Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the AltaGas fourth quarter 2019 financial results conference call. My name is Cheryl, and I will be your operator for today's call. All lines have been placed on mute to prevent any background noise. If you have any difficulties here in the conference, please press star then zero for an operator assistance at any time. After the speaker's remarks, there will be a question and answer session. As a reminder, this conference call is being broadcast live on the internet and recorded. I would now like to turn the conference call over to Adam McKnight, Director of Investor Relations. Please go ahead, Mr. McKnight.
Thanks, Cheryl. Good morning, everyone. Thank you for joining us today for the AltaGas fourth quarter 2019 financial results conference call. Speaking on the call this morning will be Randy Crawford, President and Chief Executive Officer, and James Harbilas, Executive Vice President and Chief Financial Officer. 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 questions that you might have. Presentation slides have been made available for today's webcast, and they can be accessed through our Events and Presentations webpage. However, today's prepared remarks will not follow along directly with the slides provided. A replay of the call will be available later today, and a transcript will be posted to our website shortly thereafter.
Before we begin, I'll remind everyone that we will refer to forward-looking information on today's call. This information is subject to certain risks and uncertainties as outlined in the forward-looking information disclosure on slide two of the presentation, and more fully within our public disclosure filings on both the SEDAR and EDGAR systems. With that, I'll now turn the call over to Randy Crawford. Sorry, to James Harbilas.
Thank you, Adam, and good morning, everyone. It is my pleasure to welcome you to our 2019 fourth quarter and full-year results call. We had a strong year reflecting solid financial and operational performance from both our midstream and utility segments. Normalized EBITDA was CAD 1.3 billion, which is the high end of our full-year guidance of CAD 1.2 billion-CAD 1.3 billion, and represents a 26% increase over 2018. This growth was driven primarily by full-year contributions from WGL, seven months of operations at RIPET, our industry-leading LPG export facility, and strong results from Petrogas.
These impacts flow through to normalized funds from operation, which was CAD 895 million compared to CAD 657 million in 2018. Normalized net income was up over 65% to CAD 324 million in 2019, driven by strong operational performance of our capital investments and previously referenced factors impacting normalized EBITDA and higher interest expense and depreciation and amortization expense.
Also driving the increase was a low normalized effective tax rate, which was impacted by the accretion of regulatory amounts through tax expense and higher non-taxable equity earnings. We delivered these strong results while remaining firmly focused on executing our balanced funding plan, a significant component being the disciplined approach to capital deployment and an aggressive approach to our non-core asset sales program, with funds being used to delever the balance sheet and fund organic growth. In 2019, we executed on CAD 2.2 billion in asset sales at attractive multiples, exceeding our target of CAD 1.5 billion-CAD 2 billion. We closed out 2019 with a much stronger balance sheet, decreasing our net debt by approximately CAD 3 billion and improving our debt metrics in line with expectations.
We positioned the company for continued organic growth through our accretive asset sales in 2019, including the sale of ACI, which has been approved by shareholders and is expected to close in the first half of 2020. This is an all-cash transaction for CAD 33.50 per share, generating proceeds of approximately CAD 370 million to AltaGas. In 2019, we executed on the largest capital program in our company's history, spending approximately CAD 1.4 billion, slightly higher than our guidance due to accelerated timing on certain growth capital projects and the timing of close of certain asset sales. Overall, we delivered on all our financial commitments in 2019. Moving on to our fourth quarter results, we recorded normalized EBITDA of CAD 425 million, up from CAD 394 million in the prior year.
On the surface, this shows an uplift related to the work we have completed on the rate cases in Maryland and Virginia, as well as RIPET, which added CAD 36 million in normalized EBITDA to the quarter. Strong quarter-over-quarter results were also positively impacted by higher equity earnings from Petrogas due to higher export volumes and domestic margins, partially offset by higher operating costs at Washington Gas and the impact of SINSA's rate case decision. As I mentioned earlier, we were very successful in monetizing assets to delever the company, which had a corresponding impact on lost normalized EBITDA, negatively impacting the quarter by CAD 85 million. Adjusting for this, we would have achieved over 25% growth in normalized EBITDA. Digging slightly deeper into our segments, the fourth quarter at our utility saw earnings ramp up consistent with historical seasonality expectations.
The increase in normalized EBITDA was largely attributed to the impact of rate cases in Maryland and Virginia and higher revenue from accelerated pipe replacement program spend, which was offset by the impact of the ACI IPO and higher operating expenses. As you will recall, in the third quarter, we recorded a one-time adjustment of $30 million related to the hearing examiner's report in Virginia due to an adjustment of the TCJA liability. In December, the commission in Virginia issued a final order adjusting certain of the hearing examiner's findings, some of which were favorable to Washington Gas, resulting in an $8 million increase to normalized EBITDA on the fourth quarter. Our midstream segment reported very strong Q4 results with normalized EBITDA up over 80% over the same period in 2018.
