Good morning, ladies and gentlemen. Thank you for standing by. Welcome to AltaGas Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
As a reminder, this conference call is being broadcast live on the Internet and recorded. I'd now like to turn the conference over to Adam McKnight, Director of Investor Relations. Please go ahead, Mr. McKnight.
Thank you. Good morning, everyone, and welcome to the AltaGas Third Quarter 2018 Earnings Call. Speaking on the call this morning will be David Cornhill, Interim Co Chief Executive Officer and Tim Watson, Executive Vice President and Chief Financial Officer. Also joining us on the call today is Phil Noel, Interim Co Chief Executive Officer along with a few additional members of our executive team. The prepared remarks on today's call will be followed with a question and answer period, and we'd also like to remind everyone that the Investor Relations team will be available after the call for any follow-up questions that you might have.
I would like to point out that presentation slides have been made available on the webcast. And for those of you joining us on the phone lines, the slides are also available on our Events and Presentations webpage and we encourage you to view them. Please note, however, that the presentation slides are for your reference only and do not follow directly along with the prepared remarks. 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 2 of the presentation and more fully within our public disclosure filings on both the SEDAR and EDGAR systems.
And with that, I'd like to turn the call over to David Kornhill.
Thank you, and good morning, everyone. I expect this will be my last earnings conference call. While this meeting with the great shareholders and members of the analyst communities, the conversations we've had over the past few months have been very helpful to me and AltaGas. AltaGas has never been better positioned as a company in terms of the quality of assets and strength of opportunity. Unfortunately, we have never seen such lack of confidence in the company, which is evidenced by the stock that has significantly underperformed and yields over 10% currently.
We recognize this and we're working hard to earn your confidence back. Over the last 18 months, we have seen tremendous change at AltaGas. But we have also seen the capital markets and their appetite for funding growth changed as well. We could not, due to the restrictions put on us by the approval process of WGL and the Bridge facility, make the operational and financial moves we needed to position AltaGas well for the new environment. We understand and we're taking steps to strengthen our balance sheet and position AltaGas for value creation.
When we spoke on the Q2 call on August 1, we committed by the time of this call to focus our business on gas and U. S. Utilities, complete over $2,000,000,000 worth of asset sales and pay down the bridge finance to pay down the bridge financing. Also to provide plans for repaying the remaining balance of our bridge facility by year end. We have met those commitments.
Some may have not agreed with each step taken, but we always look to balance short term finance requirements with long term value creation opportunities. We also strove to stay true to our culture as we proceeded down the asset sales path to ensure we balance the needs of our employees and all stakeholders. We are entering the second phase of our plan. This stage will strengthen our balance sheet and the transition from interim co CEOs to new CEO. We are planning to sell additional assets and expect to raise over $1,500,000,000 Several asset sales processes are underway, including selling down our ownership in the Northwest Hydro asset.
We heard loud and clear from our shareholders that equity is precious. AltaGas plans to suspend the premium drip plan at year end. AltaGas has had investment grade credit since 1998 and is very important to us today and into the future. Finally, moving forward on the CEO search, and I'm confident we will be able to provide clarity in the next several weeks. The final stage of reshaping AltaGas with its focus on gas and U.
S. Utilities will be led by the new CEO to who will optimize our business and continue to refine our asset portfolio. We would expect the new CEO to continue to look at ways to strengthen the company's balance sheet. Before I turn the call over to Tim, who will outline our financial framework in more detail as well as discuss the Q3 financial and operating results, I want to share learning from AltaGas' first major acquisition. In 19 98, we acquired our 1st natural gas utilities and closed in mid June.
You never want to close a utility acquisition in the summertime because they are breakeven at best in the Q3. Due to a long regulatory process, we closed WGL at the start of Q3 and the Q1 we reported WGRGL's results was their weakest quarter. I will now pass the call on to Tim.
Okay. Well, good morning, everyone. As David mentioned, we've never had a better set of assets. We have a clear line of sight on significant high quality growth opportunities we want to be able to execute on them for our shareholders. But in order to do that, we need to address and strengthen our financial flexibility and optimize our cost of capital.
Over the next couple of weeks, a few key events are taking place. We will be finalizing our capital plan for 2019 and have a line of sight on the multiyear capital plan. We will have a better view of our EBITDA and FFO outlook for 2019, including credit metrics as we complete our normal course annual planning process. And importantly, we expect to have the results from the annual review process with S and P. All of these pieces are connected and will allow us to give you a more fulsome view of our financial outlook and next stage of investment in growth at a reshaped AltaGas.
While we still have made progress excuse me, let me start again. While we still have progress to make in strengthening our balance sheet by delevering and applying even more discipline to our allocation of capital, we have to remember how far we've come in the last few months. It has been less than 4 months since we closed WGL and we have completed a significant portion of funding steps to rapidly repay the bridge facility. And we continue to expect the bridge to be fully repaid this quarter. As an energy infrastructure and utility business, we put a lot of capital to work.
So discipline and strong cost of capital are key ingredients to long term success and the ability to create value for our shareholders. Our objective is clear to regain our financial strength and flexibility, maintain our investment grade credit rating and to strengthen our cost of capital. This is a process that will not be accomplished overnight. First, we expect to minimize our reliance in equity capital markets and maximize per share funds from operations and earnings. As we move forward, we will be heavily focused on earnings per share and FFO per share growth along with the typical credit metrics being FFO to debt and debt to EBITDA.
