Veresen's (FCGYF) CEO Don Althoff on Q2 2016 Results - Earnings Call Transcript

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Veresen, Inc. (OTC:FCGYF) Q2 2016 Earnings Conference Call August 4, 2016 10:00 AM ET

Executives

Mark Chyc-Cies - IR, Director

Don Althoff - President & CEO

Theresa Jang - SVP & CFO

Analysts

Robert Catellier - CIBC World Markets

Dirk Lever - Altacorp Capital

Robert Kwan - RBC Capital Markets

Steven Paget - FirstEnergy Capital

Ben Pham - BMO Capital Markets

Rob Hope - Scotiabank

Faisel Khan - Citigroup

Jesse Snyder - Financial Post

David Galison - Canaccord Genuity

Operator

Welcome to Veresen's Second Quarter 2016 Conference Call. Please be advised this call is being recorded. I would now like to turn the meeting over to Mr. Mark Chyc-Cies, Director, Corporate Planning and Investor Relations. Mr. Chyc-Cies, please go ahead.

Mark Chyc-Cies

Thank you, Dan. Good morning and thank you for joining us on this conference call discussing our enhanced funding strategy as well as our second quarter operational and financial results. With me in Calgary this morning are Don Althoff, President and Chief Executive Officer and Theresa Jang, Senior Vice President Finance and Chief Financial Officer.

On this call, we will provide a discussion referencing a webcast presentation which is also available on our website at Vereseninc.com before moving on to Q&A. Some comments made on the call today and certain statements contained in the presentation, are forward-looking in nature. Forward-looking information is subject to risk and uncertainty and consequently actual results may differ materially from what is indicated. We caution all participants not to place undue reliance on this forward-looking information.

Also, certain financial information may not be standard measures under U.S. GAAP and may not be comparable to similar measures presented by other entities. These are considered to be important measures used by the investment community and should be used to supplement other performance measures prepared in accordance with GAAP in the U.S.. For further information on non-GAAP measures, please refer to our most recent MD&A and financial report.

Now, I would like to turn the call over to Don.

Don Althoff

Thanks, Mark. Good morning, everyone and thank you for joining us. While Theresa will discuss our second quarter results in more detail in a couple of minutes, I wanted to make a few points that we felt the stage for us taking the actions we announced yesterday. Our strong second quarter results were driven by good performance across the board, but especially by Alliance which has consistently been exceeding our initial expectations under its new service model. Furthermore, we believe that the market fundamentals that underpin our current performance are likely to be sustained for the next several years, with additional upside potential if NGL fundamentals continue to improve.

This has been reflected in our increased 2016 guidance which is largely based on the performance of Alliance and Aux Sable in the first half of the year, as well as our view that the market fundamentals that underpinned this performance will continue. We have been considering both the sale of the power business and suspending the drip for a while. It is largely our confidence in the sustainability of market fundamentals supporting Alliance that makes it the right time to move forward. We have also wanted to have visibility to the first two facilities in Veresen Midstream coming into service.

We have seen good progress in the construction of these facilities, with both expected to come on near the end of 2017. And while our capital requirements were already fully funded under our drip program, the strong performance of the base business and the progress of Veresen Midstream growth creates the opportunity to optimize our funding plans to deliver on two very important strategic priorities. It allows us to align our asset base around our strategy of focusing on natural gas and natural gas liquids infrastructure and it improves our per share growth metrics, while also improving our debt metrics. With that backdrop, we have determined the time is right to pursue the sale of our power business, use the proceeds to fund our growth and suspend the drip.

Over the last few years, we have grown our power business into a high quality portfolio of scale. In 2015, we placed the Dasque Middle run of river hydro facility and the St. Columban and Grand Valley 3 wind farms into service. This capped approximately $600 million of development projects net to Veresen since 2012 and resulted in the addition of 305 net megawatts of power generation capacity. Looking forward, this is a business that will become less and less material within the Company and we just do not believe it will offer the growth and the returns that can compete with the rest of our businesses. We have also seen the development of a very competitive market for power assets, with the rise of several power focused companies as well as the entry of financial players, like pensions and other large funds.