Our energy export strategy was a significant contributor to the quarter, with strong volumes at both RIPET and at Ferndale from our equity investment in Petrogas, which I will get to in a moment. Results in our base midstream business remain strong. We are seeing healthy volumes at our plants, specifically a full year of operations at the Aitken Creek North facility and new volumes from the Nig Creek facility, a direct result of the work we have done with respect to our Northeast BC and energy export strategies, creating an integrated value chain connecting our customers from wellhead to export markets in Asia. RIPET, our cornerstone asset in our Canadian midstream strategy, continues to perform well, supported by strong FEI spreads. During the quarter, RIPET generated approximately CAD 36 million in normalized EBITDA, with slightly greater than three million barrels for six ships of propane exported to Asia.
Overall, we are pleased with the performance of the facility to date. Volumes exported for the quarter were just over 36,000 barrels per day, slightly lower than anticipated due to the CN strike in the fourth quarter. We continue to see strong results from Petrogas, recording equity earnings of CAD 31 million, a significant increase from CAD 5 million in Q4 of 2018. These strong results were driven by higher export volumes and improved export margins, like what we are experiencing at RIPET, together with improved contributions from Petrogas' other core business segments and a contract termination payment realized during the quarter. Turning to our capital program and funding plan for 2020, given all the work we have done to improve our financial flexibility, our focus is now able to shift towards executing on organic growth opportunities that drive meaningful contributions in 2020 and beyond.
Our emphasis will be on capital-efficient organic growth and executing on the accelerated replacement programs at our utilities to ensure timely recovery of this growth opportunity. As such, the funding plan includes CAD 900 million in projects, primarily within our low-risk utilities business that are anticipated to deliver stable and transparent rate-based growth and strong risk-adjusted returns. In 2020, we have allocated approximately 25% more capital to accelerated replacement programs, which represents about 45% of the total 2020 utilities capital program. Capital in our midstream segment will be focused on the completion of Townsend and North Pine expansions and associated pipeline systems, maintenance and administrative capital, and the completion of MVP Southgate, which is the Mountain Valley Pipeline expansion project. We plan to fund our capital investment plan through our significant embedded growth and existing financial capacity with no expectation for raising common equity in the near term.
We will continue to maintain a disciplined approach to capital allocation. Our priorities have not changed as we focus on preserving a strong balance sheet, returning capital to shareholders through our dividend, and executing on low-risk, capital-efficient organic growth with a self-funding model, given our decision to suspend the DRIP early in 2020. Our investment-grade credit rating continues to be fundamental to our strategy. As you know, it provides us with greater financial flexibility and a lower cost of capital, which in turn supports growth going forward. In December, positive rating action was taken by S&P of BBB- with a revised outlook to stable, while Fitch and DBRS affirmed ratings at BBB and BBB (low) respectively. The S&P result was favorable and in line with our expectation, as we have made significant strides in strengthening our balance sheet and refocusing the business.
We will continue to work on improving the financial metrics of the company, and we'll continue the dialogue with the credit rating agencies with the goal of improving our credit rating over time. As we move into 2020, we are positioned to deliver strong earnings growth, which reflect the underlying strength of our business and our ability to capitalize on the ample opportunities within our core business. Growth in our utility segment is driven by rate-based growth and achieving higher returns through rate case settlements, increased utilization of accelerated replacement programs, and operating cost and leak remediation reduction initiatives. Our consolidated utilities rate base is expected to grow at approximately 8%-10% in 2020. The recent rate case settlement at SEMCO is a strong example of our ability to capture timely returns on invested capital and rate-based growth.
We completed the Marquette Connector pipeline safely, on time, and on budget in the fourth quarter of 2019, and on December 6th, 2019, an order was finalized in respect to the SEMCO rate case with an effective date of January 1st, 2020, several months ahead of previous expectations. The settlement approved included an approximately $20 million rate increase and an allowed return on equity of 9.87%. Growth in the midstream segment will be driven by the significant upfront investment we made since 2018 and increased utilization at RIPET, as well as increased volumes at Northeast BC facilities, including North Pine, Townsend, and Aitken Creek, as well as higher expected margins on U.S. midstream storage and transportation. Our distinct ability to handle the molecule through the entire value chain and provide access to premium price global markets is very attractive to Western Canadian producers.