To fund key projects that meet or exceed our return metrics, we plan to sell additional assets within AltaGas. We've identified $1,500,000,000 to $2,000,000,000 of additional asset sales to be undertaken in the near term. These asset sales will be accretive and aligned with our underlying strategy to focus on gas and U. S. Utilities.
This will include an additional interest in the Northwest Hydro facilities. Turning to capital discipline and dividend philosophy. Capital discipline needs to be balanced with a rich and diverse platform of organic growth opportunities that we have in front of us for 2019 and beyond. We will only be executing projects that provide the strongest risk adjusted returns and long term value creation for our shareholders. We will be focusing on projects with organic growth potential and favorable risk profiles that fit with our strategy.
Further to this, we're also favoring projects with strong returns and more immediate cash flow rather than projects that require long term investment prior to realizing a return. This is a prudent manner for us to deploy capital in the near term as we focus on strengthening our balance sheet and deleveraging without impacting long term value creation for AltaGas. Turning to our dividend. This has been an area focused by the capital markets lately given where the stock is yielding. We have determined not surprisingly that growing the dividend at this time is not appropriate.
What we need to assess now in a mix of other factors is what constitutes a sustainable and ultimately growing dividend for the reshaped AltaGas. It's really a matter of short term yield versus long term growth. With our business mix changing significantly including the higher contributions from utilities an appropriate payout for our new longer term asset mix must be identified. A sustainable payout ratio provides additional funding flexibility allows for long term dividend growth in line with earnings and cash flow per share growth. Moving on to the balance sheet and financing.
Let me start by saying we value our investment grade credit rating. A strong balance sheet and investment grade credit rating will position us for greater flexibility and growth going forward. We continue to work with S and P to ensure that our final plan will achieve an investment grade credit rating and expect to provide an update to you in November. We've made significant progress in our funding plan to pay down the bridge loan used to fund the WGL acquisition. Recall that with a 35% sale of Northwest Hydro in June, we only drew down US2.3 billion dollars of the bridge and the additional asset sales steps announced in September October will reduce the outstanding bridge amount to US1 $200,000,000 We are on track to repay the remaining amount by year end, notwithstanding that most of the bridge does not mature until January 2020.
This remains a top priority because it creates financial flexibility and allows us to move forward. The future path will be tailored to optimize our funding and cost of capital. Part of the strategy to minimize common equity requirements, the Board has decided to turn off the premium DRIP at the end of 2018. In the near term as stated, we intend to sell an additional $1,500,000,000 to $2,000,000,000 in assets to fund attractive identified capital projects on gas and U. S.
Utilities as well as to align the underlying assets of the business to our strategic focus. So hopefully, we've been able to give you some color here on our funding framework going forward. I'm now going to turn to the operational financial highlights of the Q3. We'll go through those pretty quickly. Starting with utilities, things are progressing very well regarding the applications filed earlier in the year in both Maryland and Virginia.
In Maryland, several rounds of testimony were filed in September and the hearings were held in early October. We expect to have an order on this application in mid December with new rates taking effect January 1, 2019. In Virginia, the new interim rates will be effective in January 20 19 and the hearing is scheduled for late April with a decision expected in the first half of the year. At SEMCO, work continues on the Marquette Connector pipeline, which will provide system redundancy and increase deliverability, reliability and diversity of supply to our CEMCO customers. We received approval for all environmental permits in September.
Construction is expected to begin in 2019 and the project is on schedule and anticipated to be in service near the end of Q4 2019. So AltaGas now has a total rate base in its regulated U. S. Utilities of approximately $4,400,000,000 serving approximately 1,600,000 customers in 5 jurisdictions. We have significant opportunities to grow our rate base with approved system betterment and the accelerated pipe replacement programs in Virginia, Maryland and Washington DC.
Through these programs and the regulatory applications in both Virginia and Maryland, we expect to grow our rate base to approximately $5,500,000,000 by the end of 2021. Now on to the highlights within the gas segment, which continues to drive the significant opportunities we see in front of us through 2021. Going to touch on just a few. The Central Penn project is a new 185 mile pipeline through Pennsylvania, which came online early in October. We own an indirect 21% of Central Penn, which has the capacity to transport and deliver up to 1.7 Bcf a day of natural gas from the Northeast Marcellus producing region to markets in the Mid Atlantic and Southeastern regions of the U.
S. The project startup was delayed approximately 5 weeks, primarily due to weather conditions, but is now fully online. We continue to be excited about our RIPET project, which is the 1st propane export terminal on Canada's West Coast. We expect to 1,200,000 tonnes per year of propane to Asia and that's equivalent to about 40,000 barrels per day. Construction activity is progressing safely and remains on time and on budget and members of the operations team are now permanently on-site to initiate a smooth transition in Q1 2019.
We expect the facility to begin receiving propane in Q1 twenty nineteen with the 1st ship ready for export early in Q2, which aligns with the propane contract year. Commercial deals to secure the remaining offtake commitments are currently under negotiation and are expected to 100% we expect to have 100% of the propane supply fully contracted before RIPET comes into service. We have deliberately balanced our contracts between commodity exposed and tolling arrangements. And with the strong support, we are also planning to increase the facility's overall capacity beyond the initial stage of 40 1,000 barrels a day and believe the increase can be achieved with minimal capital investment. This will further significantly enhance total cash flow and returns from the project.