As we have seen with comparable transactions and with our Glen Park disposition, the multiples that assets of this nature are trading at very attractive levels. The steps announced today are in service of our strategy which has not changed. We're and we will continue to be to build out an integrated, natural gas and natural gas liquids infrastructure business focused within Western Canada, the U.S. Midwest and the Pacific Northwest triangle. With CAD1.4 billion in capital projects contracted and under construction, relative to the size of our Company, we offer best in class growth. That said, we do not pursue growth for growth's sake.

We're focused on translating topline growth into per share growth. At the same time, we need to take care of our balance sheet and make sure we maintain the financial flexibility to execute our business and take advantage of opportunities that arise. Maintaining an investment grade credit rating is very important to us and critical to our ability to execute the business. These actions will improve our financial position. When one looks at the metrics of our power business, the benefits of the power divestiture is pretty clear. Power is currently about one-seventh of our EBITDA but we estimate that the disposition will reduce our absolute debt today by one quarter to one-third.

Prior to these steps, we expected our leverage to be approximately 4 to 4.5 times EBITDA once our growth projects were in service, but we're now able to bring some of that deleveraging forward. The other part of our strategy that has always been important and will continue to be a priority for us is our CAD1 per share annual dividend. Over the last five years, we've taken a business that funded roughly one quarter of the dividend with commodity exposed cash flows to one that is now completely supported by take or pay or fee for service contracts.

Slide 5 highlights our projections of how this divestiture will impact some of our metrics. Today, our EBITDA is in the range of CAD650 million to CAD750 million and our debt is approximately 5 times EBITDA. We expect that the sale of our power business will strengthen our balance sheet, although we will see a decrease in our EBITDA. Alliance will be approximately 50% of our EBITDA which is why being very comfortable with its performance under the new service model was so important to us.

Now, while this slide assumes that both the power divestiture and the midstream build-out occurred today, what you can see is that following the completion of our growth, the business will be fairly well balanced between Alliance, Ruby and Veresen Midstream. Additionally, depending on NGL margin, there is the potential for greater contribution from Aux Sable. Importantly, we will see our EBITDA increase and we also will see our leverage metrics decrease.

Now, I'll turn the call over to Theresa to discuss these actions in terms of our funding picture and provide remarks on our second quarter results.

Theresa Jang

Thanks, Don. Under our enhanced funding strategy, our dividend continues to be fully supported with the [indiscernible] cash. Based on the midpoint of our updated guidance, we expect our 2016 payout ratio to be around 93%. Depending on the timing of the closing of the power disposition, we estimate that our payout ratio in 2017 will continue to be around 100%. However, in 2018, we expect cash flows from our growth projects to improve our payout ratio. In terms of funding our capital requirements, we expect to largely rely on our credit facility at the corporate level until the closing of the power sale.

At June 30, our CAD750 million credit facility had CAD474 million of available, undrawn capacity. This is prior to the receipt of proceeds on the Glen Park disposition which closed on August 1. As the chart illustrates, we expect that the proceeds of the power disposition will allow us to fund our remaining capital commitments and reduce our outstanding debt balances. We firmly believe that the changes to our funding strategies strengthen our balance sheet and improve our overall liquidity position. Now, turning to Q2 results, as Don said earlier, the Company delivered another strong quarter both opportunity and financially. In the second quarter under the new service model, Alliance continued its impressive performance.

No longer under a cost of service model, the pipeline now offers firm service at fixed rates in addition to seasonal and interruptible service at market face rates. Demand for these new services has been very strong with total average volumes on the pipe of nearly 1.7 billion cubic feet per day during the second quarter. For reference, the current firm capacity is approximately 1.4 Bcf per day, while Alliance's nameplate capacity is approximately 1.65. From a countable perspective, Veresen Midstream now has CAD2.5 billion of gross midstream assets under construction for the Cutbank Ridge Partnership.