We will leverage our first-mover advantage to drive the continued expansion of our integrated asset base and increase export volumes at RIPET. The facility itself was built to accommodate almost 80,000 barrels per day, which will drive significant long-term earnings growth with minimal additional capital required. We expect to achieve normalized earnings per share of CAD 1.20-CAD 1.30, and normalized EBITDA of approximately CAD 1.275 billion-CAD 1.325 billion, excluding any contributions from the outcome of the Petrogas put option. We will update the market on contributions from Petrogas once we finalize the valuation and close that transaction. In conclusion, the strategy we have outlined is designed to result in reliable, attractive, long-term earnings, and dividend growth. I believe that the combination of appropriate capital discipline, business optimization, and operational excellence will position us to deliver strong performance. With that, I will turn the call over to Randy.
Thank you, James, and good morning, everyone. 2019 was a transformational and extremely successful year for us here at AltaGas. We exceeded the operational and financial priorities set out in December 2018, which resulted in earnings that were at the top half of our guidance range. This is a direct result of the newly focused strategy and, moreover, the hard work and effort of our talented teams across the company. We transformed and focused the company on our stable, high-growth utilities and midstream businesses, where we see the best return opportunities and are now well-positioned to deliver long-term value to our customers, business partners, and shareholders. Looking back, since I first spoke with you in December 2018 on my fourth day at AltaGas, I am proud of the achievements that we have accomplished.
I laid out an aggressive strategy designed to de-lever the balance sheet, regain our financial strength and flexibility, and streamline the business to focus on sustainable growth from our highest-returning investment opportunities. We successfully executed our balanced funding plan, de-levering the balance sheet and solidifying our investment-grade rating while funding the largest capital program in the company's history at almost CAD 1.4 billion. We did this through responsible execution of major capital projects like RIPET and the Marquette Connector, which were delivered on time and on budget. In May, we celebrated the official grand opening of Ridley Island Propane Export Terminal, the first LPG export facility on Canada's west coast and a cornerstone asset of our integrated midstream strategy.
Through RIPET, we offer our customers a unique and compelling proposition, providing services across the energy value chain, including access to export markets where demand is strong and the value proposition remains robust. We expect this integrated value-added capability to provide significant growth in our midstream business over several years by attracting increasing volumes to our existing facilities with minimal capital investment. We achieved significant profit growth at our utilities through projects like the Marquette Connector, utilization of accelerated rate initiatives to upgrade and modernize our distribution system, rate cases to update our current cost structure, and implementing our operational excellent model to keep future costs in check. We took steps to establish our new utility management team to address the current needs of our operating and industry-leading LDC.
We have accomplished significant milestones in a short period due to the exemplary effort and innovative commitment to a new approach of our leadership teams across North America. We are now positioned in 2020 with a significantly stronger financial footing, a sharper focus on our core businesses, and ability to capitalize on the significant portfolio of organic growth opportunities in front of us. We continue to improve our operational excellence model, which will position AltaGas to deliver on our long-term strategy of being low-risk, high-growth utility and midstream business. The near-term growth opportunities I see today exceed my original expectations and are now achievable due to the hard work the teams have delivered over the past year. Looking ahead, 2020 is all about execution at our core businesses. We have a unique investment proposition that combines higher-growth midstream assets with stable and predictable cash flows of our utility business.
We continue to believe this strategy is the right one. The quality and diversification of our asset position us to deliver sustainable, attractive, risk-adjusted returns over the long term. Our strategy is straightforward: leverage the unique proposition of our high-quality utilities and midstream businesses to utilize our expertise along the energy value chain to connect customers to markets in North America and abroad. In 2020, we expect approximately 13% year-over-year growth driven by our core businesses, which more than offsets the lost EBITDA associated with the 2019 asset sales. Our midstream strategy is underpinned by the growing demand for energy in Asia and our first-mover advantage at RIPET. We will continue to leverage our unique structural advantage to export cleaner energy to Asia and expand our footprint in Northeast BC.
We expect this unique capability to attract more Canadian production to increase producer value proposition to drive continued expansion of our asset base, increase volume, and provide more producers the opportunity to access our value export capacity. Our Northeast BC strategy and the value-added approach to our customers continues to position AltaGas as a midstream provider of choice. The success of RIPET is highlighted through premium pricing received by our tolling customers, and we see increasing demand for export capacity and tolling agreements at RIPET. By the end of 2020, we expect to increase tolling volumes to approximately 40% of throughput, to approximately 20,000 barrels by the end of 2020.
