Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's conference call and webcast announcing AltaGas advances global export strategy through increased ownership in Petrogas. My name is Michelle, 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 hearing the conference, please press star then zero for 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.
Thank you, Michelle, and good morning, everyone. Thank you for joining us today to discuss AltaGas' increased ownership in Petrogas that we publicly announced this morning. This call is webcast. I encourage those of you listening on the phone lines to view the supporting presentation titled "A Time to Grow, a Time to Optimize," which can be found in the events and presentation section of our website. As for the structure of the call, we'll start with Randy Crawford, President and Chief Executive Officer, sharing some prepared comments, and then we'll turn it over to Q&A.
We're also joined here this morning by James Harbilas, Executive Vice President and Chief Financial Officer, Randy Toone, Executive Vice President and President of our midstream business, Brad Grant, Executive Vice President and Chief Legal Officer, and Jon Morrison, Senior Vice President, Investor Relations and Corporate Development, to help answer any questions that you might have. In addition, the investor relations team will be available after the call for any follow-up questions that you might have. We'll also 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 here on slide two of our presentation and which can be found on our website, and more fully within our public disclosure filings on SEDAR and EDGAR. With that, I'll now turn the call over to Randy Crawford.
Thank you, Adam, and good morning, everyone. Thank you for joining us. After nine months of going through the put process with SAM Holdings and our joint venture partner, Idemitsu, we are excited to be here with you announcing that we have come to a definitive agreement with regards to Petrogas. I'll be running through the presentation today. Since we aren't in person, I'll try to remember to cue you when we move to the next slide. As shared in our public press release this morning and captured on page three of our investor presentation, AltaGas is indirectly acquiring an additional 37% of Petrogas equity for total consideration of approximately CAD 715 million. This consideration includes the acquisition of approximately 4.8 million shares of Petrogas and incorporates working capital normalization and other certain factors.
Post-closing, AltaGas indirect ownership in Petrogas will increase to approximately 74%, with our joint venture partner, Idemitsu, owning the remaining approximate 26%. We are excited about the opportunity to increase our ownership interest in Petrogas. This acquisition is consistent with our global export strategy, our growing midstream operations, and corporate focus on building a diversified, low risk, high growth utilities midstream business that is set to deliver resilient, durable and compounded value for our stakeholders. Along with our Ridley Island Propane Export Terminal, or RIPET, as we call it, and our existing midstream assets, it positions the company to capture efficiencies that will accrue to our shareholders and producers across Western Canada.
The capital intensity of Petrogas asset base is very low, and the platform should produce strong and recurring free cash flow over the coming years that will allow us to deleverage our capital structure and fund our low-risk growth of our utilities and midstream platforms. In addition to increasing our interest in the Ferndale LPG export terminal with propane and butane export options, the acquisition will also provide AltaGas with greater access to NGL supply and storage, including Fort Saskatchewan. It will expand our logistics capabilities with significant complementary and contracted asset base in key regions across North America and add a large network of additional customer relations, along with operational expertise across these regions. The continuous improvement of our logistics capabilities, along with low capital intensive investments in additional storage and rail improvements, will provide the opportunity for cost reductions that will accrue directly to the bottom line.
Although many of you are familiar with Petrogas, as it has been part of the AltaGas platform since 2014, we wanted to give an overview of the platform, so we'll do so starting on page four of the investor presentation. Petrogas is one of the largest privately held midstream and logistics companies in North America, with operations dating back to 1985. The company operates a large-scale, fully integrated natural gas liquids and crude oil platform that provides sourcing, storage, marketing, and transportation services of NGLs, LPGs and crude oil for customers, 86% of which are investment grade, throughout Canada, the U.S., and Asia.
In total, Petrogas has four divisions, but the first two are the most important, as they represent more than 90% of the EBITDA. The first is LPG exports and distribution, which is comprised of the Ferndale LPG export facility and engages in the purchase, sale, and distribution of LPGs throughout North America and Asia. The second is the domestic terminals platform, which operates various North American storage terminals that support the LPG exports and distribution activities. The division also enters into long-term take-or-pay contracts for management, logistics, and optimization services. On slide five, we highlight some of the strategic rationale behind our increased investment. The acquisition supports AltaGas' vision and long-term strategy. It aligns with our corporate focus of building a diversified, low-risk, high-growth utilities business that will deliver resilient, durable, compounded value to our stakeholders.