The amount net to Veresen is approximately CAD1.2 billion. Once commissioned, we expect these facilities to add CAD250 million to CAD300 million of incremental run rate EBITDA to Veresen Midstream based on target volumes. In the second quarter, Veresen Midstream invested an additional CAD424 million or CAD203 million net to Veresen with over 35% of the total capital required to complete the Sunrise Tower and Saturn [indiscernible] 2 facilities invested today. During the quarter, Veresen Midstream also placed a 50 million cubic feet per day refrigeration expansion of the Hythe gas processing facility into service. The additional capacity is in support of increased liquids rich production by Cutbank Ridge Partnership and represents Veresen Midstream's first brownfield expansion.

The refrigeration expansion was designed, constructed and placed into service by Veresen Midstream and is indicative of the kinds of opportunities Veresen Midstream expects to capitalize on in the future. The facility was delivered ahead of schedule at a total capital cost of approximately CAD24 million or approximately CAD12 million net to Veresen, in line with expectations. Moving to Jordan Cove, on March 11, we were informed by the FERC that they had denied the applications of Jordan Cove LNG and Pacific Connector.

Specifically, the FERC stated that with the lack of demonstrated commercial support for the project, it was not clear to them that the public benefits of Pacific Connector outweighed the potential for adverse impact on landowners and communities. In the 30 days following the FERC's decision, we made significant progress in demonstrating a high level of commercial support for the project. We announced that we had reached key commercial terms with two leading companies in the global LNG space as customers for at least 50% of the design capacity of the terminal. Perhaps more importantly for our application to FERC, we entered into binding transportation service precedent agreements for Pacific Connector representing more than 75% of the pipeline's capacity.

Largely on the basis of these additional agreements, we filed a request for a rehearing with the FERC on April 11th. On May 9th, the FERC issued an order granting rehearing for further consideration, often referred to as a tolling order which will grant the FERC additional time to consider the merits of the case. On the commercial front, we continue to make good progress on the remaining capacity at the Jordan Cove terminal. We believe the project continues to be a very attractive option for buyers, even in the context of today's global LNG dynamics where Jordan Cove is directly competitive with brownfield Gulf Coast projects on a delivered to Tokyo Bay basis. In the second quarter, we earned adjusted net income of CAD13 million or CAD0.04 per share.

This is an increase of CAD2 million relative to the second quarter of 2015, but a CAD5 million decrease over the first quarter of 2016. The pipeline business was particularly strong due to the performance of Alliance as a result of wide AECO Chicago basin and persistent egress issues out of the Western Canadian Sedimentary basin. We expect both of these factors to continue to support strong volumes on the line in the short to medium term. Additionally, Alliance's result also reflects reduced operating costs and lower depreciation. With two full quarters of results under the new service model, we're now comfortable that Alliance's performance over the first half of the year is generally representative of its run rate capability.

However, we would caution that there will still continue to be some variability in quarterly earnings due to factors such as seasonality. The pipeline segment continued to benefit from a weaker Canadian dollar that increased adjusted net income from Alliance and Ruby relative to the comparable quarter last year, although the Canadian dollar has strengthened since the first quarter of 2016. As we would expect, seasonally lower volumes at Alliance led to lower revenue and equity income in the second quarter compared to the first. In our Midstream business, NGL margins recovered slightly from levels earlier in the year, however Aux Sable reported a slight loss in the second quarter.

The improvement relative to the first quarter was a result of stronger NGL margins at Aux Sable's North Dakota business. Aux Sable Shanahan [ph] operations continue to benefit from the NGL sales agreement with BP which provides a floor to potential losses and we'd expect that we would need to see NGL margins roughly double before Aux Sable's profit begin reflecting an NGL [indiscernible] recovery. Equity income from Veresen Midstream was effectively in line with the first quarter. Relative to the second quarter of 2015, earnings strengthened as a result of higher throughput at Dawson.

