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

DBRS has today confirmed the ratings 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 rating actions follow the announcement today that AltaGas has offered to acquire all of the issued and outstanding shares of Pacific Northern Gas Ltd. (PNG; rated BBB (low) and Pfd-3 (low)) and that both parties have executed an Acquisition Agreement. The takeover offer of $36.75 per PNG share represents a 20% premium over the closing price of $30.50 per share on October 28, 2011. The proposed purchase price of approximately $230 million, including assumed debt of approximately $85 million and preferred shares of $5 million, represents approximately 1.2 times the regulated rate base of $174 million. The regulated assets earn an allowed rate of return of approximately 10.1% with a weighted average equity thickness of approximately 44%. The transaction value equates to approximately 9.6 times PNG’s EBITDA, which is reasonable. AltaGas expects the acquisition to be immediately accretive to earnings and cash flow. Closing is expected on or about December 16, 2011, subject to regulatory and PNG shareholder approvals.

DBRS expects the impact of the proposed acquisition on AltaGas’s credit profile to be slightly positive. DBRS believes that the PNG acquisition would modestly improve AltaGas’s business-risk profile through the addition of relatively low-risk, regulated natural gas distribution assets in British Columbia, increasing the combined rate base of its Utilities operations by more than 50% to more than $500 million. It would also increase the Company’s relative exposure to regulated natural gas distribution in its Utilities segment (from 14% to 20% of segment EBITDA pro forma the acquisition for the 12 months ending September 30, 2011).

Conversely, DBRS expects moderate deterioration in the Company’s credit metrics as a result of the acquisition funding through existing credit facilities (plus assumed PNG debt). DBRS estimates that the Company’s total debt-to-capital ratio would rise from 47% to 52% and its cash flow-to-debt ratio would fall from 20% to 17% pro forma the acquisition as at September 30, 2011. As noted previously (see the DBRS press release dated October 4, 2011), DBRS expects some deterioration in the Company’s key credit metrics during its 2011 to 2014 growth phase, with recovery toward the end of the period as expected cash shortfalls are to be primarily funded by debt. 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 and for the PNG acquisition within the context of its current BBB rating, with total debt-to-capital in the low 50% target range and adequate cash flow to support its increasing debt load. DBRS views the PNG acquisition as a component of the Company’s growth phase, which is expected to grow and diversify earnings and cash flow while reducing its relative business risk.

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.