBITDA and rate base growth over the next 5 plus years. So utility is going to grow as a percentage of our mix. But at the same time, we're expecting similar type of profile growth out of our midstream company. And so we take a position of a capital discipline approach and earning a return in excess of our cost of capital and both businesses have excellent opportunities. And it's why we've focused our efforts on improving our balance sheet, so that we can profitably pursue these opportunities.
So I think you'll see us continue to become more and more of a utility mix over the next year or 2, but we also continue to see opportunities for growth at the midstream. So those percentages I think will tilt a bit more to the utility post again after petro gas we'll change the percentage a bit more from that forward point I think you'll continue to see utility be a larger percentage. When you talk about business mix, look I want to make a comment that we've done a lot of work to focus on the businesses where we see the greatest opportunity now and we've got a unique investment as I've said position combining our midstream utility businesses. So I continue to believe that's the right strategy and as the quality and diversification assets provide us that opportunity to deliver that sustainable growth. So while the mix will fluctuate, we have opportunities prospectively to keep the utility to be a significantly large portion of that as we grow the midstream too.
Okay, that's great. I'll leave it there. Thanks, Randy.
Our next question is from Robert Cohen with RBC Capital Markets. Your line is open.
Hey, good morning. If I can just maybe continue on that topic and can I get your thoughts on the Dominion transaction? And if you're able to provide some thoughts to compare and contrast their decision with your situation?
Yes. Well, look, Dominion made a strategic decision to focus in towards its electric side of its business and had significant capital requirements in that business. So there's clearly I don't think we have a $5,000,000,000 pipeline that we're writing off. So we're not exactly the same there, but I understand your point, Robert. And I think that when we look at as a management team, we're always looking at ways to surface back the full value of our assets.
And that potentially one day could be separating those 2 platforms similar to what Dominion did. But we also need to stack that up against the fact that we are still in the early days of executing our strategy that we laid out last year and we want to continue to focus at the task at hand And so we see a significant opportunity in both businesses. And so I think that we're a bit that contrast our view, I think maybe from what Dominion saw on his pipelines in terms of the opportunities for expansion.
Got it. Does that when you think about your midstream business then does that cause you to maybe think differently with respect to how you pursue that business in the sense of if you're thinking about the potential for a full break, does that change your appetite to take on partnerships or partial sell down as that may make the standalone entity less attractive given the medium to long term?
Sure. Look, I think now is our time to execute and we've done the work and we believe that's the best way to maintain that. And we're always looking at opportunities to I've said this before on the calls, if there's an opportunity to partner or do JVs that 1 plus one equals 3, we're absolutely going to do that and we will not be constrained. What we are focused on is growing profitable both our profitable business in a capital disciplined manner and consistently growing our business platform to continue to grow earnings and the resiliency of our model. And I think we're doing a great job.
And no, I don't think it affects our decision making, but we take all those factors into account as we make management sits down and looks at every lever that we have available to us, Robert.
And then I just finish with a question on the upcoming elections and specifically when the Tax Cuts and Jobs Act was put in place, I think the guidance was that it would be about a 5% reduction to EBITDA and FFO, just given the negative impact on utilities from the lower tax rates. Just wondering, do you have you taken a look at what actually got realized as part of that? And do you have some thoughts as to if tax rates were to go up in the future, what that would mean kind of for your business as it stands now and the ability to actually recover some of that in a timely fashion?
Yes, Monroe, thank you for that question. My perspective is that when tax law and rates were reduced from a utility perspective, we had excess deferred taxes on the balance sheet in the future liabilities that would not be at the same tax rate. So the utilities began to flow those back and those are over periods of time in different jurisdictions. So I would expect that from a utility perspective, if tax rates were increased, then we would adjust those deferred taxes. So I guess we're in a position maybe that's somewhat enviable than maybe other businesses where we would actually have excess deferred taxes that could absorb a federal tax increase.
Okay. And just in terms of that 5% guidance that originally was put out, is that fairly similar to what actually got realized in the business?
You know
what? So EBITDA and FFO?
Sure. I'm going to have to defer that one to James, Robert. So I don't have those numbers if James has them in front of him or not.
Yes. Robert, I think that's very much in the range of the impact. Obviously, it was a bit different in terms of how certain regulators treated the refund of that and the timing of it to some customers. The most aggressive refund was in Virginia and we reflected that impact in 2019, but that's very much in the range of the impact that occurred on FFO to debt.
Our next question is from Julien Dumoulin Smith with Bank of America. Your line is open. [SPEAKER JULIEN DUMOULIN
SMITH:] Good afternoon. Good morning. Thanks everyone for the time. So just to follow-up on some of these questions here, you talked about focusing on the utility. I want to focus now on utility CapEx.