Adjusted net income from our power business was consistent with the first quarter of 2016 and relative to the comparable quarter in 2015, adjusted net income was higher due to above average water flows at our B.C. run of river hydro facility and incremental earnings from our St. Columban and Grand Valley Phase 3 wind power facilities. Another factor that had a meaningful impact on adjusted net income was our project development spend. In the second quarter, we incurred CAD40 million relative to CAD23 million in the second quarter of 2015 and CAD43 million in the first quarter. This is not indicative of the expected run rate for the second half of 2016, with the dual fees now well underway, spend for the remainder of the year will be contingent on the project continuing to meet commercial and regulatory milestone's.

Distributable cash for the second quarter was CAD93 million or CAD0.30 per share and that's increase of CAD12 million or CAD0.03 per share relative to the first quarter of 2016 and an increase of CAD28 million or CAD0.08 per share compared to the second quarter of last year. on a quarter-over quarter basis, Alliance and Aux Sable drive the majority of the variance in our distributable cash. Ruby distributions are fixed in U.S. dollars, so they only fluctuate due to exchange rates. Veresen Midstream distributions are also fixed while [indiscernible] and power are fairly stable businesses. The higher distributable cash from Alliance was partly due to timing of cash flows.

The notable difference from the second quarter of last year, other than those already discussed, is that in this quarter we have no current tax expense, improving our distributable cash by CAD7 million. We don't expect to be cash taxable in Canada or the U.S. for the next several years. We've increased our 2016 distributable cash guidance to reflect the strong operations and improved fundamentals in some of our business segments. Overall, we've increased the midpoint or our distributable cash per share by about 7% with an upgraded range to CAD1.03 to CAD1.13 per share relative to our previous range of CAD0.94 to CAD1.08 per share. The biggest change was at Alliance, where we increased the midpoint by CAD0.08 per share.

We also increased the Aux Sable midpoint by CAD0.02 per share to reflect its performance in the first half of this year, but we remain cautious in factoring in additional recovery in NGL margins in 2016 into our guidance. We've also made small downward adjustments to G&A and the power segment. In looking at the quarterly profile of our second half distributable cash, the Shanahan facility will undergo a full turnaround in October when the Alliance system is shut down to accommodate the construction of a highway project in Regina, Saskatchewan. The duration of the [indiscernible] is expected to be up to seven days. Alliance will be reimbursed for project costs and foregone revenue.

At Veresen Midstream, we're also aware of a planned third party turnaround downstream of our operations that could impact approximately 200 billion cubic feet per day for up to four weeks in September. This, as well as the Aux Sable maintenance turnaround, were previously included in our guidance numbers. It continues to be a priority for us to improve transparency and make it easier for our investors to understand our Company's businesses and our structures. This quarter, we provided additional information on our debt amortization on a proportionate consolidation basis, as well as EBITDA, debt and capital by business segment, by quarter for 2014 and 2015. We believe these disclosures will be helpful to the market and will allow for more accurate evaluation on a comparable basis to our peers.

Mark Chyc-Cies

This concludes management's formal remarks. I will now turn the call back to the operator and we'll take any questions that we have at this time.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Robert Catellier from CIBC World Markets. Please go ahead.

Robert Catellier

I just wanted one cleanup question on the 2017 outlook. It sounds to me like you're not planning on any improvement in Aux Sable margins to get to that 100% payout ratio.

Theresa Jang

That's right, Rob. We want to be cautious in what that recovery looks like and as we said in our comments, we're seeing improvement in the market dynamics, but for 2017 we've not yet incorporated any material improvement in Aux Sable's financial performance.

Robert Catellier

Okay. And can you just comment on the likely timing of the power sale? I mean it's really up to the market and how the process goes, but it seems to me it might be a little tight to actually fit it into 2016.

Theresa Jang

Yes, I think we would expect that this may take until the first quarter of 2017. It is a robust market but we do have lots of moving parts. So that would be an estimate timeline, sometime in the first quarter.