We are now able to consolidate our ownership in the strategic assets that AltaGas knows well, and we are positioned now to optimize for the benefit of our company and the broader North American energy industry. The addition of Ferndale provides in excess of 50,000 bbl of butane and propane export capacity and will increase our export capacity to more than 130,000 bbl a day and advance our global export capability and product offerings. The addition of butane to the AltaGas product offerings will provide producers a one-stop market for both propane and butane. The acquisition also provides improved access to supply in Fort Saskatchewan and creates significant supply and logistics optimization opportunities, providing benefits for the broader energy industry. The acquisition is being done at attractive financial metrics that we will get into more detail later in this presentation.
Lastly, we take comfort in the fact that this continues to advance AltaGas' environmental and carbon reduction goals. This transaction will leave us as the largest exporter of clean, lower carbon Canadian energy to Asia. Flipping to slide six, we highlight Petrogas' footprint relative to our existing assets. As you can see, there are multiple interconnects with AltaGas' existing footprint, which positions us with increased touchpoints across the energy value chain. It provides enhanced optionality for customers and producers across the basin to optimize price realizations and realize improved cash flow from production. It also positions AltaGas to leverage its industry-leading footprint in Northeast British Columbia to grow alongside large industry-led growth initiatives associated with condensate supply, supporting oil sands production, and long-term feedstock for LNG Canada.
We believe it continues to position AltaGas midstream platform for where the market is heading over the next three to five years. On slide seven, we highlight the Ferndale advantage, where shipping distances between the terminal and key Asian import markets is approximately 11 days, compared to 25 days out of the U.S. Gulf Coast and 18 days out of the Arabian Gulf. This is very similar to the shipping advantage that RIPET provides and allows producers across the premium LPG markets in Asia. Initially, we will continue to send merchant volumes to Asia as we focus on our goal of increasing our long-term tolling arrangements. Our mission here is to provide industry participants with long-term contracting opportunities and improved egress for their LPG output. On slide eight, we highlight how the Petrogas assets fit into our existing midstream value chain.
As you can see, there are multiple interconnects with AltaGas' existing platform, which enables AltaGas to touch increased molecules across the value chain. The platform will provide increased scale and multiple paths to the market and enhance flow assurance for our customers. It provides enhanced functionality for customers and producers across the basin to optimize price realization. On slide nine, we highlight our historical background with Petrogas and our partner, Idemitsu, where we have been aligned in a partnership since 2013 and held a 2/3 ownership interest of Petrogas since 2014. We have also had operational responsibility for these assets in the past. As such, this transaction is increasing our ownership in strategic assets that we know well.
The assets that we have been part of the AltaGas platform in a smaller form for the past six years are well-positioned to optimize for the benefit of our company and producers across Western Canada. We are also excited to be continuing our long-term partnership and working alongside Idemitsu, a partner we hold in the highest regards. We look forward to leveraging the best practices of our company and Idemitsu in an organization that has been involved in global energy sector for more than a century. On slide 10, we provide some financial highlights. We are not going to go through these in detail, but we wanted to be very open about the past performance of Petrogas to help the market understand its historical performance and what we see on the horizon.
Over the past three years, from 2017 to 2019, Petrogas' average normalized annual EBITDA has proven approximately CAD 186 million, with 2019 being a record year. This is a credit to the Petrogas team, which has a long history of increasing LPG exports through strategic investments and solid commercial strategies. Over the trailing 12 months at June 30th, 2020, normalized EBITDA was fairly consistent at approximately CAD 184 million. Within these figures, the positive impacts of contract settlements and other factors have been backed out to not overinflate the trailing averages for any of these events that do not occur frequently. Flipping to slide 11, we provide some guidance around the pro forma contribution as expected to look like.
Assuming consistent LPG exports from Ferndale in 2021, the current forward curves and other logistic assumptions, coupled with Petrogas' fixed fee-based contracts, Petrogas is expected to earn an estimated CAD 185 million of EBITDA in 2021 prior to our operational synergies. In addition, by optimizing the marketing contract portfolios and logistics, together with supply chain efficiencies and potential cost savings, AltaGas also estimates there to be an opportunity for approximately CAD 30 million of annual synergies. The company plans to take steps to substantially achieve these synergies in the first full year and be fully realizing them on a run-rate basis at the end of 2021. As such, on a run-rate basis, the platform should provide approximately CAD 180 million of incremental EBITDA versus the previous contribution that was only recognized our equity pickup and our preferred share dividend.