Obviously, you've got a number of programs underway in terms of accelerated replacement programs. Can you talk about the DC program, what your ability is to shift capital around to the extent which it isn't fully approved at your ask or otherwise? Know what I'm saying? Like as in the consistency and planning around to ensure sort of a smooth trajectory on capital?
Yes. Great question, Julian. And we absolutely manage that as we move capital around and look at specific projects. It's sort of a project based approach. But I'm going to let Blu go ahead and answer that question for you.
Blu?
Sure. Yes. Thanks, Randy. Yes, Julien, it's a great question. As you know, those are regulatory processes and proceedings.
So we are in the process of working through what is called DC Project Pipes 2. And so to your point, what we look for is an ongoing project mix that maximizes the positive impact to the system for safety, reliability, but also allows us to smooth the cash flow or the CapEx, if you will, spend, which then follows through on the cash flow. We do that across all of our jurisdictions. So we're very thoughtful about that. We're in constant conversations with the oversight bodies on how that works and what's next there.
We do look to maximize all of those programs as we move forward. So does that answer your question?
Yes. All right. You've got contingencies in mind. Maybe that's the critical underwriting. Correct.
Right. We can move dollars to other jurisdictions and cruise around on the line so that we can still smooth out and meet our plans to the best extent possible on our accelerated pipeline replacement program. It's a big focus area. So yes, and we've
got some pretty
consistency in Virginia and Maryland that give us flexibility, Julien.
Excellent. All right. And if I can turn back just quickly to the midstream side with RIPET. Can you talk a little bit more about the depth of the market? I mean, obviously things have turned around here, should we say.
How do you think about the ability to hedge forward, especially on a tolling basis? I heard your comments earlier on 2021 to the last questioner. But can you elaborate a little bit more on the depth of multiyear contracting and then just also the ability to sustain over time that 60% to 80%, how high can you get as long as the tender?
Yes. You know what I mean? Clearly, when it comes to liquidity and hedging, we can get there over the next few months as we do. But you're talking longer term. And when we go to de risk these assets longer term, we're really looking at our tolling strategy.
And we as we do that, right, and I've said that we're experiencing pretty demand for accessing this capability. So I feel pretty good. And those are longer term, right. Those go into the 10 year plus agreements and the team has done an excellent job to date. And why am I bullish that we're going to do this over the long term and de risk these assets including Ferndale events because we're as we have continued discussions with large aggregators and others in the basin that gives us the confidence that we're going to toll those.
Now we could do multi year hedges as well. We could look at that. But I think our real driver is that we are a company in a midstream company that connects producers to markets and we are not in the commodity business. And so we'll continue to de risk that and let our customers be able to realize those margins in Asia. If that answers your question.
Just quick clarification because you said it this way. Over the long term, over the long term tolls, what time period do you think you get to a point in which you're hedged
at that 60% to 80% was on
a tolling basis or No.
No, I got you. No, I think so we're about 30% right now. I'd be disappointed if we're not there by the end of next year. I mean, I'm trying to on the lower end of that, right, as we go through 2021. If we don't get to that part, then we'll double that.
That's going to be our objective. But again, we'll see how the market works, but that's where we're going to try to target as we go through 2021.
Excellent. Thanks for the added clarity.
Sure.
Our next question is from Linda Ezergailis with TD Securities. Your line is open.
Thank you. Appreciate the comprehensive update today and presentation. Looking at Slide 35, appreciate the sources and uses of cash and that you're at a self funded model. But I'm wondering what might cause AltaGas to either be opportunistic and maybe accelerate some deleveraging or prefunding of future opportunities or conversely might cause you to shift your plans for sources, for example, if asset sales don't materialize? And can you discuss kind of what other levers you might consider pulling, including potentially an ATM or a discrete equity issuance and what factors would be in place for you to consider that seriously?
Sure. I can let James get a bit more specific into your question, Linda, and thank you for the questions. From our perspective, we have a pretty strong track record of be moving that forward. So we've continued to deleverage and we feel confident that we'll be there. Be moving that forward.
So we've continued to deleverage and we feel confident that we'll be there. We will not miss if we have opportunities for financially rewarding capital projects that we can have access to capital to do that going forward. But I think clearly our plan is pretty conservative. But James, why don't you I'll let you
Yes. So it really comes down to the current macro environment we're in and with the timing of moving forward with some of these asset monetizations, some of these continue to derisk. So if we like some of the values that we're seeing for these assets because they've been derisked and that's something that we can move ahead with in the latter part of this year and potentially raise some funding for next year's CapEx program. But obviously, the other thing that we're tracking closely is just this current year CapEx program. At the end of Q2, we're tracking a bit behind our spend in terms of what our expectations were.
So that could take some money and move that into 2021 as well potentially, especially given the fact that our midstream CapEx program is a capital light approach that we're using right now.
Okay. And what might cause you to shift your funding plans and revisit it in any situation if you see more opportunities potentially or other factors?