As you know, we spent a significant amount of time over the past several years cultivating and nurturing the Japanese market and its counterparties. We have seen this significant investment generate material benefits as we move forward towards COD at RIPET. Asian propane prices are at a significant premium to pricing received by Canadian producers, which makes RIPET an extremely attractive market. High rail cost to Conway in the Midwest U. S, which has which itself has a significant discount to Mont Belvieu, coupled with strong demand and higher prices in Asia means that access to export markets, which RIPET provides, can result in significantly better propane netbacks for producers in Western Canada.
During the quarter, we announced the Kelton Black Swan transactions, both of which really highlight the strength of our integrated value chain as well as efficient use of capital. We are continuing to extend and build out our unique value proposition and integrated gas strategy right in the middle of the Montney. These projects utilize existing AltaGas infrastructure, providing very strong integrated economics and strengthening our strategic footprint within Northeast BC. As a result of these new projects, the North Pine liquid separation facility is expected to be expanded in 2019. And we also continue to have additional discussions with other Montney producers who are looking to AltaGas to provide a fully integrated customer focused midstream solution, including energy export options, which provide increased value for their products.
Now quickly moving on to the results for the Q3. We had a lot going on in this quarter and have certainly seen a lot of change we reported Q2 back in July. And as you know, we have almost a full quarter of WGL operating results. Overall normalized EBITDA the quarter came in at $226,000,000 up $36,000,000 or 19% over last year. As you would expect, the WGL acquisition accounted for much of the increase in year over year Q3 EBITDA.
Total normalized EBITDA in the gas segment came in at $65,000,000 up 27% over last year. The legacy AltaGas Gas business itself saw strong 12% year over year growth and contributions from Townsend 2A and North Pine, which commenced commercial operations in the Q4 of 2017. Also stronger realized frac spreads and volumes and higher revenues at Hermaton due to increased NGL activities there. WGL contributed $8,000,000 to Q3 gas results. These positive factors were partially offset by reduced ownership at Younger and lower contribution from Petrogas where we recorded equity earnings $2,000,000 versus $6,000,000 last year as the solid underlying operating performance at Petrogas was offset by some unrealized mark to market losses on hedging activities.
Moving to the Power segment. Total normalized EBITDA was up 21% to $128,000,000 in the 3rd quarter. WGL's Power business contributed $32,000,000 of that. The legacy AltaGas business benefited from higher dispatch generation at Blythe due to greater operational and fuel flexibility and also by about $2,000,000 from a favorable U. S.
Dollar exchange rate. Positive results were somewhat offset by $8,000,000 lower EBITDA Hydro due to lower river flows caused by colder than normal weather conditions and $3,000,000 due to the expiry of the Ripon PPA. Finally, Utility segment EBITDA was $32,000,000 in the Q3 of 2018. This is a decrease of $6,000,000 year over year. As I noted earlier, the WGL acquisition was a drag on the utilities segment EBITDA by about $7,000,000 due to the timing and normal seasonality of WGL earnings as well as higher leak remediation expenses.
This is also where we saw the greatest impact of U. S. Tax reform, which had a $3,000,000 impact on AltaGas' legacy utilities along with $4,000,000 of WGL's utilities. Positive impacts came from lower operating expenses in several of the utilities, colder weather in Alberta as well as a favorable $1,000,000 impact from FX. And as David pointed out, the summer is not the most ideal time to close the Gas Utilities acquisition.
However, going forward, we do expect WGL to be a significant contributor to our utility segment on an annualized basis and in the Q4 as we move into the winter heating season. Normalized funds from operations for the Q3 were $117,000,000 or $0.45 per share, down from last year's $143,000,000 or $0.83 per share. Funds from operations for the 3rd quarter were impacted by the same factors impacting EBITDA. However, higher interest expense associated with utilities business. 3rd quarter dividend income from Petrogas was stable at $4,000,000 represented by $3,000,000 of preferred dividends and $1,000,000 of common share dividends.
Current taxes in Q3 were comparable to the previous year, but deferred GAAP taxes were more favorable due to various non recurring expenses. Normalized net income in the 3rd quarter was a loss of $17,000,000 or $0.07 per share versus a gain of $48,000,000 or $0.28 per share in Q3 2017. Higher EBITDA as previously discussed and lower income tax expense was more than offset by higher interest expense and higher depreciation and amortization expense associated with the WGL acquisition and bridge financing and higher preferred share dividends. The effect of having less than a full year contribution from WGL in 2018, while having the full transaction costs including financing results in this partial year impact. A full year of WGL in 2019 should result in a more balanced impact.
Per share metrics were materially impacted by the higher number of outstanding shares from the $2,600,000,000 of subscription receipts to fund the WGL acquisition. Now quickly moving on to the funding, we've moved quickly and swiftly since closing the WGL acquisition to complete the $2,000,000,000 asset monetization plan and pay down the bridge facility. In the Q3, we successfully completed the AltaGas Canada IPO, which closed on October 25, 2018. The total cash proceeds for AltaGas when including both the IPO proceeds as well as the debt to be repaid will be about $874,000,000 and this amount could increase to as much as $910,000,000 if the underwriters over allotment option is exercised in full. The IPO together with the non core gas and power asset sales of about $560,000,000 which are expected to close in the 4th quarter represent the final steps of our initial asset monetization strategy.