On a run-rate basis, we anticipate that this transaction will be approximately 10% accretive to EPS, approximately 15% accretive to cash flow per share, while improving our pro forma run-rate leverage metrics despite entirely debt finance. The transaction, based on 100% debt financing, implies a purchase price of 4.6 x pro forma incremental debt to pro forma incremental EBITDA and will therefore be credit accretive. Any subsequent non-core asset sales over 2021 will be expected to further improve AltaGas credit metrics. On slide 12, we highlight our pro forma integrated midstream business after the transaction. As the slide depicts, the AltaGas value chain is based on operations that spans from the wellhead to global markets. The acquisition expands our global export capability, which we believe will attract additional rich gas to our existing North B.C. assets and provide incremental investment opportunities surrounding the Montney.
We are a high-quality operator that has built our business with the purpose and is well-positioned for where we believe the market is headed over the next three to five years. Over the coming years, you can expect us to be focused on actively de-risking the platform, improving our financial returns, and driving value from increased volumes through our existing assets. It is how we create value for our stakeholders, including our customers. On slide 13, we talk about the road ahead, which will be focused on integration and optimization. Integration and optimization are mission-critical. The ability to capture and exceed targeted synergies will be the difference between a good investment and a great investment. We will be focused on optimizing past investments made within Petrogas as we take over operational responsibility. We will be integrating logistics operations with AltaGas' existing export logistics operations.
The transaction is focused on enhancing AltaGas' value chain with Petrogas midstream infrastructure logistics service offerings that will extend and strengthen the company's integrated platform. We will offer material value-added benefits for our producer suppliers and end-use customers. We estimate in the short term, there will be approximately CAD 30 million of annual synergies with the combined platform, including supply chain efficiencies, market optimization, strategic positioning, and other cost-saving opportunities. In the longer term, the addition of the Petrogas assets will position AltaGas with the opportunity to make investments to facilitate the full utilization and capacity of our combined platform to export additional LPG cargoes to Asia. Petrogas has a long history of increasing LPG exports for limited capital outlay. AltaGas will continue that focus.
This includes leveraging the shipping advantage relative to other facilities, capturing opportunities from the continued strong growth in LPG demand expected over the coming decade, and providing a premium market for the excess natural gas liquid supply that will come from the Montney as LNG Canada increases volumes. In the final slide, on 14, shares who AltaGas is on a broader level. We are a leading North American energy infrastructure company that connects natural gas liquids and natural gas to domestic and global markets. At our core, we are committed to maintaining safe and reliable operations, continuing to deliver critical energy to end users, and honoring the social and moral contract that we have in the communities we serve. We believe we have a clear plan.
We are convinced that the future of Canadian LPG lies in the global economy, and AltaGas is now positioned to provide significant access to those markets. We remain entirely focused on de-risking our platform, which includes our balance sheet, counterparties, contract duration, and cyclicality. We are building a resilient business that is focused on creating durable and expanding earnings that compound shareholder value over time. With that, I believe that covers all of the prepared comments that we wanted to make. I'll turn it over to the operator to open up the line for questions.
At this time, if anybody would like to ask a question, please press star one on your telephone keypad. Again, that will be star one on your telephone keypad. We'll just wait a moment to compile a Q&A roster. Your first question comes from Rob Hope from Scotiabank. Your line is open.
Morning, everyone. First question is just on the 37% that you're going to pick up. Can you maybe add a little background of how the discussions went with your partner and why there was a 37% increase here versus SAM Holdings 33%? Why did the partner not want to participate? It does look like you bought a little bit of their shares as well.
Sure. Look, as we went through the put process, clearly I'm going to let James talk to you about your question specifically about the 37% and 33%. Clearly, we're very happy with the transaction. In terms of our partner, Idemitsu, who I have tremendous respect for you. I mean, we don't want to get in specifically to what the drivers were for them exactly. Clearly, AltaGas has the majority of synergies and the operational capabilities to drive the real value here.
Rob, we're excited about the opportunity, and we believe it fits very well into the platform, into our existing midstream and export. We understand that the potential to contribute to our strategy going forward. I think that we're very pleased to be acquiring the entire interest in consolidating the asset. James, do you want to speak specifically to Rob's question about the 33%-37%?
Yeah, Rob. James here. Obviously, in the capital structure of Petrogas, both AltaGas and SAM Holdings had CAD 150 million each of pref shares. Those preferred shares were converted by SAM Holdings at the end of 2019. We're going to convert ours pre-close. That's how you get to the 74%. We both go from 33%-37% once you account for those pref conversions to common.
