DBRS Comments on AltaGas Ltd.’s Acquisition of GWF Energy Holdings LLC

DBRS Limited (DBRS) today notes that AltaGas Ltd. (AltaGas or the Company; rated BBB and Pfd-3 with Stable trends) has announced an agreement to acquire GWF Energy Holdings LLC (GWF), which holds a portfolio of three natural gas-fired electrical generation facilities in northern California totalling 523 megawatts (MW) (the Acquisition), including the 330 MW Tracy facility, the 97 MW Hanford facility and the 96 MW Henrietta facility (collectively, the Facilities). The purchase price of the Acquisition is USD 642 million, subject to certain closing and post-closing adjustments. The transaction is subject to customary approvals, including regulatory approvals from the Federal Energy Regulatory Commission in the United States and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Acquisition is expected to close late in Q4 2015.

The GWF Facilities are fully contracted under power purchase agreements (PPA) through to Q4 2022 with an investment-grade counterparty, Pacific Gas and Electric Company (PG&E). AltaGas plans to finance the USD 642 million (approximately $835 million, assuming an exchange rate of $1.30) purchase price with a portion of the proceeds from $300 million of a common equity offering on a bought-deal basis ($345 million if the 15% over-allotment option is exercised in full), with the balance funded by existing credit facilities; future debt and preferred share financings; and potential dispositions of non-core assets. AltaGas has also announced an increase of $0.005 per share in its common share dividend to $0.165 on a monthly basis ($1.980 per share annualized).

DBRS views the Acquisition as modestly positive for the Company’s business risk profile as it would diversify AltaGas’ energy infrastructure portfolio through the addition of relatively low-risk, fully contracted and long-life gas-fired power assets in Northern California to its existing power generation assets located in Southern California (507 MW Blythe Energy Centre), thereby expanding its presence in the California power market. The PPAs with PG&E are structured as tolling arrangements for 100% of the energy, capacity and ancillary services, which eliminates price and volume risk. AltaGas benefits from a highly contracted portfolio of power assets, and the commissioning of Forest Kerr (195 MW in 2014) and Volcano Creek (16 MW in 2015) run-of-the-river projects supported by a 60-year PPA with British Columbia Hydro and Power Authority (rated AA (high), Stable, by DBRS) as well as the acquisition of three western U.S. gas-fired power assets (combined 164 MW in January 2015) have partially mitigated the impact of weaker realized Alberta power prices and volumes for the Company. DBRS estimates that, the Acquisition increases AltaGas’ power-generation capacity to 2,035 MW from the current 1,512 MW and, consequently, the Company’s EBITDA contribution from its Power segment is expected to increase to approximately 40% from 31%, resulting in a more diversified lower-risk asset portfolio. DBRS is moderately concerned that there is re-contracting risk on the GWF PPAs which expire in 2022. However, the California Renewable Portfolio Standard Policy requiring utilities to use 33% renewable energy by 2020 and state legislation to boost California’s greenhouse gas reduction target to 40% by 2030 could result in the retirement of coal-fired utilities, thereby supporting the continued existence of gas-fired utilities to ensure adequate power supply.

DBRS expects the Acquisition to have a neutral impact on the Company’s financial risk profile. DBRS notes that the funding for the acquisition is consistent with the Company’s current capital structure and that the Acquisition is expected to provide a stable stream of contracted EBITDA of approximately $95 million annually (approximately 17% of EBITDA for last 12 months ended June 30, 2015). While the Acquisition is being financed with an initial common share offering ($300 million to $345 million), the balance of the purchase price is likely to be financed by a combination of debt and preferred share issuance, resulting in minimal impact on leverage. DBRS does not expect the increase in dividends to $0.165 per share to have a meaningful impact on the Company’s cash flow.

DBRS estimates that, following the Acquisition, DBRS adjusted total debt-to-capital is likely to remain largely unchanged with cash flow and interest coverage ratios improving slightly on a 2015 full-year pro forma basis. Overall, the Acquisition is expected to maintain the Company’s credit metrics consistent with the current ratings.

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

The applicable methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (January 2015), Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2014) and DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions), which can be found on the DBRS website under Methodologies.