We exceeded our $2,000,000 target with approximately $2,400,000,000 raised. With the proceeds from these two transactions, we will reduce the outstanding amount on the bridge facility to approximately US1.2 billion dollars As I excuse me, as I clear my throat a few times here. As I mentioned, going forward, we expect the WGL acquisition to benefit from all three segments, and we expect the utility segment to have the greatest contribution on an annualized basis starting in 2019. Based on all the steps discussed, we see utilities representing about 50% to 55% of full year 2019 EBITDA with gas at approximately 35 percent and Power at 10% to 15%. Turning to the outlook for 2018 in total, we're still tracking in a 20% to 30 25% to 30% growth range for 2018 full year EBITDA.
Despite the later closing of the WGL acquisition and a few headwinds including seasonality of WGL earnings, lower generation revenues at Northwest Hydro, the higher WGL utility leak remediation costs and the delayed in service date for Central Penn. This guidance also accounts for the impact of the announced and expected asset sales and other financing initiatives. Quickly running through the individual business segments, gas will continue to benefit from WGL's growing pipeline investments, including Stonewall, which is already in service and Central Penn, which came on earlier this month. We're also benefiting from the higher frac exposed extraction volumes of about 10,300 a day with attractive hedges in place for 73 percent of those volumes in 2018. Townsend 2A and North Pine also contribute to full year performance.
The Power segment will continue to benefit from WGL's growing distributed generation assets and higher power prices in Alberta. Utilities will be driven by the contributions from WGL's growing utility business as we move into the heating season in Q4 as well as higher full contributions from SEMCO and ENSTAR. This is partially offset by the impact of tax reform, which for the rest of 2018 in total will be $16,000,000 for our legacy U. S. Utilities and about $22,000,000 for WGL's utilities.
The increased EBITDA from business operations is expected to be partially offset by asset sales, including the pending sales of non core gas and power and the close of the AltaGas Canada IPO, which will reduce 2018 EBITDA by about $46,000,000 Just as a reminder, with about 60% of our 2018 EBITDA being U. S. Based, here's a quick sensitivity for Q4. For every $0.05 change in the foreign exchange rate, there's a corresponding CAD11 million impact on Q4 2018 EBITDA, which is only about 1% of our total 2018 expected EBITDA. Given some of these headwinds referred to earlier, we now expect full year normalized FFO in 2018 to grow approximately 10% year over year, which is below the previous guidance of 15% to 20%.
2018 FFO is being impacted by the same factors as EBITDA. But again, however, due to a smaller denominator, the FFO growth as a percentage is more sensitive to these factors we've already discussed. The net combined capital expenditures are tracking to the high end of our previously stated guidance of $1,000,000,000 to $1,300,000,000 with $675,000,000 spent in the 1st 3 quarters of 2018. The guidance for full year 2018 is now $1,200,000,000 to $1,400,000,000 And of that, 45% to 50% capital will be spent in the gas business on RIPET, Central Penn, Mountain Valley and the recent CELT and Black Swan transactions with another 45% to 50% in utilities for attractive replacement programs in the start of Marquette Connector. Gas and Power maintenance capital for full year 2018 is expected to be $30,000,000 to $35,000,000 In summary, due to all the moving parts this quarter and subsequent to quarter end with the asset sales, it's a bit hard to see the strength of our business.
However, this should not overshadow the underlying performance or the opportunity which our business has. We continue to be confident and excited about our asset base and its potential. We've made considerable progress over the past quarter on reshaping and optimizing our operating business through the closing of WGL and our asset monetization strategy, including the successful IPO of AltaGas Canada. But as we move forward, we will continue looking for ways to further optimize our business and execute on our growth opportunities for the long term benefit of our shareholders. As we finalize our capital and funding plan for 2019 and beyond and complete our normal annual planning process, we'll come back to the market later this quarter with a more fulsome plan and a clearer view of our financial and business outlook.
I'd like to now turn it back to David for his closing remarks.
Thank you, Tim. You will see us over the coming months a very planned and measured approach to funding and capital plans. So we effectively deploy capital today to result in long term value creation. To close, AltaGas has never been better positioned than it is today to benefit from the growth of this of its asset base and opportunity set. Our investment in our Northeast BC strategy as well as positive developments in LNG have positioned us very well in this basin.
RIPET is shaping up to be a home run for us and is continuing we continue to see upside for producer customers and AltaGas in the integrated value chain we have created. We are seeing good progress in the Marcellus Basin with our pipeline investments there. Our U. S. Utilities are experiencing significant growth, system betterment, population growth as well as the market connector are key drivers for us in the midterm.
And we are keeping our capability strong in power and adopting a capital light strategy at the moment until the economics of the Power business meets our return thresholds. We look forward to reporting back to you in late November with a fuller picture on our funding framework, more detail on our 2019 capital projects, providing greater detail on the transactions we are seeing both in the gas and U. S. Utilities and update on hiring a new CEO. Finally, I want to thank the AltaGas employees who've been working very hard in trying conditions.
They've been performing outstandingly facing ridiculous deadlines and ever changing conditions. With a balanced funding strategy and a focus on opportunities ahead of us and a dedication of our employees, I'm confident about the future plans and growth. Thank you very much.
Now I'd like to turn the call back over to the operator to facilitate the Q and A session.
Thank you. And your first question comes from the line of Robert Kwan with RBC Capital Markets. Your line is open.
Good morning. If I can just start with you laid out a number of the goalposts here, but it's possible to refine some of that just when you're looking first on the credit rating and the investment grade side of things, can you just talk about your desire to stay at BBB or is BBB- being considered given that still an investment grade rating?