I would tell you more strategically, Linda, there would have to be some other opportunities that we would see out there that would require us to access capital beyond what we have in our plan inclusive of Petro Gas obviously. It would have to be something along those lines. But right now we have a pretty focused plan as I said in my comments. We are executing very well. The team has in terms of our EBITDA and our guidance.
And look, we're focused, laser focused on achieving net debt to EBITDA that's less than 5x and getting our ratings notched 1 or 2 above the BBB- and that's a priority. And so that's where our focus is. But certainly, if there are opportunities that come up in the new and that are in our that create shareholder value, we could revisit that.
Okay. And maybe as a follow-up to the coming presidential election, I guess beyond potential changes in tax rates. I'm wondering if there are any other policy changes potentially as it relates to perhaps renewable energy or other infrastructure build that might open up opportunities for your franchise in the U. S?
Yes, I think that really it's hard to predict elections clearly, especially in the times that we're in today. But we try to position our company to be successful with whomever might be in office, because it's oftentimes really about economics and what makes sense for customers at the end of the day. So, but renewables are clearly a big push. I think they'll continue to be because the economics supports them. And we'll look for funding on infrastructure to look at new technologies around our as I said in my prepared remarks, hydrogen and other fuels that may be able to blend into our system that can reduce and decarbonize.
And that's why I'm very excited, but we're early in the process. And what we're doing working with the Washington DC Commission is to further enhance really our ability to innovate and deliver clean energy solutions. So I think as the election plays out, we like to position our company to be successful and confident that we will either way. But this might be some ideas about the clean energy and incenting infrastructure and we think we'd be well positioned in the U. S.
And really we've been have a long strong history as I mentioned around developing innovative clean energy solutions.
Thank you.
Sure.
Your next question comes from Andrew Kuske with Credit Suisse. Your line is open.
Thanks. It's just on the frac spreads that you realized and I'm aware of your hedging program as you disclosed it. So it looks like ballpark on the unhedged portion of the frac, you actually outperformed the average spot price through the quarter. Can you maybe give a little bit of detail
unhedged portion? James, you want to address that or Randy?
Sorry, Andrew, can you repeat the question?
Yes. If I look at your frac spreads, what you realized, the $16,61,000 and then I deconstruct your hedging program a little bit, which is about half the barrels that you had in the quarter, It seems like you've outperformed on the versus the average spot price on your unhedged portion. If you could maybe just give a bit of color as to what happened there? Is that just the value of having your physical footprint positioning? Any other color would be great.
Yes. Well, I think it's really the fact that we were hedged at a much higher rate than 50%. We've been hedged at north of 90% for most of the year. So we were able to realize the higher frac spread relative to the spot because of our active hedging program at the end of last year and the beginning of this year. That's really what it came down to.
But to your broader question, and that's spot on, but Randy and his team have always leveraged the physical assets to optimize value for both our customers as well as ourselves. So it doesn't surprise me that they get a little bit better on some of that spot.
Okay, that's great. And one maybe follow-up and a little bit different and just on the balance sheet. And Randy, you mentioned about all the work you've done on the balance sheet. I guess, how do you think about your metrics? Where do you want to land them?
And this is really at the WGL level and also the top of the house and then the positive benefit of, let's just say, the regime changes in the U. S. From the tax regime and we see tax rates go up again, how does that play into your thought process?
Yes. I think that with the utility, they tend to want to be financed more from a say 55% equity thickness in the rest of debt. From our leverage, from a corporate perspective, and I just mentioned it just a little bit earlier in the question, it might have been from Linda, but I was talking about our target of a net debt to EBITDA of less than 5x and a notch or 2 above BBB minus. So that continues to be a priority from a corporate perspective and we think with our business mix that gives us positions us quite well both from ability to fund growth, but also a strong balance sheet with dry powder. And so I don't think that the tax rates or changes would impact how we want to finance the business.
James, did you want to comment on that anymore?
No, I think you covered the salient points there, Randy. I mean, we do have additional levers to pull that we've highlighted a few times on this call with respect to additional asset monetizations, and we continue to invest in the utility CapEx program with heavily weighted ARP. So that gives us immediate recovery and reduces regulatory lag. So that's another way for us to continue to move those leverage metrics down, especially with the midstream business being capital light and having the ability to grow into some of our existing investments we've made in prior years through increased volumes, which will in turn drive increased EBITDA.
Okay, that's great. Thank you.
This concludes the Q and A portion of today's call. I will now turn the call back over to Mr. McKnight.
Thanks again, Chris. And thank you everyone once again for joining our call today and for your interest in AltaGas. Just as a reminder, the Investor Relations team will be available after the call if you have any follow-up questions. And that concludes our call this morning. I hope everyone enjoys the rest of their day.
And you may now disconnect your phone lines.