We expect approximately 15% growth within the midstream segment in 2020 after adjusting for the loss of EBITDA from asset sales in 2019, driven by a full year at higher propane export volumes at RIPET and increased volumes at Northeast B.C. facilities, including North Pine, Townsend, and Aitken Creek. We also see significant opportunity to further expand our current service offering through the increased ownership of Petrogas, which owns and operates the 50,000 barrels a day Ferndale NGL export terminal in Washington State. The opportunity for AIJV to obtain full ownership of Petrogas upon the closing of SAM Holdings exercise of its put option, and AltaGas acquisition of a greater indirect interest as a result, will create the opportunity to provide producers additional market alternatives through access to up to 130,000 barrels of industry-leading West Coast energy export strategy. Shifting to the utility segment.
Through the ownership in WGL, we are uniquely positioned to capitalize on one of the higher annual rate base growth rates in the U.S. at 8%-10%, underpinned by the replacement of aging infrastructure, innovative rate design, and growth in our customer base. Our strategy is centered on safety and reliability, capital discipline, and growing the rate base through accelerated replacement programs. We continue to drive towards a performance-based culture to enhance our capital efficiency and returns and maintain affordable rates for our customers. We will optimize every dollar spent on repairing and replacing aging pipe to improve safety and reliability, improve our customer experience, and reduce leak remediation costs. Through 2020, we expect over 10% growth in our utility segment, underpinned by approximately 10% rate base growth, higher retrieved returns through rate case settlements, increased utilization of accelerated placement programs, and operating cost reduction initiatives.
In January, we filed a rate case in the District of Columbia asking for an increase in rates of approximately $35 million to reflect the growth in rate base and updating our operating costs. We haven't filed for new rates in D.C. since 2016. It is currently the jurisdiction where we see the largest gap between earned versus allowed returns. This rate case represents a significant step towards closing the gap on achieving our allowed ROEs. In summary, we have a clear line of sight on a significant portfolio of growth within our utility and midstream segments and a stronger balance sheet, which will allow us to deliver sustainable growth. We have the internal cash flow and incremental debt capacity to fund approximately CAD 1 billion in annual growth capital that will provide us the ability to invest in our profitable growth opportunities. Finally, our near-term priorities have not changed.
We continue to execute on our organic growth opportunities while preserving capital discipline within our self-funding model, maintaining a strong balance sheet and prudent payout ratio that reflects the long-term nature of our asset and balances the need to fund growth and return capital to shareholders. That concludes our prepared remarks. I will now pass it back to the operator to facilitate the Q&A session.
Thank you. Ladies and gentlemen, we will now conduct the analyst question and answer session. If you would like to ask a question, press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. There will be a brief pause while we compile the Q&A roster. Your first question comes from Rob Hope of Scotiabank. Please go ahead. Your line is open.
Morning, everyone.
Morning, Rob.
First question's on the utilities. In your prepared remarks, you mentioned that D.C. had the largest gap between the earned and allowed ROE. Can you kind of walk us through where you actually earned in 2019 or what your actual income on the utility side were to be if we were to kind of back into some of the parts there?
Well, I think clearly, as I said in the prepared remarks, Rob, that the D.C. district currently has our biggest gap between allowed return and current. We have a slide in our investor presentation, I think, that walks you through essentially the different steps that we go forward. We filed our Maryland rate case last year and updated our rates as well as Virginia. So the main focus really is on getting the Washington D.C. district rates up to current basis.
Okay. Moving over to RIPET, can you just remind us what percentage of your volumes historically or I guess in the last couple of months have gone to China versus Japan, and whether or not you could see a slowdown in exports there just given coronavirus?
Sure. Rob, I tell you what, I don't have the exact percentages, but I'll make comments in terms of the coronavirus has had an impact, obviously, on propane demand in Asia. Some of the factories have been shut down. We haven't seen any direct impact on RIPET operations at this point, and we really don't anticipate that it will. Again, we have a structural shipping and pricing advantage from the West Coast to Canada over the supply destinations such as the U.S. Gulf Coast, we would not expect to be the first impacted. We continue to see and receive multiple bids for our spot cargoes in January as well as March. With the lower demand in Asia for LPG, we have seen FEI pricing come off. However, the spreads in North America for propane Cal 20 are still strong.
The FEI to Mont Belvieu is at CAD 11.55 a barrel. We have additionally, to your point about Japan and Asia, we have firm term commitments with Astomos. That's 16 cargoes per year. We have over 22,000 barrels of our merchant that are hedged, and I mentioned the tolling. Again, if you look at our history, Astomos has been probably taking 50% of the load in the prior year, and then the spot cargoes tend to go to China and other countries.
All right. That's great. Thank you.
You're welcome.
Your next question is from Robert Kwan of RBC Capital Markets. Please go ahead.
Great. Good morning.
Good morning.