Robert Catellier

Okay. And then just one quick observation here is that if you're successful with the power sale, the composition of your cash flow might be slightly more weighted to U.S. dollars. So curious if there's any change to your hedging plans?

Theresa Jang

Not at this time.

Robert Catellier

Okay. And then just to wrap it up on Jordan Cove, I mean there's probably not a lot that you can say on FERC and timing of their tolling order, but is there any color you can give us there? And then secondly, on the EPC contracting, when do you think you'll get down to finalizing the turnkey EPC terms and slow the spending down?

Don Althoff

So on FERC, it's a policy issue that they're wrestling with and therefore, we don't have a lot of precedent and it's hard to speculate about exactly when we think it's going to go. What we're doing is we're continuing to be proactive in our communication with them about things like we have been able to achieve more options on right-aways for the pipeline which was one of their issues and concerns. And we have tried to make sure that the FERC understands there's a lot of community support and political support for the project.

So those are the actions that we're working on. On the EPC, we should have two lump sum turnkey offers before the end of the year and really, we're starting to see one of the EPC firms starting to ramp down the engineering as they're starting to get more into the procurement side of it. So that big spend and really having two very clear definitive packages will be done by the end of the year and that will be an important milestone for the project.

Operator

Your next question comes from the line of Dirk Lever from Altacorp Capital. Please go ahead.

Dirk Lever

I was wondering if you could give us a little bit of guidance on the development costs now looking at 2017, where you see it. And then if you could comment on how you're progressing with getting some third party processing done on your Veresen Midstream as we look forward.

Don Althoff

So as we chatted a bit about and I think on past calls is that what Jordan Cove is doing is they've got a series of activities that are needed to really have a world class project. One of them is we really needed to do these to get really the best lump sum turnkey, especially in today's environment. So we've put a lot of time and energy into that. We've also put a lot of work into right-aways, work that needs to get done on the Harbor, all of the things that you need to get done to get a project like this financed and a lot of it will culminate at the end of the year.

So what 2017 looks like really depends on what it looks like -- what milestones we hit. If we get FERC, we get the rest of the plant sold out and papered, the budget for 2017 might look differently than if we're still looking to try to finish selling out the plant. So that's how to think about it. I don't want to give guidance at the moment because there's some really big milestones that we still need to achieve. But that's how you should think about it. We'll get most of the heavy lifting done this year. If we can get FERC and the buyers then we'll have I think a real clean view of the budget. If not, it'll be a much, much lower spend than we've got today.

Dirk Lever

And then on the Midstream?

Don Althoff

The Midstream business, we've actually seen a bit more third party volume in Veresen Midstream. It's not a material amount at the moment, but I do think it is a major focus for us and we're looking at some -- actually some investments that would help us interconnect the plants and connect us up to other systems. And so it's very much in our priority and focus and for us, I'm encouraged with the conversations that we're having with producers in the area and I think we'll be able to announce something next year.

Dirk Lever

All right. So does it look like then that you could be expanding beyond Canada and be building facilities then for others?

Don Althoff

That's the goal. The goal is to leverage the footprint and to bring others in and do brownfield expansions. One thing that's great about the plants, it's -- by the mid-2018, we'll have a billion cubic feet a day of C3 Plus refrigeration. It'll be easy to expand it. It'll be very low cost. It'll be very competitive. And so really, what we want to do is leverage out footprint. One of the ways I think about it is I think for us, Veresen Midstream was a bit of hitting a home run and now, I think we're going to get a lot of singles and doubles. I think what you'll see is you'll see things like storage. You may see things like truck -- ancillary access that supports other producers in the region. And then over time, getting them into those facilities through some brownfield expansions or some very low cost to bottlenecking. We think that's a great footprint. We're right in the middle of the Montney so we're really excited about what that may look like.

Operator

Your next question comes from the line of Robert Kwan from RBC Capital Market. Please go ahead.