All right, thanks. Maybe just as a follow-up, just how are you thinking about allocation of capital? With some of the larger midstream projects having been completed, it would have seemed that the focus has been on quicker returning cash utility investments. Does this signify a bit of a change there and more willingness to do midstream? Was this a one-off and moving forward organic should largely be on the utility side?
Rob, with our midstream business, we're in a fortunate position where we've completed our RIPET export facility and our Townsend and North Pine expansion. We're in a position to really harvest those cash and fill up the existing capacity. Each one of those businesses are well-positioned to do that, and they generate a lot of free cash flows. Right now we have a significant opportunity for growth in our utility business. In terms of our hurdle rates, again, we're generating significant cash flows from our midstream business. We're reinvesting as we're doing going forward with the Petrogas investment, and we believe that will add additional volumes to our infrastructure and provide investment opportunities well above our cost of capital into the future.
As we go through our prioritization and in terms of our capital investments, we're always looking at the opportunities to invest in both of these businesses. I think they both have tremendous opportunities going forward. We're really in an enviable position right now with respect to our midstream assets, and we can have low-cost expansions and continue to add volumes for minimal capital.
All right. Thank you. Appreciate the color.
Your next question will come from Ben Pham from BMO Capital Markets. Your line is open.
Hi. Thanks. Good morning. I wanted to touch on your comment around the credit accretion that you expect, and I just want to make sure I understand some of your financial metrics you put up here. You're going to be issuing CAD 700 million of debt, but you're also assuming or consolidating the debt at Petrogas. Is that 4.5, is that suggesting that Petrogas, there's couple hundred million dollars of debt you're consolidating there? I guess net really in the end, where do you see leverage really going here post-Petrogas ownership change?
Sure. Ben, really in terms of debt with Petrogas, we're forecasting debt at year-end to be less than CAD 100 million. A small amount of debt on the balance sheet. When it comes to debt, the acquisition is debt accretive, even if financed, as I said. We have additional non-core assets that are available to sell when the time is right. The sale of those non-core assets in addition to the debt accretive Petrogas, will further reduce debt metrics going forward. James, did you want to comment as well?
Randy, I think you touched on some of the salient points. Ben, if you look at what we're forecasting for net debt, it's between CAD 75 million-CAD 100 million of debt at Petrogas level at year-end. Randy touched on it. They generate significant free cash flow, and they've seen significant de-leveraging over 2020. That's where we expect the debt to end up. We're going to be obviously drawing about CAD 715 to pay for the equity at close. Our debt will go up by CAD 815 million, roughly.
If you look at the incremental EBITDA that we would be consolidating, then we would expect our net debt to EBITDA to come down by 0.15 turns using consensus estimates. Beyond that, we expect further deleveraging, and Randy touched on it through non-core asset sales. Some of the non-core assets that we've talked about in the past continue to be in our power portfolio and obviously our non-operated pipeline in the U.S. being MVP.
With that leverage reduction, especially with asset sales, are you comfortable with your conversation with credit rating agencies and maybe a subtle change in business risk mix there? Is that your leverage target you had previous transaction? Are they still intact, or do you need to move the guideposts internally for you to sustain credit rating?
No, I think they're still intact. We have had preliminary discussions with the rating agencies, obviously it is going to be credit accretive, not only from a net debt to EBITDA standpoint, but from an FFO to debt standpoint as well. Those discussions have gone well. We don't expect any issues. The put process is something that the rating agencies have been aware of since it began back in January of 2020. Even when we account for Petrogas on a consolidated basis pro forma, the majority of our EBITDA continues to come from the utilities, which is something that all the rating agencies have cited as a credit positive. I don't think it materially moves the utility contribution below a range that the rating agencies have cited as a credit positive historically.
Okay. Can you remind me lastly of non-core asset sales? You mentioned Blythe and MVP in the past. With the addition or more control of Petrogas, is there maybe anything else within that could be on the list?
Yeah, Ben, I'll address. I think it's too early to speculate. Most of the midstream assets are part of an integrated value chain. We do have an integration team in place, and it will be their job to evaluate that over time. That's through the integration process. We'll make that conclusion. The majority of these assets fit very well into our midstream platform.
All right. Very good. Thank you.
Your next question will come from Andrew Kuske from Credit Suisse. Your line is open.
Thank you. Good morning. If you could just provide us a bit more color on the composition of exports off of Ferndale and how you see a future interplay by pushing more propane volumes to RIPET, and what that does to further de-risk RIPET itself?