Maybe just starting with a higher-level strategic question. You have mentioned about being a diversified company, I'm just wondering, what are your thoughts as you get both sides of the house in order and then start growing? What are the thoughts on splitting the business into a WCSB midstream company and a separate U.S. utility company?
Well, Robert, right now, as I've said in my prepared remarks, I think we currently believe we've got a unique investment proposition combining our high-growth midstream assets with our stable, predictable cash flows. Currently, we believe that's the right approach for AltaGas as we've focused the company on the highest quality core businesses. We've restructured the company. I think right now the diversification in our stable and growing utilities and our higher growth midstream business portfolio enable us to deliver strong risk-adjusted returns over the long term. At this point, I think we're focused on two strong businesses run under a common platform. Because we see significant growth opportunity at this point. We'll always look at corporate structure, but at this point, as I said, the combination of two strong businesses is the best path forward at this point.
Got it. If I can turn to Petrogas, I'm just wondering, are you able to quantify how much the one-time contract booking was and if there's any color on just the nature of that contract?
Sure. I'll let James answer that.
Robert, it's obviously a contract termination that's specific to one contract. As a result, we don't want to disclose the amount because it is commercially sensitive information. What I can confirm that it wasn't a material contributor to quarterly performance, and the cancellation of that contract doesn't impact our guidance for 2020 as well. It will not negatively impact our 2020 performance.
Got it. If I can just slide a quick third one here. Can you just give an update on MVP, specifically as well, just thoughts on the ACP Supreme Court hearing and read-throughs for your project?
Yeah, sure, Robert. I think based on our discussions with our partners, EQM's call, I think we continue to believe that is an excellent project. That will ultimately be in service. They're targeting the end of this year. Clearly, focusing on the court's decision. There's been some recent comments that appear to be positive. We'll see how that turns out. Overall, our view is that excellent project. They're 90% complete as we speak. They're targeting the end of this year for in service.
Great. Thank you.
Your next question comes from Robert Catellier of CIBC Capital Markets. Please go ahead. Your line is open.
Oh, okay. Hi, good morning. I just wondered if you could walk through the provision on Pouce Coupé, and just generally discuss your appetite for allocating capital to other gas plants in the current environment?
Yeah, Robert, it's James here. With respect to Pouce Coupé, it's an acid gas injection well that basically we've shut in because we're in the process of drilling a new well in that area for the purposes of acid gas injection and just felt that it was the appropriate provision to take given the fact that we're replacing it with a new well.
Yeah, Robert
Go ahead.
I'm sorry. I was just going to comment, this is Randy, on your second question in terms of the basin, that we continue to believe that we have long-term fundamentals and outlook for gas and NGLs in the Montney continue to remain strong. For us, we're in an enviable position with the fact that the capital spent that we did in 2019 positioned us well with respect to RIPET, with 80,000 a day of capacity. The completion of our processing facility in Townsend and a doubling of frac capacity at North Pine this year allow us to have a capital light program and really grow into those capacities going forward. As the market evolves. More broadly the egress issues that are impacting Canadian production to some extent are easing. The TransCanada North Montney Mainline is expected to come on shortly.
We're helping a great deal with our LPG RIPET asset to providing an outlet for the 40,000 barrels a day. Excellent basin, well-positioned company with assets that are providing producers access to valuable markets. In the long run, I think we're well-positioned to continue to have growth in this basin.
Okay. Just adding to that, the aspects of B.C. enshrining UNDRIP recently, and then also we've seen some protests and rail blockades. How does that factor into your capital allocation decisions?
Yeah. Well, again, the particular rail issues that we've encountered are really not an overly concern. We don't like interruptions, but the rail is an integral part of our supply chain in Canada. It's been that way for over 100 years, and while we wouldn't expect labor strikes and blockades as a common practice in the long run. As we look forward into our investments, we see that rail will be a viable option in the long run.
Okay. The final question from me, I noticed there's a sensitivity in there related to the pension discount rate. I don't think we've seen that sensitivity published before. I'm just curious why now, and under what conditions would trigger a change in the discount rate used in your pension accounting?
Yeah. We've included it because obviously, having bought WGL and having a defined benefit plan and post-retirement benefit plan, we felt that it was an appropriate disclosure. Obviously, returns of the plans themselves could potentially impact the rate and as well as work that the actuaries do. We felt that it was an appropriate sensitivity to include, just given the impact to EBITDA that a change in that rate could have as based on work that actuaries do every year with respect to the appropriate discount rate from a funding standpoint.
Really, it's a question of what rates the actuaries pick and when they pick them.
Correct. Yeah. That's something we look at annually with respect to those plans.
Thank you.
The next question comes from Linda Ezergailis of TD Securities. Please go ahead.
