DBRS Confirms AltaGas at BBB and Pfd-3, Trends Stable

DBRS has today confirmed the rating on the Medium-Term Notes (MTNs) and Preferred Shares - Cumulative of AltaGas Ltd. (AltaGas or the Company) at BBB and Pfd-3, respectively, both with Stable trends. The confirmation reflects: (1) continuing progress on the Company’s goal to grow and diversify earnings and cash flow while reducing its relative business risk; (2) proactive mitigation of cost overrun risks on its major growth projects; and (3) a prudent financing plan for the 2011 to 2014 growth phase supported by a strong liquidity position. However, DBRS expects some deterioration in the Company’s key credit metrics during the above-noted construction period, with recovery toward the end of the period as expected cash shortfalls are to be primarily funded by debt.

AltaGas has large organic growth plans that are expected to double its EBITDA between 2010 and 2017 while reducing its relative business risk. Future growth projects are expected to be well supported by long-term contracts with predominately investment-grade counterparties as evidenced by (a) the $236 million Gordondale Gas Plant project supported by a long-term supply agreement with Encana Corporation (Encana; rated A (low)) with a late 2012 expected in-service date, (b) the $147 million Harmattan Co-Stream Project backed by an initial 20-year cost-of-service agreement with NOVA Chemicals Corporation (Nova; rated BBB (low)) and a Q1 2012 expected in-service date, (c) the $725 million Forrest Kerr hydroelectricity generation project (Forrest Kerr) supported by a 60-year electricity purchase agreement (EPA) with British Columbia Hydro & Power Authority (B.C. Hydro; rated AA (high)), expected to be in service in mid-2014, and (d) potential development of the McLymont and Volcano Creek hydro projects (combined $300 million cost estimate), which are expected to have a long-term EPA with B.C. Hydro on similar terms to Forrest Kerr and expected in-service dates in 2015 and 2016.

DBRS believes that the Company’s significant portfolio of hydro and wind power development projects support its plan to increase its installed power generation capacity from 509 MW at present to 1,000 MW in 2017. The projected growth is focused entirely on renewable power and is consistent with the Company’s objective to reduce its current dependence on the Sundance Alberta power purchase agreement, which expires in 2020, for the vast majority of its power generating capacity, from 69% in 2010 to 35% in 2017. AltaGas expects Power segment EBITDA subject to commodity price risk to decline from 38% to 20%.

AltaGas also has substantial growth opportunities in its Gas segment that are projected to increase the amount of natural gas that it touches from 2.0 billion cubic feet per day (Bcf/d) at present to 2.5 Bcf/d in 2017 and to increase natural gas liquids (NGL) production from 50,000 barrels per day (b/d) to 75,000 b/d over the same time frame. The Company expects to reduce Gas segment business risk by focusing on long-term, fixed-fee or cost-of-service commercial arrangements in its growth projects, reducing its exposure to Gas segment EBITDA subject to fractionation spread risk (see below) from 20% in 2010 to 12% in 2017.

Finally, AltaGas also expects significant organic growth in its regulated Utilities segment (rate base projected to rise from $286 million in 2010 to $480 million in 2017). The Company’s projections would result in a return to relatively equal EBITDA contributions from its Power and Gas segments (43% and 46%, respectively) with the balance from Utilities (11%) in 2017 compared with 33%/54%/13% in 2010.

For the 2011 to 2014 period, AltaGas has identified $1,531 million of committed capex and $440 million of dividends (at the current rate) as uses of funds. Projected fund sources include free cash flow from current operations and projects under construction ($960 million), the dividend re-investment plan ($130 million) and current bank liquidity ($890 million). 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 in the low-50% target range, with adequate cash flow to support its increasing debt load. AltaGas has been proactively fixing the capital cost of its major projects on a progressive basis to mitigate cost overrun risks.

For the 12 months ending June 30, 2011, the Company’s DBRS-adjusted debt-to-capital, cash flow-to-debt and EBITDA interest coverage ratios were 45%, 21%, and 3.7 times, respectively. DBRS believes that the Company’s credit metrics are at reasonable levels for the current rating based on its current business risk profile. DBRS expects some deterioration in these key credit metrics during the 2011 to 2014 construction period, with recovery toward the end of the period.

The Company has maintained strong liquidity. It had $812 million of availability at June 30, 2011, under revolving credit facilities maturing in 2015. In line with AltaGas’s past practice, the existing credit facilities used to fund the growth initiatives are expected to be refinanced with MTNs to maintain a good liquidity position during the growth period noted above.

Contractual and hedging arrangements reduce AltaGas’s commodity price exposure over the medium term. (a) With respect to its power exposed to Alberta power prices, 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. At June 30, 2011, AltaGas had hedges in place for two-thirds of Q3 2011 exposed Alberta power volumes at $70 per megawatt hour (MWh), one-half of Q4 2011 exposed Alberta power volumes at $65 per MWh and one-third of 2012 exposed Alberta power volumes at $62.50 per MWh. (b) Within its Extraction and Transmission business, 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. At June 30, 2011, AltaGas had hedges in place for fractionation spread exposure, with 65% of exposed volumes fixed at $26.85 per barrel for the second half of 2011 and 50% of exposed volumes fixed at $35 per barrel for 2012.

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

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies, which can be found on our website under Methodologies.