Sure. When we look at Petrogas acquisition, we're looking at a world-class supply basin in the Montney, as well as a growing premium Asian market over the long run. We feel confident in our overall asset position. As with RIPET, we'd be looking to transform our export business into a more global fixed-fee business. Again, by providing Canadian supply to global markets, we're going to do our part to legitimize the Montney in the eyes of the Asian markets, and I think that's critical. LNG Canada will also support this mission. We believe that once the Canadian supply can reliably be made available to the Asian markets, that we will see the market reaching back, even through RIPET and Ferndale to lock up longer-term. We've also had significant interest from producers and aggregators in locking up capacity in the market in the long term.
No, this won't happen overnight, but where we're active, we'll have hedging activities that cover that risk. Again, in terms of synergies as well, optimizing and integrating PAC by maximizing the use of assets, supply chain, rail logistics, expect increased utilization there, specifically increasing the load factor and utilization of rail cars, optimizing the rails interconnect, and we can decide where to send the product, are just a few examples. That gives us the confidence in this, and we do it every day, and we'll continue to de-risk the assets.
Maybe just another way of getting into some details. From the time that you started RIPET to now, to what degree do you feel that Petrogas was effectively impacting your economics at RIPET from a propane supply? Because obviously some propane was moving down to Ferndale versus the opportunity up at RIPET. Is there any quantification of the impact that that had on you volumetrically or financially?
No. Look, I think Ferndale's been operating for quite a while. RIPET came on board a little over a year ago. We're in an oversupplied position for propane and butane, and now we'll be able to have an integrated solution to provide valued Asian markets for butane as well. I think again, we're actually increasing competition for the market and providing other alternatives for producers. Again, I think it's just improving the overall net backs to customers, which will increase drilling and more volumes. Again, I don't think nothing has changed in terms of the last few years, at least a year or two, as these assets have been operating.
If I can, maybe just one final question, broader in nature. Clearly there's assets in Petrogas that are clearly core, and then are there some assets that you would view non-core disposition candidates into the future?
Yeah. Well, like I said earlier, I think it's too early to speculate. Again, most of the midstream assets are part of an integrated value chain, and that's important. Again, I think that's just too early at this point to say. Our judgment is that this is an integrated platform that creates tremendous value for customers. We'll look at that, but at this point, it's too early to speculate.
Okay. That's great. Thank you.
Your next question will come from Robert Catellier from CIBC Capital Markets. Your line is open.
Hey, good morning, everyone. Congratulations on this important transaction. Also, thank you for holding the call this morning. Most of my questions have been answered. Maybe just some clarifications here. I think you responded to Ben that you are not changing your leverage targets pro forma Petrogas. Is that correct?
Well.
So I just-
It's actually improving those credit metrics. Go ahead, James. Sorry.
That's what I was going to ask for clarification on, Robert. Clearly, the metrics themselves are going to get stronger as a result of us consolidating Petrogas, both at the FFO and net debt to EBITDA level. We will see a positive trend in that direction even before we consider further asset monetization from non-core assets.
Right. Perhaps I didn't ask the question properly. It's clear that your metrics are going to improve given the valuation you're paying for the asset. My question is on your targets. It looks like despite the change in business profile, you're keeping your existing targets. If that's the case, given the strong free cash flow coming out of Petrogas, how much quicker will you actually attain those targets? It looks like it should bring you closer to your targets a lot quicker.
Yeah, that's right. We've said all along that we're striving to get below 5x net debt to EBITDA. You are correct, with the free cash flow generation of this, it will accelerate that. We've always said that that's a medium-term goal of ours. We feel that we could probably get there in the next two years without asset monetization, maybe even quicker if we're successful in monetizing MVP or Blythe later in 2021.
Yeah. Just on the funding, it's clear that you're keeping this with short-term debt so that you can monetize those assets and pay down the debt. I wonder if you could speak to the relative quantum that you're considering on the asset sales. Further to that, assuming you make those asset sales, pay down some debt, you're going to be in a stronger free cash flow position. Would the priority for capital allocation at that point be further debt reduction, organic growth, dividends, or something else?
Well, I think that all of the above, right? We'll go ahead and continue to reduce our leverage. Our goal is to increase, again, subject to the board's approval, to continually increase our dividend consistent with our growth in earnings per share. We'll come out and talk about that with the board's direction. Overall, we'll be looking to invest in organic growth projects that are in excess of our cost of capital. Yeah, we're going to execute on all those fronts.
Okay. Longer term, what is the vision for the remaining 24% interest that Idemitsu continues to hold?