Thank you. I realize there's a lot of moving parts to how this year will unfold on a number of fronts, but I'm wondering if you could give us a sense of how much was already baked into your 2020 EBITDA guidance when you introduced it in December. What do you see as the more significant headwinds and tailwinds emerging since then that were not contemplated when you introduced the guidance?
Sorry, Linda, I didn't catch the first part of your question. Do you mind just repeating that?
Well, I was just saying, when you introduced your EBITDA guidance in December.
Yeah
I think you had certain assumptions baked in there, and things are fluid and dynamic and continue to evolve as 2020 continues on. I'm just wondering.
Yeah
What has changed since then that was not contemplated that's presenting headwinds and tailwinds that might cause where you land, either within guidance or potentially need to revise guidance-
Yeah
As the year unfolds.
Well, look, when we actually rolled out our guidance in December of 2018, we knew about the CN rail strike. It had more or less come and gone. Obviously, blockades and the coronavirus were not something that were in play at the time with respect to the guidance that we've rolled out. That being said, though, you've heard very clearly from Randy that despite some muted demand in Southeast Asia, we have not seen a drop-off in terms of cargoes leaving RIPET. We have not seen a drop-off in demand whenever we go to market with a spot cargo. We wouldn't anticipate those issues impacting our ability to land within the guidance range that we provided to analysts when we rolled out our numbers in December.
Are you seeing?
The only thing I will add is obviously the other thing that's changed since we rolled it out is the Petrogas put option. Once we close that deal, we will update the markets on the contribution on a pro forma basis of that Petrogas acquisition.
Any sense of timing, bookends of timing of when Petrogas might close?
Yep. Linda, this is Randy.
Thank you.
Our judgment is that at the end of the second quarter is where we would see that coming out at this point. I would add that acquiring the third interest in Petrogas in a greater interest in operational control of these strategic assets are a nice fit within our midstream footprint, as you know, and it's a great opportunity to take on that operational control. We would expect to, and we're hopeful through the second quarter, that we will work toward closing that transaction.
Can you maybe give us a sense of how you're seeing potential synergies as you do gain operational control of Petrogas, whether it be revenue or cost synergies or maybe even future capital allocation decisions, how they might shift now that you would have that full control of Petrogas?
Well, Linda, I guess I would answer your question this way, that we've made an investment in Petrogas in 2013. We were bullish on the prospect of exporting products from North America, and we continue to remain bullish. We currently are moving, as I said, through the process to determine the value of SAM's ownership stake. Therefore, at this point, as I think you'd agree, I can't get into great detail, but what I can tell you is that we recently did invest in building our Ridley Island LPG, and we continue to move RIPET to a more of a tolling model, right, and to position the asset for upside. We will deploy the same strategy for Petrogas. The opportunity to have more access to the Asian markets is exciting for us.
I firmly believe that the valuation of SAM's interest will be accretive to our ALA shareholders, and that ability to operate Petrogas together with ALA assets will prove valuable to all of our stakeholders.
Okay, thank you. Just a final question on Petrogas. I realize that the funding plan can shift depending on a number of considerations, but have you started a parallel process to tee up the funds required for that? Can you comment on, I know you can't comment on asset sales, but would they be partial or full sales of assets? Any context you can provide on how the funding plan has started, if at all, would be appreciated.
Yeah. It's James here, Linda. What I can say is that obviously, that we will not need equity to fund Petrogas. I just want to reiterate that for you in the markets. Our first option from a financing standpoint is cash flow and some additional leverage, because we will have incremental EBITDA once we start to consolidate that acquisition. With respect to asset sales processes, no, we haven't started any yet, but we do have non-core assets that we can monetize when the time is right to be able to fund that. I don't think that we need to close an asset sale at the same time that we close Petrogas, because we've got capacity on the line, but we can close it shortly after we close Petrogas on an asset monetization and pay for that.
Thank you.
Your next question comes from Julien Dumoulin-Smith of Bank of America. Please go ahead.
Hey, good morning, team. Thanks so much for the time. Again, congratulations on some pretty incredible results here. Want to focus here on the utility front first. The MRP success in Maryland is pretty incredible. Can you guys talk to whether that was contemplated in the rate base discussion that you guys provided in December? Separately, speak to timeline on achieving your ROEs. To what extent did you intend or have a thought process about using this again towards your broader achieving of the ROE? Separately and related, on D.C. and tackling that, I know you've talked about a rate case, but is there any ability to file anything more formulaic as we saw in Maryland of late?