Robert Kwan

Just turning back to the power sale side of things, just wondering if you have any preconceived notions or plans of trying to sell this as one package or break it up and are you willing to retain any pieces if there's buyers that don't want it all and you don't like the prices for kind of the loose ends.

Theresa Jang

Yes, so Robert, I think it's all pretty open at the moment. We will be -- when we put the assets up for sale, indicating that we will entertain either on block bids or if potential bidders look at only bidding on portions, whether it's renewables or gas fired. We'll look at that as well, but the key for us is really to maximize value from the sales process in whatever shape or form that looks like is what we'll do.

Robert Kwan

And are you willing to retain pieces?

Theresa Jang

It would be our preference not to.

Robert Kwan

Did you receive any unsolicited bids for the assets prior to putting them up for sale?

Theresa Jang

Yes.

Robert Kwan

And does that give you then -- sorry, were you saying something?

Don Althoff

I just weekly.

Theresa Jang

Regularly.

Robert Kwan

I guess when you look at those numbers, that gives you a high degree of confidence that maybe in the second part of my questions versus what were some of the other alternatives that you looked at? And I know you've talked in the past about funding by dropdowns into Veresen Midstream. Is there anything else you looked at? And again, coming back to some of these unsolicited bids, was it really those numbers that gave you the confidence that selling the power made a lot more sense than the other alternatives?

Theresa Jang

Yes, that's right. It's been a big topic of conversation, our funding strategy and that just underscores how much we've been looking at this and looking at how we could optimize the funding for our growth. And this is what we determined made the most sense.

And as Don mentioned in his comments, really all the circumstances lining up to make it the right time to sell. Alliance's great performance and the sustainability of it, that line of sight to Veresen Midstream's cash flow and frankly, we only in December finished building out all of our power development projects. And so that in conjunction with the valuations we were both seeing in comparable transactions and what we're hearing give us confidence that this best approach to our funding.

Robert Kwan

Makes sense. If I can just ask one last question, just turning to Alliance. In looking at the numbers in the first couple quarters of the year, the op costs, good progress in making -- having those come down. Is there anything more that you think you can do on the operating cost front?

Theresa Jang

Well, you're right. We've taken a pretty firm approach to the targeted reductions in operating and G&A costs. I think what you've seen in the first half of the year is indicative of what you'll see for the rest of the year. Anything beyond that, there's nothing big on the horizon we would think of but it's great advancement in tightening up their cost.

Operator

Your next question comes from the line of Steven Paget from FirstEnergy. Please go ahead.

Steven Paget

On power, you said you've received unsolicited bids. Did any of those get to the point of signing a CA?

Theresa Jang

I couldn't say if they did, but clearly, we'll be starting a formal process and so anyone that has previously provided unsolicited bids is welcome to participate in the process.

Steven Paget

Did you consider an IPO of the business?

Theresa Jang

Not really. Just again, going back to our strategy and our focus, it's not something we entertained.

Steven Paget

What's driving volumes on Alliance? Is it more the Aux Sable proposition and getting liquids out to the Chicago market without needing to build processing or needing new investment processing? Or is it more the gas market or simply pipeline transportation, the situation in northern BC?

Don Althoff

I hate to say it but it's been both. I think we've seen a lot of producers get on the line and marketers get on the line and get no value for the liquids at the other end, because they needed to get their product to market and the pipe has been so into the money, it's been a good value proposition, but we're also seeing producers who are struggling to get things like propane to market that would utilize the line as well. So it's really been both, Steven.

We've seen really a lot of demand for the pipe, both in the methane because it's one of the better net backs in the market and two is the market is having trouble clearing all of the NGLs that are being developed and Alliance is a great outlet.

Steven Paget

If cost of capital permits, would you look at making another transformative acquisition? I'm noticing there are midstream assets for sale in the basin?