Well, again, we have tremendous respect for Idemitsu. They've been a tremendous partner and a value-added resource as we go and expand our relationships in Asia into our customers as well. Again, our intention is to really, at this point, integrate this asset, create the value and the synergies that we had said. I think that we just value Idemitsu, and we expect them to continue as a partner over the long run.
Okay. Fantastic. My final question is just a clarification. Randy, in your prepared remarks, I got the impression that there's no tolling currently at Ferndale. It's entirely merchant. Is that correct?
No, that's not correct. I didn't mean to do that. There is currently tolling at Ferndale in the range of around 30%. Again, what my comments were is that we're going to continue to de-risk the asset. At the same time, the acquisition increases the access to markets. By bolstering that capacity at the demand end of the value chain, we're going to provide us opportunities. We expect the front-end processing to grow and increased fractionation will provide more barrels as well. We'll execute the hedging strategy on those merchant volumes similar to what we're doing with Petrogas and continue to de-risk the asset. We want to be, again, opportunistic as well as we take advantage of this valued asset and the strong commercial skills that come with Petrogas and the management team.
Okay. Excellent. Thank you very much.
Your next question will come from Patrick Kenny from National Bank Financial. Your line is open.
Yeah. Good morning, guys. Maybe just to follow up on that 30% tolling number at Petrogas. I know you're looking to ramp up your tolling percentage there at RIPET next year towards, I think, 60% + by year-end. Would you have any similar targets for Petrogas as well through 2021? I'm just curious if going after both tolling agreements at Petrogas, while at the same time trying to secure supply for RIPET, might have any impact on your timing for reaching your goals at RIPET by year-end 2021.
Yeah, sure. Look, certainly every company would like to eliminate risk from its portfolio, and that's what we've been going to balance. Our primary approach is going to balance the various linked term related to tolling contracts with some of the hedged merchant activity that provides some upside, as I said, for the company. Propane and butane export terminals, coupled with the storage, do create the optionality, and we plan the business to capture those short-term arbitrages through the option value and to augment those revenues surrounding our export business.
Specifically to your goal, we need to get in there and make a judgment. Clearly, we have significant interest from the market both from producers, large aggregators, as well as the demand side of this equation. I'm not prepared to give you specific targets for Petrogas until we get in there, but I'm confident in the direction that we're headed and that the macro is strong for us.
Okay, great. Then just with respect to funding the transaction, I know you're looking at non-core asset sales next year. I assume that the 15% cash flow per share accretion does not take into account any asset sales next year. So I'm just wondering if you do take sort of a base case scenario for an asset sale of, let's say, MVP at precedent multiples, what the pro forma cash flow accretion might look like here on today's transaction including the sale of MVP as well.
Well, certainly, like we said, we can finance this as we're doing, and we'll sell the assets when the time is right. In terms of your specific question on the metrics, it certainly has an improvement on the credit metrics if we were to transact it at the multiples that you're talking about. James, I don't know. We've run those, but I don't have those numbers right in front of me. We could provide that.
Sorry, I didn't catch the multiples you're assuming, because that obviously will drive those metrics.
I guess if you want to just take maybe the precedent transactions for the other U.S. midstream assets that were sold over the past couple of years, just as a starting point, and then what that might do to the 15% run rate accretion here on a cash flow per share basis.
Yeah, that's a pretty broad range. If you look at precedent transactions for these pipelines, we've seen them between 12.5-14.5. I think if you use a midpoint, I'd say that easily adds about 200-250 basis points to those cash flow accretion metrics.
Okay, thanks, James. Last one for me, guys. Just wondering if you could speak to any future growth potential here off the asset base, either at Ferndale, just confirming whether 50,000 bbl a day is the max, or also at Fort Saskatchewan any future growth opportunities on the undeveloped land there, and which might represent further upside to the CAD 185 million base EBITDA? I guess conversely, is the Petrogas asset base more supportive of, say, further upstream growth within your Northeast BC, Northwest Alberta footprint on the gas processing side?
Yeah. As I've said, the core of our export strategy is going to augment that by increasing volumes, increasing netbacks to customers. It certainly will add investment and growth opportunities to our fractionation and processing assets. Similarly situated to RIPET as Ferndale is, there is significant opportunity for low-cost expansion capabilities above, as we said in our press release and comments, the capacity a minimum of 50,000. We certainly see de-bottlenecking and other opportunities that can provide us, we believe, significant opportunity for growth in the years ahead. These are assets that are well-positioned. It's really about the logistics. You talk about Fort Saskatchewan, we're going to have access to more storage, more capabilities. We'll look at more unit trains, more optimization, and those are the key factors that drive increased throughput and allow us to bring more volumes to both facilities.