Clearly BBB is our hope and that's what we're working to. It's in and those are the plans that we're putting forward. But it's a determination of S and P and bond raters to make that determination. I can't give you any more clarity than that.
Is there a comfort level though, obviously, it may not be the desired outcome, but to operate at the BBW- level?
In the past history, AltaGas had been BBB low with S and P for a number of years and operate quite effectively. But clearly, we prefer BBB mid.
Understood. I'd just say, Robert, I mean, there's S and P, what we're going to be as we've noted a couple of times, we will be having further discussions and updates with them here very shortly. They do have different parameters and criteria at different rating levels. And so we need to go through that with them and fully understand it and understand how holistically it fits with our overall business plan. And so that's part of the process.
Got it. I guess turning to the dividend and on an appropriate payout ratio. I'm just wondering what are the different payout ratio metrics you're looking at? You did mention EPS earlier as well as cash flow. I'm just wondering, are you still looking at FFO or would you also be looking at deductions from that number around your preferred dividend financing, minority interest distributions, maintenance CapEx as well as rate base investment into the yields?
I'm going to jump into this one because I think you've got to look at everything. I think you can I prefer FFO because I find it a purer number than doing all the adjustments and normalizations? And I think earnings whatever if they are true earnings and not adjusted with current some of the current GAAP normalized are probably the best 2. I think it depends what you think is the appropriate range on those two metrics. But AFFO, you AFFO are all factors that should be coming into your calculation on range at FFO.
So quite aware of all those and what happens with changing mix and changing ability to fund dividend.
Got it. And if I can just finish then on the focusing of capital towards the highest quality projects. Are there any projects underway that don't fit that new definition or more stringent definition from your perspective? And if not, are there any examples of projects that you've done in the past few years that you wouldn't be doing going forward if they were in front of you today?
I don't think it's quite a fair question because of different cost of capital and different things. But clearly we've made the decision that where we see power investments going forward are too low for the needed returns. And so we would look at some of those slightly differently, I would think. But clearly since Phil and I've stepped in, we've slowed down a number of investments to high grade them to higher returns and reduce some significant capital spend.
I'd say, Robert, I think we're very comfortable with the projects, the key projects we mentioned, the ones in the center of the fairway that we're spending capital on, the critical ones we talk about led by RIPET, but Central Penn and other examples like that, especially the integration aspects around many of those key projects, extremely comfortable with those. It's really where's the marginal dollar going forward and that's where the criteria comes up.
That's great. Thank you.
Your next question comes from the line of Rob Hope with Scotiabank. Your line is open.
Good morning, everyone. Turning over to asset sales, you did highlight that the Northwest Hydro could be monetized. Do you have a target ownership level there? And if you go down below 50% or don't control that asset, would you be subject to any longer review processes?
We haven't set a target. I think we over the last months have been working through to understand. And I think we have quite a bit of flexibility in terms of what ownership will end up with Northwest Hydro.
All right. And then just moving over to the timing of the asset sales, are you looking for earlier closed assets or could we be more in the back half of twenty nineteen?
With respect to the over $1,500,000,000 I would be significantly disappointed if those were not substantially done by the end of Q1 2019.
All right. And then just
to wrap
up, just in terms of your conversations with S and P, are they more focused on FFO to debt? And given the kind of build out of your program in 2019, are you seeing some potential to realize those targets in 2020? Or is it real a focus to hit them in 2019?
I think 2019 is a natural year simply because it's the 1st full year. So it's a very it's a much cleaner year certainly than the Q3 that we just described. And so that is the timeframe for the first the near term timeframe for those key metrics. But make no mistake, we're looking at the foreseeable future and we certainly have discussions with S and P and everybody else over a forecast planning period that goes beyond 2019 as well.
Thank you.
Your next question comes from the line of Ben Pham, BMO. Your line is open.
Okay, thanks. Good morning. Good morning. I wanted to go over a bit of your comments around the transformation of your business last 18 months and just some commentary on the dividend and where you thought it was going to go before and where it could go going forward. And so when you think about that business plan 18 months ago going into WIGO, I know, David, you mentioned the financing or kind of markets have effectively closed relative to gas.
But is there something else there that you should may have misjudged along the way because it's the impact on your stocks and quite significant that is it really the financing market that's changed for the last 18 months?
I think clearly if you look at where the financing market was almost 2 years ago now, when we're contemplating this transaction to today is quite different, primarily in terms of models and expectations of the market and access to equity. And we've been unable to really adapt over that period of time. If we weren't locked up in large regulatory process and part of that was So we're playing catch up quite frankly. If you look at go back 2 years ago from investment thesis, people are looking for growth, people are supportive of growth. Today people want from a shareholders perspective are looking for totally self funding and growth within that self funding model and which I think is prudent quite frankly.
But that changed the dynamic dramatically. And if we look at our cost of capital, we see the cheapest cost of capital right now is asset sales. And we're pursuing that because we think it's the best way to long term enhance shareholder value. So we hadn't contemplated we had contemplated $2,000,000,000 but we're announcing almost $4,000,000,000 now with the 2.4 already done and another in excess of 500 that was not contemplated going into the plan. And as you sell assets, you unfortunately have to use sell assets that generate cash flow.
And so that's quite a different model and assumption that we went into. But the cost of capital is better for our shareholders to sell assets at this point than to raise additional equity.
