DBRS Confirms AltaGas Ltd. at BBB, Stable Trend

DBRS has today confirmed the rating on the Medium-Term Notes (MTNs) of AltaGas Ltd. (AltaGas or the Company) at BBB with a Stable trend. This follows the successful conversion of AltaGas Income Trust (the Trust) to the Company under a Plan of Arrangement (POA) completed on July 1, 2010.

Previously, DBRS rated both the outstanding Medium-Term Notes (MTNs) issued by the Trust and the Issuer Rating of AltaGas Holding Limited Partnership No. 1 (AGHLP No.1) at BBB with Stable trends. AGHLP No. 1 was the previous borrower under the Trust’s credit facilities and guaranteed the MTNs issued by the Trust, thereby ensuring that all of the Trust’s senior debt ranked pari passu. Following implementation of the POA and certain internal transactions to simplify the corporate structure, the outstanding MTNs and credit facilities were assumed by the Company, eliminating the previous need for the AGHLP No. 1 guarantee of the Trust’s MTNs. Consequently, effective July 1, 2010, DBRS transferred the BBB rating on the MTNs to the Company and discontinued the Issuer Rating of AGHLP No. 1, which was dissolved. Concurrently, DBRS discontinued the Trust’s STA-3 (middle) stability rating, reflecting the fact that the Trust is now a corporation.

The confirmation also reflects the following factors:

(1) AltaGas continues to make progress on its goal to diversify earnings and cash flow within its power generation business based on projects to be supported by long-term contracts over the medium- to long-term. This was demonstrated by (a) the October 2009 commencement of operations at its $200 million Bear Mountain Wind Park project (Bear Mountain) and (b) the June 2010 announcement of a 60-year Electricity Purchase Agreement (EPA), indexed to the consumer price index (CPI), with British Columbia Hydro & Power Authority (B.C. Hydro; rated AA (high) by DBRS) for its 195 megawatt (MW) capacity Forrest Kerr run-of-river hydroelectricity generation project (Forrest Kerr).

Forrest Kerr is the first of three such projects (totaling 277 MW of capacity for $1 billion) expected to be developed by AltaGas in the area. Forrest Kerr has a total estimated cost of approximately $700 million, with an expected in-service date in 2014. Initial construction commenced in June 2010.

DBRS believes that the Company’s significant portfolio of hydro and wind power development projects (total renewable energy capacity under construction and development of approximately 1,900 MW) could eventually result in substantial growth and diversification opportunities within its power generation segment. This is consistent with AltaGas’s objective to reduce its current dependence on the Sundance Alberta power purchase agreement (PPA), which expires in 2020, for the vast majority of its current power segment EBITDA. In addition, AltaGas has approximately $1 billion of growth opportunities in its gas segment, although less well defined than those in the power segment.

(2) While large in the context of AltaGas’s current operations, spending for the above-noted projects would be spread over several years, although significant external financing would be required over the period. DBRS expects AltaGas to manage the construction period risks (e.g., cost overruns, completion delays, large financing requirements and potential deterioration of credit metrics) for all of its projects within the context of its current BBB rating and total debt-to-capital target range of 45% to 50%, with adequate cash flow to support its increasing debt load. Post-construction, DBRS expects these projects to improve AltaGas’s business risk profile through diversification and a significant increase in the proportion of lower-risk revenue streams from long-term contractual arrangements.

The acquisitions of AltaGas Utility Group Inc. (AUGI) and Heritage Gas Limited (Heritage, collectively the NGD acquisitions) and construction of Bear Mountain, all of which were completed in Q4 2009, resulted in some deterioration in the Company’s financial profile due to the significant debt component (including assumed debt) of the transactions and of the project’s financing. In addition, AltaGas moved its target total debt-to-capital ratio to the 45% to 50% range (50% at March 31, 2010) from the previous 40% to 45% range (38% at year-end 2008). On a pro forma basis (including the NGD acquisitions as if these occurred on January 1, 2009), DBRS estimates that the Company’s cash flow-to-debt and EBITDA interest coverage ratios weakened to 22% and 3.5 times on a pro forma basis at year-end 2009, respectively, compared with 37% and 7.9 times, respectively, in 2008. While notably weaker, DBRS believes that the Company’s credit metrics and the new target leverage range are at reasonable levels for the assigned rating based on its improved business risk profile following the addition of low-risk, regulated NGD assets and the 25-year EPA with B.C. Hydro at Bear Mountain.

In addition, the Company has maintained good liquidity with $415 million of availability on a pro forma basis at March 31, 2010, under revolving credit facilities maturing in June 2013, a level that is sufficient to fund its normal business operations and debt maturity profile. DBRS expects that AltaGas will continue to access the term debt market to maintain its liquidity position during the growth period noted above.

(3) Following completion of the POA, AltaGas intends to declare annual dividends of $1.32 per share, a 39% reduction from the Trust’s annual distributions of $2.16 per unit. Consequently, AltaGas will have an additional $68.2 million of annual cash flow available to support its growth strategy, based on the approximately 81.2 million shares outstanding immediately following completion of the POA. DBRS expects that AltaGas will maintain a per share distribution that is closer to the 50% to 60% of cash flow range than the Trust’s target payout ratio of 65% to 75% of cash flow (82% in 2009). AltaGas’s dividend policy is now closer to that of its corporate peers in the energy infrastructure industry.

(4) Contractual and hedging arrangements reduce AltaGas’s commodity price exposure over the medium term. (a) With respect to its 50% interest in the Sundance B PPA, AltaGas enters into rolling short- and medium-term sales contracts, although it remains exposed to power prices over the long term as the hedges are rolled over. AltaGas has hedges in place for two-thirds of 2010 PPA volumes at $72 per MWh, slightly below hedge prices in 2009 (22% of PPA volumes hedged at $62 per MWh in 2011). (b) A large proportion of AltaGas’s production from Extraction and Transmission (E&T) is sold through long-term contracts with no commodity price risk or lower risk fixed fee or cost of service contracts. The Company has a modest exposure to fractionation spread risk, although the risks can be minimized through re-injection of the NGL barrels into the natural gas stream. AltaGas has hedges in place for fractionation spread exposure, with two-thirds of exposed volumes fixed at $27 per barrel in 2010.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas and Pipelines), which can be found on the DBRS website under Methodologies.

This is a Corporate (Energy) rating.