The guidance we gave is specific to where we're headed in 2021, but beyond that, we see significant opportunities. As I said, the market is hitting more to the opportunity to reach these Asian markets going forward. We think we're in the right spot with some great assets.
Okay, thanks for the color. Thanks, Randy.
Your next question will come from Linda Ezergailis from TD Securities. Your line is open.
Thank you very much. I'm wondering if you could provide any incremental details about the two-year earn-out in terms of the conditions that must be fulfilled for it to be paid. How is it calculated, and what are the bookends of the amount that might get paid out?
Sure. I'm going to let James give you the specifics, but it's really an incentive that the team stays in the game and helps the solid transition going forward, and it's an earn-out. James, why don't you go ahead and provide the details for Linda?
Linda, it's a payment that's up to CAD 16 million at the maximum. It is tied to specific EBITDA targets. Obviously certain milestones from a transition standpoint as we transition the business over to us. The way we would be accounting for it, if and when it becomes payable, is as an expense through the P&L. We factored that into our EPS guidance that we're providing to the markets here from an accretion standpoint.
Thank you. Sorry, just to clarify, is that CAD 16 million or CAD 60 million?
16.
Okay. Thank you. Maybe also, just to get a better understanding of the governance at Petrogas now that AltaGas is the main owner. Have there been any updates? What are the options available for Idemitsu to exit? Conversely, are there scenarios where it has options to flex up its ownership? Just wondering if you can walk us through. Further to that, on the governance side, can you provide some parameters about any delineation about who does what, like if certain investments are to be made at the Petrogas level versus the AltaGas level?
Sure, Linda. We've been part of Petrogas through this JV and Idemitsu since 2014. In fact, we've been the majority shareholder through our joint venture, owning 66%, and we had four board seats. The only thing that's changed is that AltaGas is owning an increased share, and we have operating responsibility going forward. In terms of the specific governance, there's some specifics around capital investments and such as you would expect under a joint venture types of agreements. I don't know if Brad or James want to add any more specifics around that.
It's Brad here. I don't think we want to get too deep into the specifics on the given confidentiality around our commercial relationships with our partners. We do have an existing unanimous shareholder agreement in place now at both the AIJV, the Petrogas level that governs certain rights. We will continue to operate going forward under those agreements. We may make modifications with the new shareholder interests. Those discussions are still underway right now with our counterparts.
Thank you. Maybe you can just help me understand. Petrogas has a history of making some pretty interesting strategic acquisitions, and I'm just wondering what the thoughts are beyond the organic growth that you've identified beyond 2021. What sort of acquisitive opportunities there might be over time at Petrogas and how those might be financed?
Sure. Look, Linda, I think at this point, I have the utmost respect for the Petrogas management team and Stan Owerko, who's built a tremendous company. We're looking forward to working with them and working together to get continued strategic ideas. I'd like to get the opportunity to actually buy this and integrate it before we look at other types of acquisitions. Right now, I think our main focus is on really driving the integration and the optimization of these assets and providing the value to our customers. Again, we'll get increased access to the port, more supply, and if there's bolt-on and other opportunities, we'll certainly consider them. Right now, I think our primary focus is to get this integrated and to create the value and drive the EPS that we have guided to.
Thank you very much.
Your next question will come from Robert Kwan from RBC Capital Markets. Your line is open.
Great. Good morning. You gave some contracting color around Ferndale. I am just wondering if you take it up to a higher level, I think your guidance for 2020 is 60% regulated, 25% take-or-pay, and then equal amounts of fee-based, merchant, hedged, and unhedged. If you took the 2021 EBITDA guidance for Petrogas and included that, what would that contract type mix change incorporating what Petrogas has today?
James, do you want to address that?
Robert, I'm going to have to ask you to repeat that question. There was a lot of data there. Can you go through that again?
Yeah. If you take your existing 2020 contract type pie chart and you layer on Petrogas at your expected 2021 EBITDA, but with the current Petrogas mix of take-or-pay, fee-based, and merchant, how would that shift your overall mix? If it's easier, what would Petrogas standalone mix look like?
Yeah. I don't have that at my fingertips. Why don't we take that offline, and we can deal with that in a follow-up call here after this.
Sounds good. Then James, you also mentioned on the accretion with the sale of MVP that you expected that could increase the cash flow accretion by 200, 250 basis points. Are you making that calculation presumably based on MVP contributing nothing at this point to cash flow? Or is that net of a lost cash flow?