Okay. So was the prior plan and there was on top of the DRIP, which was more diluted, there was actually a plan to issue equity, external equity in that 3 to 4 year plan?
There was a more growth oriented forecast on rather than as far as we've going on asset sales. So I think that's a major change. And some of that would have been equity in future years that we're basically looking to for a self funding model going forward. So that's quite a dramatic change in assumptions.
Okay. And then my last question, as you think about the asset sales of 1,500,000,000 you turned off the premium drips, you're probably going to save $200,000,000 a year or so, call it $600,000,000 in 3 years. So does that difference, does that replace a lot of the debt that might have been in your prior plan or your thinking maybe a few months
No. Premium drift from our perspective is we just don't like the dilution it does to our existing shareholders. And we think we want to deliver growing per share metrics. And so we think it's a prudent thing to what we're hearing from our shareholders is equity is precious and we want to you as a company to treat it that way.
Okay. All right. Thanks a lot, David.
Your next question comes from the line of Linda Ezergailis with TD Securities. Your line is open.
Thank you. I'm wondering if you could help us understand how your outlook for And I'm also wondering, if your outlook, for the And I'm also wondering if your outlook from an operational cash flow and EBITDA contribution has declined beyond 2018 as well. And specifically, I'm wondering if those higher leak remediation costs were kind of more one time in nature in 2018 or continue the road and if there's any other factors that might have contributed to a decline?
That's a big question. Lots of different things. Jim, I guess I'll jump I'll say one thing and then Tim will correct me. The biggest change that we saw in our forecast on FFO was just the performance of Northwest Hydro and the record drought. And as you could I think you will remember in the news, Telegraph Creek Fire that the Tel Tan suffered through total evacuation of 1 of the largest forest fires in BC's history was right in the watershed or right next to the watershed of the Northwest Hydro.
I think that's the biggest change for the change in guidance and FFO. And in Canada, we're non taxable. So EBITDA and FFO took March step. But Tim can maybe answer some additional questions.
I mean, I think we've always talked about 2019, as I said earlier as being the 1st full year and the year that we start to assess and benchmark WGL transaction on a pro form a basis. We still believe it's very accretive to us in 2019 versus what we would have been on a stand alone basis. And that's the test that we've been using since day 1. Obviously, there's been changes as David alluded to and I've alluded to in our prepared comments around funding mix. When you sell certain assets with cash flow associated with those and issue less shares, that changes the metrics, at least on a per share basis it does.
But I'd emphasize that again, WGL, our expectations are that it's performing in line with what we originally expected. And a quarter doesn't make a year nor does it make a lifetime in terms of the long term nature of those assets within WGL. And so we think 2019 is going to be a very strong additive year with WGL in tow. And so I don't think that changes our perspective on accretion Linda.
That's helpful. And the 2019 business mix that you provided, similar to 2018 guidance, which baked in asset sales. Is that business mix after asset sales?
Yes, it is. So that's as best as we can do right now we look at everything we talked about. I mean, and we're not leaving anything out here because otherwise it wouldn't be a truly representative business mix. So when I said 50% to 55% utilities, 35% gas approximately and 10% to 15% power and that's EBITDA I'm talking about in 2019. That's everything baked in.
The asset sales that we are closing this quarter, the asset sales that we're undertaking and have underway, as David alluded to, dollars 1,500,000,000 to $2,000,000,000 Any other assumptions, base assumptions on the financial or operational side that's fully accounted for.
Thank you. And just if you can maybe help us further understand the outlook for cash flows. Would it be possible to get an update on your cash tax outlook, your maintenance cost outlook and maybe what the timing of cash flows and over what period might be for the various regulatory commitments that you booked at onetime merger commitment cost of 182,000,000 dollars
Yes. We'll work on that.
We can circle with you on some of those specifics. Our cash taxes haven't changed a whole lot. I mean, we are effective tax rates in the order of 20%, 21%. And we're not cash tax on Canada and haven't been for a period of time. So
we're changing.
And similarly your maintenance CapEx outlook isn't changed that much?
No, it hasn't because again my guidance was $30,000,000 to $35,000,000 for this year. And going forward, I mean as you add new assets that come on, but you subtract certain assets as part of asset sales, it's really not shifting a whole lot. That $30,000,000 to $35,000,000 on maintenance capital is gas and power. In terms of depreciation, which is maybe a proxy for utilities maintenance, where AltaGas AltaGas' U. S.
Utilities are AltaGas total utilities this year are probably about $75,000,000 of depreciation. That will decline to about $50,000,000 next year the IPO. And on the WGL side, on a full year basis, their depreciation is probably in the order of CAD175,000,000
Helpful context. And the merger commitment cost, do those flow through the cash flows from operations? And what's the cadence of that?
Yes, they do. And so they would have been reflected. And as you know, we report normal GAAP metrics as well as normalized metrics. So for Q3, we would have they would have flown through, there would have been transactional related costs in the order of as reported in our MD and A of 35,000,000 merger related transaction costs this quarter of about $182,000,000 So just a little over $200,000,000 in total and those would be normalized out of those normalized results.
So that was cash out the door of $182,000,000 for the merger commitment cost?
Some of that's related to change in working capital, but I think I'll have to just circle with you to give you the full breakdown of that. We do have that really available. So we'll circle with you on that Linda.
Your next question comes from the line of Robert Catellier with CIBC Capital Markets. Your line is
open.
