DBRS Comments on AltaGas Ltd.’s Acquisition of Blythe Energy, LLC

DBRS notes that AltaGas Ltd. (AltaGas or the Company; rated BBB and Pfd-3, both with Stable trends) has today announced an agreement to acquire Blythe Energy, LLC (Blythe), which owns a 507 megawatt (MW) capacity natural gas combined cycle power plant in Blythe, California (the Blythe Power Plant). DBRS views the Blythe acquisition as modestly positive to the Company’s credit profile and supportive of its current credit ratings.

The Blythe Power Plant is fully contracted (a power purchase agreement (PPA) was signed in 2007 and runs until July 31, 2020) with an investment-grade counterparty, Southern California Edison, which assumes all price and volume risk and delivers and pays for all fuel requirements. The Blythe Power Plant has a strong operating history with a very competitive heat rate performance (in the range of 7,000 to 7,500 British thermal units per kilowatt hour generated) and is likely to be well positioned for re-contracting purposes upon expiry of the PPA.

The proposed purchase price of approximately US$515 million is equivalent to approximately US$1,016 per MW of capacity and equates to approximately 10.3 times Blythe’s expected EBITDA of approximately $50 million, both of which are reasonable measures. AltaGas expects the acquisition to be accretive to earnings and cash flow per share in 2014. The transaction is subject to customary approvals, including regulatory approvals, and is expected to close in Q2 2013.

AltaGas plans to initially finance the US$515 million purchase price (no assumed debt) of the transaction with a portion of the proceeds from $352 million of common equity ($405 million if the 15% over-allotment option is exercised in full) through a bought deal offering, with the balance funded by debt financing through draws on the Company’s existing credit facilities and a new US$300 million unsecured credit facility (which would rank equally with all of AltaGas’s other unsecured and unsubordinated indebtedness). 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 Blythe acquisition on AltaGas’s credit profile to be modestly positive. DBRS believes that the Blythe acquisition would improve AltaGas’s business risk profile through the addition of a relatively low-risk, fully contracted and long-life gas-fired power generation facility in California with access to the California ISO and Desert Southwest (Arizona) power markets, and further diversification of the Company’s power generation capacity away from coal-fired power (to 33% from 60% of total) and toward gas-fired power (to 52% from 12%).

DBRS estimates that, including the pro forma full-year impact of the August 30, 2012, acquisition of SEMCO Holding Corporation (SEMCO), the Company’s relative exposure to its Power segment would increase to 29% from 21% of segment EBITDA on a pro forma basis for 2012. On the same basis, DBRS estimates that the Company’s EBITDA contributions from its Gas and Utilities segments would decline to 32% and 38%, respectively, from 36% and 43%, respectively, resulting in a more-diversified and lower-risk asset portfolio. AltaGas estimates that, in 2013, approximately 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.

DBRS expects a modestly positive impact on the Company’s key credit metrics as a result of the common share offering on a bought deal basis, partly offset by the acquisition funding through the new credit facility. DBRS estimates that the Company’s ratio of total debt and equivalents (which includes a component of preferred shares) to total capital would fall to 56% from 59% on a pro forma basis as at year-end 2012. Combined with the pro forma impact of the August 30, 2012, SEMCO acquisition, its ratio of cash flow before extras to total debt and equivalents would rise to 12% from 11% on a pro forma basis for 2012. The above pro forma ratios assume that the 15% over-allotment option on the common equity offering is not exercised.

As noted previously (see press release dated September 24, 2012), DBRS expected 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 were 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 acquisitions within the context of its current BBB rating and total debt and equivalents-to-capital ratio in the low-to-mid-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. However, DBRS expects 2013 credit metrics to be enhanced by the placement into service of the Gordondale Gas Plant and the Harmattan Co-Stream projects in December 2012, which are expected to contribute annual incremental EBITDA of $25 million and $30 million, respectively. DBRS estimates that the combined total is equivalent to approximately 16% of 2012 EBITDA.

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

The applicable methodologies are Rating North American Pipeline and Diversified Energy Companies (May 2011) and Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.