Hey, good morning, Julien. This is Randy. Good questions. Look, when we looked at building our guidance, we built in the results of our Maryland and our Michigan rate case into our forecast into 2020. We built those aspects in. I think we'll look at a variety of innovative approaches in D.C. We filed the case straight up, but we're having discussions on a variety of different approaches that can modified rate approaches and such like that. More to come on it, but certainly the team is looking at a variety of ways to have an innovative rate structure that can allow us to have the opportunity to earn our allowed return going forward.
Okay. All right. Fair enough. We'll just stay tuned here on what those innovative approaches might be.
Right. I don't want to get ahead of it.
No, very much appreciate the regulatory process here. If I can pivot back here quickly, why do you think there hasn't been more of a pricing impact on propane? I hear what you're saying about volumes and the demand for volume, but the pricing commentary about that being sustained has been, dare I say, surprising. I'd be curious on any further thoughts there. If you can, I'll squeeze in just the last one. Any financial metrics you can disclose as you think about this Petrogas pro forma? I'll leave that there.
Yeah. We have seen, with the impact on demand, a decline in FEI pricing. The real driver is at the end of the day, that the spread between the alternative, the Mont Belvieu market, and FEI, and that has remained strong. I think that's the key driver for us. As I said, with the shipping advantage off the West Coast of Canada, it provides a very cost-effective solution to the market. While you might see some declining, you'll see the overall spreads have remained strong on a going forward basis for us. Your second question was about more financial guidance with respect to Petrogas. I'll let James touch on that.
Julien, I would say that until we finalize the valuation, there isn't very much in the way of pro forma or the impact that we can provide. What I can point you to, though, is note 14, I believe, in our MD&A that discloses what the after-tax equity pickup of Petrogas has been in 2019 and 2018 as well as historically. Obviously once we close that process, though, we would be consolidating that acquisition and not doing an equity pickup.
Fair enough. Okay, guys. Best of luck. Talk to you soon.
Thank you.
Your next question comes from Patrick Kenny of National Bank Financial. Please go ahead.
Yeah, good morning. Just starting with the 8%-10% rate base CAGR outlook for utilities through 2024. Can you remind us what level of annual CapEx is required to achieve that growth rate? Perhaps comment on how much of that annual CapEx would be exposed to pre-approval from the regulators versus ongoing maintenance and replacement capital.
Right. Again, we get these U.S. and Canadian conversions. When I look at this as a 10% rate base growth number, our rate base is about what? $4.5 billion ?
Yeah.
Right. Yeah. About that. You're talking about a CAD 400 million CapEx program for growth capital beyond that. Specifically to the strategy of getting current recovery on those. As I mentioned in the past, the accelerated rate recovery in all of our jurisdictions has been pre-approved over a five-year plan. D.C. is a bit shorter, and we're working through that process. Our strategy is to all investments above depreciation and maintenance will be recovered through our accelerated rate recovery mechanisms that'll give current recovery to those investments.
Okay, perfect. Moving over to RIPET. Just curious at what point in 2020 you might be able to achieve the 50,000 barrels a day of throughput. I assume it depends on being able to secure the incremental volumes through tolling agreements this spring. Just curious if you might be able to achieve 50,000 barrels a day well before the end of 2020, if all goes well on the contracting front.
Sure. We would expect capacity to grow in material increments commencing in April of 2020. That aligns to the LPG contract year. We feel very good about our forecast and our supply aggregation. I think you would see that starting up in April on a going-forward basis.
Okay, perfect. Circling back to funding the Petrogas option here with additional non-core asset sales. How do you think about timing the cash payment there, assuming it is the end of the second quarter with maximizing value for something like your stake in MVP? Do you need to see that project in service before you look to sell it, or is that a process that could be undertaken well before year-end?
Well, I'll comment on the asset sales, and as James has said, we've got a good bit of asset sale liquidity with MVP, with our power assets that we have, and we can be selective as to how we move forward with that. I think James referenced the fact that we could close this transaction without those asset sales comfortably. When we look at MVP, we believe that's an excellent asset, and we'd like to de-risk that and see that a little bit more clearly before we do any transactions there. We would expect that clarity to come later this year.
Okay. Last one from me, guys, if I could, just on your recent sustainability report. Obviously propane displacing higher carbon fuels in Asia is a good news story. Just wondering how this ESG momentum might be playing into some of the commercial contracting discussions you're having with customers right now, both producers and off-takers. Are you seeing any financial tailwinds from this rising demand from industry towards decarbonization?
Well, I think that the overall macro market in Asian demand for propane is strong, and that's driving some of the pricing, as we get through the coronavirus and we look long term. Clearly, the ability to displace higher carbon-intensive fuel is good for the world and it's good for Canada. I think it's a very important part of reducing carbon emissions, and we're excited to be part of it. While I think that we expect that to continue to grow on a going-forward basis.
Got it. I'll leave it there. Thanks, guys.