Just a couple of questions here to follow-up on the asset sales and then the dividend. What informs the $1,500,000,000 to 2,000,000,000 dollars target of additional asset sales? Why that level and what exact financial objectives are you trying to accomplish versus lesser amount?
Well, we look at the RIPET coming on next year, the capital spend for that and a number of projects. And we're looking at how do we best balance our growth in capital commitments, ensuring an investment grade credit rating and setting ourselves up 2020 beyond growth. So that's how we determine those numbers and it's everything's kind of circular and linked, but we felt that that was a prudent number.
So there's a big future capital commitment, I suspect, or an ongoing capital commitment that
2019 we talked about was a growth year and with the U. S. Pipelines and with RIPET finalized and the just in Marquette Connector being spent. So all those we've talked about. And so what we felt was that this is a quantum that we thought was very transactable quickly at the scale and we feel highly confident that we should be north of $1,500,000,000 by the end of Q1 next year.
Okay. And is the suite of assets that could be divested include Mountain Valley and or Central Penn Pipelines?
Not within that $1,500,000,000 no.
Okay. And then just on the dividend, I guess there's still a lot you need to figure out before you readdress the dividend level. But I'm just curious whether you saw a case for a cut now to help you, I mean that would be credit positive, might help you with the debt funding. And second, you've got the premium drip, but why not cut the drip altogether given where the stock price has been?
Main reason, I've never been a fan of the premium drip. I shouldn't say that. I just think it's a selling pressure on their stock and stock keeps coming into the market. We and the timeline makes sense at this meeting to do it for year end, it's turned from a contractual perspective. And a lot of our shareholders do like to reinvest in AltaGas and our DRIP is pretty consistent with the norm within our competitive group.
So historically, I'd like to give shareholders the opportunity to reinvest in company if they can. And so that was the reason I didn't personally, I don't view premium drip as an investment back in the company. I view it as more of a trade.
And Robert, we can as David said, we've had the DRIP for our shareholders over time, very consistent with our peers. And we have the ability to adjust the terms on the DRIP as well. So you can, as you know, sort of modulate the discount percentage and things like that.
And just the first part of the question is why not cut now to help with some of the credit funding that you're looking to do to repay the bridge?
Because we're not ready
with all the
work we're doing.
You could always address the debt markets once the cuts made, I guess.
We've got budget, we're coming back in November. The dividend we're proud of and paying sharing that with our utilities. But the trade off and we've been talking to shareholders a lot and listening is short term yield, long term growth trying to balance that listening to our shareholders. And we're doing the goal is to increase our long term value of the company. So we're taking all that into account and thinking through it and there's no so that's the process that we're going through and that's a process the Board wants to go through.
So the objective at the end is how do we best deliver long term value to our shareholders, grow our earnings per share, grow our FFO per share and provide a sustainable dividend level. So that's what the Board is will
be looking at. And most companies, Robert, at this time of year are in their budget planning processes, right, for the forward year 2019. And so we're no different. Every year we go through that in November. Last year was no different from a timing perspective.
Really, if you just think about logically, it makes sense to make sure that we fully go through that process in the most fulsome way because the dividend is part of the overall holistic business plan that we have. So that's a reason why to complete that.
Yes, I understand. It's just you just can't rush it and you're not ready yet. So that's fine. Thank you.
I just want to reemphasize that our employees are working very hard on a lot of things, sold over $2,400,000,000 assets and we want to make sure that we do the right thing and a reason thing. And I think it would have been imprudent for us to do anything at this time.
Okay. Thank you.
Your next question comes from the line of Patrick Kenny with National Bank Financial. Your line is now open.
Yes, good morning. Yes, I would agree David that you guys deserve a lot of credit for the $2,400,000,000 of asset sales. But guess I'll just start with a quick comment on how you define the new plan here as building shareholder value and not to kick anyone bother down by any means, but I think it's probably a good starting point in order to regain the trust of some of your loyal shareholders out there that you just call spade a spade and define your new plan as being designed to recover shareholder value, just given the stock needs to basically double from current levels just to get back to where it was before the acquisition. In terms of my question I
totally agree with you.
Okay. Thank you. In terms of my question, I'm just wondering how you square the comment that you've never had a stronger asset base with the new plan to sell down arguably the highest quality asset across the Canadian Energy Infrastructure space in the of course, the Northwest hydro assets. And most importantly, I guess to circle back on Robert's question, if the rating agencies view the sale of the hydro as enough of a reason to move down to BBB- and let's assume for whatever reason the U. S.
Hybrid market isn't attractive over the near term. Do you have other assets that you'd be willing to sell over and above the $1,500,000,000 to $2,000,000,000 target? Or should we assume at that point external equity just to protect the investment grade credit rating?
No, I think well, I guess the I hate compound question because you always go to the last one first. Clearly, our Stage 3 will be optimizing portfolio. I don't know what that would look like with the new CEO, but clearly focused on the gas and power business. If you look at the Northwest Hydro, I totally agree with you that it's the best asset in the infrastructure portfolio. But as held by AltaGas, the valuation that those that asset is getting is discounted heavily compared to other holders of that asset.
So and it's not from everything I know from S and P is not asset that is valued as highly as you stated today. So I guess in combination of those versus and it is an asset that has limited growth in the future other than inflation in terms of cash flow growth compared to other assets.