Don Althoff

We're going to be really, really disciplined about the types of opportunities we take on. We've got a wonderful set of opportunities in front of us, really the best in the industry relative to our size. And so I think for us, that the best thing going forward is to build out the footprint and anything that kind of looks and expands on that footprint, we'll be very interested in, but we'll be very disciplined as well. If it doesn't fit neatly into the portfolio, we'll look at it but I doubt that we'll be a serious contender.

Operator

Your next question comes from the line of Ben Pham from BMO. Please go ahead.

Ben Pham

I wanted to follow-up on a couple things on the power sale process and then also some of your prepared remarks about your expected debt that you could repay on the back of that. I think you mentioned 25% to one-third and which seems to suggest perhaps a [indiscernible] price expectation in your base plan you're expecting there. So I'm just wondering is that base number, is that based on support from some of the unsolicited offers you've had and maybe some commentary on some of the flex points there where it could be below or above that range?

Theresa Jang

The data point that we've used in our remarks are kind of [indiscernible] that we derived ourselves, not based on anything other than that and it's just to give an indication of what -- and it really just is an indicator of what we might expect as we do this transaction.

Ben Pham

Okay and can you comment on if of your partner is -- particularly on one of your large gas plants -- do they have a first right on that? And would that maybe force you to maybe break up the package if they wanted to buy that piece?

Theresa Jang

There are certain provisions in some of the partnership agreements that I can't really get into and again, it will all get woven into the process as it unfolds.

Ben Pham

Okay and last cleanup, what perspective the sale and if you get what you want and you pay down debt, is that more just not refinancing your fuel long-term debt so you get a better pickup than just paying down credit facilities?

Theresa Jang

No, it is currently our plan. We have some medium term notes coming up for maturity at the end of the first quarter there and it is our plan to refinance that with a similar term bond.

Operator

Your next question comes from the line of Rob Hope from Scotia Bank. Please go ahead.

Rob Hope

Just a couple questions on Alliance. Just want to get your thoughts on the potential impacts of -- on Alliance if TransCanada is able to lower their tolls later in 2017.

Don Althoff

Well, we don't think it'll actually have much of an impact at all. I think fundamentally, what they're trying to do is lower the toll which would effectively drop the price of Dawn. If Dawn goes down, it actually might even help Alliance a little bit. So we don't think that that's going to be a big material impact. It looks a little challenged.

I think from a -- we haven't seen a lot of producers that want to sign up for ten years, especially going to Dawn. And from a regulatory point of view, it's not that straightforward because you're going to have people upstream and downstream at Dawn not all that pleased they have to pay a lot more to get their gas there. But fundamentally, we don't -- we think it's probably good for the basin and it's -- and therefore it's good for our producers and therefore it's a good thing. But the fundamentals really should drive Dawn pricing down which should actually help us.

Rob Hope

And then just a bit of a more detailed question. Just when I look at distributable cash for Alliance of CAD50 million in Q2, going from net income before tax to free cash flow, there's a CAD4 million tailwind there versus a minus CAD5 million headwind in Q1. Just want to get a sense of what's in that other line there.

Theresa Jang

Sure. The way that we determine distributions at Alliance obviously changed when it moved away from this constant service model. So we took some time in the first half of the year to calibrate how we would approach doing the quarterly distributions. And so in Q1, we didn't distribute all of the EBITDA that was generated. Some of it was held back and so if you look at that, distribution to EBITDA ratio in Q1 was disproportionately low.

All we've done is we've caught that up now in Q2 and again, it goes to our confidence in what the rest of the year and this continued earnings profile will look like. And so, the first half of the year is kind of representative of how we look at it going forward versus a catchup.

Rob Hope

Okay, so I guess the part of the distribution in Q2 would actually be cash earned in Q1?

Theresa Jang

That's right.

Operator

Your next question comes from the line of Faisel Khan from Citigroup. Please go ahead.

Faisel Khan

Just on the power sale, have some follow-up questions on that. How are the agencies looking at the power sale? Is this sort of accretive to the credit or is sort of credit neutral? Because I thought the agencies did look at some of this diversification as sort of credit enhancing, but just wanted to get what your guys' perspective is on that.