Yeah, no, that's right, Robert. If you look at where MVP has been in terms of its contribution in 2019 and so far in 2020, it's AFUDC, right? In 2021, between the start of the year and when it becomes operational, it would continue to be AFUDC. That's why once we monetize it's not really contributing anything to cash flow, but it would allow us to delever and save cash interest, so that's where we would get the lift to cash flow for sure.
Is it fair to say then on a full kind of apples basis, it would actually bring those numbers down?
If it was contributing cash flow?
Correct.
Yeah.
Right.
Yeah. Right now it's AFUDC.
Just the last question's on the ownership structure. I get you have certain kind of commercial or governance agreements. Is it fair to say, though, that Idemitsu at a minimum has negative control? Can you comment if you decided to do anything with your midstream business in the future, are there any tag-along or drag-along rights that we should be aware about?
Yeah, I would say it's more of a passive investment, but we certainly work hand-in-hand with them in terms of they add value, but generally speaking, that's correct. No types of issues with, if you're talking about other options with the asset down the road because the acquisition further positions the company for that option, obviously. I don't think we're there yet, and it's critical that we integrate this business with our own. Until we do, we're not ready to consider that option. To your question, no key drivers that would impact that within the midstream.
That's great. Thank you very much.
Again, if anybody would like to ask a question or has a follow-up, please press star one on your telephone keypad. Again, that is star one on your telephone keypad. Your next question comes from Elias Foscolos from Industrial Alliance. Your line is open.
Good morning. Congratulations.
Good day.
I've probably got a question directed more towards Randy Toone regarding optimization of the Petrogas assets. It was touched upon by Randy earlier and Patrick Kenny. In your CAD 30 million of synergies or synergy EBITDA, is there any capital involved in that, or is that mostly sort of supplies and logistics?
Yeah, this is Randy Toone. There's minimal capital in that CAD 30 million. It's mostly just optimization of, say, rail cars. Lower rail costs. Less demurrage , just more efficient operation with rail logistics and also marine logistics, we see a big part of that CAD 30 million.
Okay. Following up, again, a bit more on the asset. You've clearly had your hands off from an operational point of view, and I sort of sit back and look at the asset and I'm perplexed as to why it's sort of a mixed export. Randy earlier alluded to debottlenecking opportunities, is there sort of a larger broad stroke change that you might consider, which is making it pure butane, for example? That is something that you've contemplated, or is it too early to tell?
Well, no, I think it might be too early to tell, but I think the team at Petrogas has always optimized the product mix and clearly having the flexibility to move both propane and butane export to the growing Asian market is going to be critical. Yeah, a little bit too early to tell you if we could make a complete shift, but certainly we'd be focused in on providing our customers as much access as we could practically provide, whether that's for butane and propane, and it's going to give us a lot of flexibility to do a good bit of that, and we're really looking forward to it. We've really become, to your point, more of a logistics company here, right?
Our sort of growing capability at RIPET and Ferndale is going to put a significant premium on the ability to move those products efficiently, right? Randy alluded to it, and we're rapidly becoming as much of a logistics company as we are an asset operator. The continued development of what Randy and his team are building, a world-class operations and logistics center, is going to be key to how we maximize value. Absolutely, we'll consider exactly what you're pointing out, if that's what the customers are looking for.
Yeah, the customers, I'm not sure if it's the end market or the producers, whatever the customers are. Yeah, that was the guts of my question. Thanks for that clarification.
No, thank you.
Maybe one last question for James. The 4.5x number that was quoted in terms of acquisition or debt assumed to EBITDA, is that net of the pref dividends and also does it include estimated operational synergies?
There wouldn't be any pref dividends coming from Petrogas on that EBITDA because we will convert, so there is no pref dividends that grind that number. It is the incremental EBITDA that we would be consolidating once we take operational responsibility or 74% ownership, and it does include partial synergies.
That's what I thought on all those, but I wanted to be clear. Thank you very much. That's it for me, and I'll turn it over.
Thank you.
This brings us to the end of our Q&A session today. I would like to turn the call back over to Adam McKnight for closing remarks.
Thank you, Michelle. 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. Please reach out via email after the call to either myself or Jon Morrison. Both of our emails can be found in the press release. We'll do the best we can to connect and ensure everybody's questions get answered. That concludes our call this morning. I hope you all enjoy the rest of your day. You may now disconnect your phone lines.