So that
with all those things, I believe that it makes sense to monetize 35%. And when I look at cost of capital for equity versus selling assets, I think it's prudent for us to sell additional interest in Northwest Hydro. Personally, if I could own it myself, I'd only be buying that asset all day, but it's not doesn't make sense, I don't think for AltaGas to hold that asset.
And I think saw the valuation in June and that was about 27 times EBITDA. And so what we've done is we've achieved the appropriate valuation for that asset. We weren't prepared to sell us for something uniquely less than that frankly. And that reflects, I think, the unique attributes of that asset. But we even think about it as we've effectively received the value for that.
What we're doing is we're taking money and we're reinvesting it. We're reinvesting at 1x rate base into some highly attractive utility assets. We're investing at 6x to 8x or if you think about capital over EBITDA in our integrated gas midstream business. And so you think about that I'm going to use the word arbitrage, but that difference I guess. And there's a real ability to create value there.
And the Northwest Hydro asset, as I just said, we received appropriate value recognition for it. It is a nice stable asset, not a lot of growth, but nice stable asset, but we've also significantly enhanced the utilities, which are actually viewed more highly by the agencies than even Northwest Hydro. So there is some logic in terms of this thinking. We're just trying to tie together for you a little bit.
Yes. No, we would agree that capital allocation standpoint makes sense to sell the hydro at the June valuation levels. I was just curious about if the hybrid market didn't come together as you'd expected, if that puts the spotlight back on the funeral equity.
And by the way, Pat, I mean like in the hybrid market, sorry, I didn't mean to cut you off there. But the hybrid market is still something we're looking at and we're all teed up as you know with the U. S. Dollar base shelf. But there's also obviously the Canadian market too.
I mean the Canadian preferred market is akin to the hybrids treated the same way. And it's a market we value as well going forward. So those are all options.
Just one at the end of the day, we will do from a costing function what makes sense on a cost basis and what's most effective way to have equity, low at 5.
And that's a good lead into my next question and final question here, David. You mentioned the ability to expand RIPET beyond the initial capacity with minimal capital. Just wondering, at least until you achieve your target credit ratios and have some dry powder, if your view of a new self funding model over the medium term might include more JVs, more partnerships with private equity, How do you think about slowing down growth across the portfolio versus keeping the foot on the gas pedal and bringing in some other funding partners?
Clearly for RIPET, the capital is not material. We are debating whether we want to do JVs and how fast we want to do that versus just high grading our projects from a critical perspective and focused maybe late 2021 timeline for more growth. So we haven't determined that. And I think it's partly it's important that the new CEO has input into that discussion. And it clearly is an option for us.
But at this point, we're looking at being able to grow just in a self funding model with no external funding from a JV.
Okay. That's great. Appreciate all your comments.
I just want to make one other quick comment on this is really the extension on what Pat was saying. Just want to be clear that the asset sales, I'm just trying to simplify it. We've announced a bunch of asset sales are closing here shortly. Some have already closed like the IPO. We've announced the additional 1.5 $1,000,000,000 to $2,000,000,000 in the near term.
But again to be clear that additional $1,500,000,000 to $2,000,000,000 is not earmarked for the bridge repayment. The bridge repayment has been already whittled down to $1,200,000 and we still intend to do term debt to complete that bridge repayment. So I just want to make sure we're not losing sight of one of the steps that we're still actively have
underway. Before we move on to the last question, I'd like to remind participants that if you have any further questions, simply press The last question comes from the line of David Galison with Canaccord Genuity. Your line is now open.
Good morning, everyone. So I just I also just want to circle back to the asset sales. Maybe is a sell down of your investment in AltaGas Canada as part of the one of the options that you'd be considering as well? I guess on the flip side of that, is there ability to maybe drop assets down into
AltaGas Canada? We're comfortable where we are with AltaGas Canada. We have no plans at this point to drop any assets down. And that's clearly something the future. We haven't contemplated that in our current plans at all.
And we're happy at our current level, but if the broker option is exercised, we go down to just under 37% and that's our go forward plan to stay at that level is our current plan.
Okay.
And then just touching on the dividend and we've talked a bit about the targeted payout ratio. When you look at the overall business and when you look at the 2019 and go forward, Alvogas largely being a utility now, does it make sense to look at a target payout ratio similar to non utility type peers? Or is it how are you thinking about it?
I guess when I look at it, there's different appropriate payouts depending on the businesses. If you look at a hydro business with very low maintenance, you could justify a long term higher payout ratio. I think it's pretty standard for most pure midstream or heavily midstream is kind of a mid payout ratio and utilities have a lower payout ratio because of their need to invest to maintain the rate base to maintain earnings. So I think we become a you put those all together to determine what's the appropriate payout ratio for AltaGas and if the business mix changes, I think the long term payout target should change appropriately to reflect the business that we're in. I think in 2017, our largest segment from EBITDA perspective was power, followed by utilities, followed by gas.
So in 2019, Tim was saying our largest will be utilities 50% to 55%, gas at around 35%, and power the smallest at about 15%. So we dramatically reshaped the company over this period of time. So I think the dividend payout would make sense to reflect the change in the business.
All right. Thank you very much.
There are no further questions at this time. I'll turn the conference back to Adam McKnight for closing remarks.
Okay. Thanks. We've covered a lot of material this morning. So as a reminder, the Investor Relations team will be available after the call for any follow-up questions that you might have. I'd also like to thank everyone once again for joining us this morning and for your interest in AltaGas.
That concludes our call and have a great day.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.