Theresa Jang

Sure, well I'd start by saying we'll let the rating agencies speak for themselves. But in our view, these steps really are credit positive. They improve our liquidity. They reduce our overall debt levels and so we think it's quite credit enhancing. Having an investment grade credit rating is important to us as we've stated and so any time we ever take actions like this or we contemplate it, we do work very closely with the rating agencies. So we've been through that process. I'm sure the rating agencies will make their views known in due course.

Faisel Khan

And just when I'm looking at your distributable cash flow guidance per share, just want to make sure, that does include the amortization of the debt within the different joint ventures? Is that correct?

Operator

Your next question comes from the line of Jesse Snyder from Financial Post. Please go ahead.

Jesse Snyder

Firstly, I just wanted to ask how much -- if you look up -- if you add up all of the assets under your -- that all of your power generation assets, how much -- how does that compare to the total assets under the Company? And secondly, if you could just elaborate on why you haven't seen the growth in the returns that you might have expected from those assets?

Theresa Jang

The assets would represent about one-seventh of our total asset base and I'll let Don address the growth question.

Don Althoff

I think for us, the issue is why do we think we could be successful in the business. And I think that when you look at the type and the scale of the business development groups that you need to be successful in this to have a strong understanding of the regulatory issues of the utility policies and really have market intelligence on it. It really begs for a company that's al to larger that can spread those costs out over a lot more businesses. That's number one.

Number two is we've seen over the last few years the competitive nature of the assets, I think driven probably mostly by the search for yield, bring a lot of new participants in the market that really have driven the multiples down on these projects to very low levels. So we don't see a competitive advantage like we do in our midstream and our pipeline business where we can do brownfield expansions that keep us out of necessarily competitive bids and/or at least we go in with a much lower cost structure.

So it's really been for those three factors is that we're just not that big and the majority of our assets are in the midstream business and so the business development side was very expensive. Two is it's tough to win them because of the cost of capital game and the price that people are bidding on them. And internally, we've developed so many projects internally, the competition for capital is pretty fierce and the power returns just aren't as high as the midstream and pipeline returns that we see.

Jesse Snyder

And Theresa, can you just repeat the answer to the first question. You had cut out just as you were responding.

Theresa Jang

Sure. It is about one-seventh of our total asset base.

Operator

[Operator Instructions]. Your next question comes from the line of David Galison from Canaccord Genuity. Please go ahead.

David Galison

So just a quick question on your interim funding plans. So with the suspension of the drip and considering that the power sale could carry into 2017, how should we or how are you thinking about the interim funding plan?

Theresa Jang

Well, the interim funding plan would see us drawing on our revolver which has a good amount of liquidity on it. So we'll draw that between now and when the power proceeds are realized.

David Galison

And is there any flexibility in the capital spend that you can push out until the sale happens? Or is that pretty fixed?

Theresa Jang

No, it's pretty fixed.

David Galison

And just switching to Jordan Cove, I guess just wondering -- I believe that the tolling agreement negotiations were still underway for the capacity that's been sort of spoken for. Can you talk a little bit about how those negotiations are going?

Theresa Jang

Well, there's really -- I think about it in two pieces. I think that we've got half of the volume under key term sheets and we're working closely with Jaren and Toshu to convert those over into Litsus and that's moving along well. And then we're in negotiations with additional buyers for the rest of the capacity in the plant. I'm optimistic and encouraged by it.

We're seeing a lot of due diligence. We're seeing a lot of site visits. They're spending money to really dig into the project in a material way which gives me confidence that we're going to be able to get some more contracts in place and some more buyers in line. So we feel good about it, mostly from the perspective that we still see a lot of positive engagement.

Operator

And we have no further questions in the queue at this time. I'd turn the call back over to Mr. Chyc-Cies.

Mark Chyc-Cies

Thank you. We have no further comments at this time, but would like to remind you that investor relations will be available after the call for any follow-up questions you may have. Thank you for joining us today and have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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