Your next question comes from Ben Pham of BMO. Please go ahead.
Okay, thanks. I want to go back to the main topics of RIPET, Petrogas, and maybe more broadly, your appetite for, I guess, commodity exposure. Maybe that's not the right word, but maybe just more of the non-regulated side of it. I guess my question is there a certain level of commodity exposure, just that Far East Index exposure that you guys start to get a little bit more uncomfortable when you look at your total enterprise?
Look, I think that our strategy is a low risk, high growth utility and midstream business. We continue to move toward more of a tolling arrangement, as I mentioned, at RIPET. With respect to the merchant, we hedge those volumes as soon as we enter into one side of the transaction, if that's the supply side with the FEI. We continue to focus on annuity long-term earnings. With respect to Petrogas, as I mentioned previously, we continue to move RIPET more forward with a tolling model, and we would expect to operate similarly as we do with Petrogas. We are not a producer. We connect producers to valued markets, and the commodity risk should rest with those that are bearing that commodity risk. We provide the upside for those producers to access that market. That's our strategy, and we'll continue to execute on that.
Ben, if I could just add to that. If you look at 2019, if you look at our hedge positions and then you layer in tolling, RIPET was anywhere between 75%-80% hedged for us during the year. I want to stress that we're not out there taking commodity exposure. To Randy's point, we'd lock it in.
Yeah, I appreciate that. I guess I'm just thinking, you're not locking in like a 10-year hedge, right? Are you? I don't think you're expecting the tolling arrangements to be 100%, right? It's more 40%, 50%.
Yeah. What I've said in the past is that we'll continue to de-risk the asset. We had to seed this business so that we could show the Canadian producers the advantage of getting to the Far East market and to get FEI pricing. We've done that, and I believe strongly that as we continue to move forward, the percentage of tolling will just continue to increase on a going-forward basis. Yeah, our strategy was to seed this business to clearly demonstrate the value of getting to the Far East market, and our producer community is seeing that clearly. We'll work on the demand pool side of this, too, for long-term annuity type contracts as well to reach all the way back. That's our philosophical approach, and I think we're making excellent progress in that way.
Okay. Thanks for that. There was a question on corporate restructuring before, and I want to tie it into my first question around mod exposure. Are you, in a sense, as you guys take some of this RIPET far east exposure that maybe it makes it a little bit harder to structure a business later on?
No, I think these two businesses run under a common platform that are both annuity-based long-term sustainable businesses with annuity cash flows. They fit together quite well, and I don't think it precludes any other corporate restructuring down the road, if that's a direction that's in the best interest of our shareholders.
Okay. I'm not sure if this was disclosed on the patch. I might look. Do you know, or can you quantify the Mountain Valley AFUDC that you're booking?
I'll turn that to James, if we have that.
Yeah. It's the AFUDC I think that we're booking is about CAD 35 million a year, CAD 35 million-CAD 40 million a year.
Okay. All right. Thanks a lot, guys.
Thank you.
Your next question comes from Jeremy Tonet of JPMorgan. Please go ahead.
Good morning, Randy. Great to talk again.
Hi, Jeremy. How are you?
Very good, thank you. Just wanted to start off, if I could, for RIPET, didn't know if there was any sense you could provide for the level of contribution to EBITDA last year. Just trying to get a feel for how big that was, or maybe just looking forward, I guess, on the midstream side. How do you see the business evolving between liquids handling, processing, fractionation, like the size of those different contributors to midstream EBITDA going forward, just directionally speaking, if you could?
Yeah. No. With respect to last year's contribution, we had seven months of RIPET, and it was approximately CAD 85 million of EBITDA contribution, and then we have a full year built into 2020. I said in the past, Jeremy, that we want to be able to touch the molecule throughout from the wellhead through our processing fractionation facilities, and ultimately through RIPET to the West Coast. We're doubling the size of our fractionator at North Pine, moving from 10,000 barrels to 20,000 barrels this year, and that'll be completed in April. We're adding an additional 200,000 a day of processing capacity at Townsend, all backed by firm contracts with shippers. We'll continue to see growth in the business in those areas.
While we don't touch every molecule, our overall goal is to be able to provide an integrated business model to our producers and attach them to attractive markets.
That's helpful. I'll stop there. Thanks.
Thank you, Jeremy.
This concludes the Q&A portion of today's call. I will now turn the call back over to Mr. McKnight.
Thanks, Cheryl. Thank you everyone once again for joining our call this morning, and for your interest in AltaGas. As a reminder, the investor relations team will be available after the call for any follow-up questions that you might have. That concludes our call today. I hope you enjoy the rest of your day, and you may now disconnect your phone line.