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 that AltaGas has agreed to acquire SEMCO Holding Corporation (SEMCO). SEMCO is the sole shareholder of SEMCO Energy, Inc., a regulated public utility company with natural gas distribution and storage operations in Michigan and Alaska. The proposed purchase price of approximately US$1.135 billion, including assumed debt of approximately US$355 million, represents about 1.5 times the combined regulated rate base of US$725 million. The transaction value equates to approximately 8.7 times SEMCO’s expected EBITDA of approximately US$130 million in the first full year of ownership in 2013, which is reasonable. AltaGas expects the acquisition to be immediately accretive to earnings and cash flow per share by more than 10%. Approximately 99% of SEMCO’s revenues are derived from regulated operations, with the balance from unregulated storage assets. SEMCO has no direct natural gas cost exposure due to pass-through mechanisms at both SEMCO natural gas distribution utilities. The transaction is subject to customary approvals, including regulatory approvals, and is expected to close in Q3 2012.

SEMCO’s Michigan operations, which are regulated by the Michigan Public Service Commission (MPSC), are composed of: (1) a regulated natural gas distribution utility with approximately 286,000 customers, a rate base of approximately US$425 million, a prescribed 50% equity thickness and an allowed return on equity (ROE) of 10.35%; (2) five regulated underground storage facilities, with 4.9 billion cubic feet (bcf) of total capacity; and (3) a 50% interest in a 12.8 bcf non-regulated storage facility.

SEMCO’s Alaska operations, which are regulated by the Regulatory Commission of Alaska (RCA), are composed of: (1) a natural gas distribution utility (ENSTAR Natural Gas Company), with approximately 132,000 customers, a rate base of approximately US$200 million, a prescribed 51.4% equity thickness and an allowed ROE of 12.55% and (2) a 65% interest in a natural gas storage utility (Cook Inlet Natural Gas Storage Alaska (CINGSA)) that is constructing a natural gas storage facility that is expected to have an initial total capacity of 11 bcf upon being placed into service in Q2 2012, with potential future expansion to 18 bcf of storage capacity. CINGSA will earn a regulated ROE of 12.55% on a prescribed 50% equity thickness upon construction completion. SEMCO’s share of CINGSA’s rate base is approximately US$100 million.

AltaGas plans to initially finance the US$780 million cash portion of the transaction with $350 million in equity ($403 million if the 15% over-allotment option is exercised in full) through a subscription receipt bought deal offering, with the balance funded by debt financing through a combination of draws on a new one-year US$300 million unsecured credit facility (which ranks equally with all of AltaGas’s other unsecured and unsubordinated indebtedness) and the existing revolving credit facilities of AltaGas. The Company intends to refinance any draws on its credit facilities through future debt and preferred share financings and is committed to maintaining its investment-grade credit rating.

DBRS expects the overall impact of the proposed acquisition on AltaGas’s credit profile to be modestly positive. DBRS believes that the SEMCO acquisition would improve AltaGas’s business risk profile through the addition of relatively low-risk, regulated natural gas distribution and storage assets in Michigan and Alaska, more than doubling the combined rate base of its Utilities segment operations to more than $1.2 billion. DBRS estimates that, combined with the December 20, 2011, acquisition of Pacific Northern Gas Ltd. (PNG), the Company’s relative exposure to low-risk regulated natural gas distribution and storage operations in its Utilities segment would increase from 14% to 43% of segment EBITDA on a pro forma basis for the 12 months ending September 30, 2011. On the same basis, DBRS estimates that the Company’s EBITDA contributions from its Gas and Power segments would decline from 52% and 34%, respectively, to 35% and 22%, respectively, resulting in a more-diversified and lower-risk asset portfolio. AltaGas estimates that, in 2013, two-thirds of its consolidated annualized EBITDA is expected to come from regulated or long-term contracted assets. DBRS expects the EBITDA mix to become more equally weighted over time as the Company completes various projects included in its long-term capital plans (see below).

DBRS expects a negative impact on the Company’s key credit metrics as a result of the acquisition funding through existing and new credit facilities (plus assumed SEMCO debt), partly offset by the subscription receipt offering on a bought deal basis. DBRS estimates that, combined with the impact of the $144 million common share offering completed on November 15, 2011, and the December 20, 2011, PNG acquisition, the Company’s total debt-to-capital ratio would rise from 47% to 54% and its cash flow-to-debt ratio would decline from 20% to 16% on a pro forma basis as at September 30, 2011.

As noted previously (see press releases dated October 4, 2011, and October 31, 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 the PNG and SEMCO acquisitions, within the context of its current BBB rating and total debt-to-capital ratio in the low-50% target range, with cash flow-to-debt in the high-teens to low-20% range, as calculated by DBRS. If the Company’s ratios do not move closer to the above-noted ranges (from the pro forma levels) over the near to medium term, its credit ratings could come under negative pressure.

DBRS views the PNG and SEMCO acquisitions as significant components of the Company’s above-noted 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 methodologies are Rating North American Pipeline and Diversified Energy Companies and Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.