DBRS Confirms AltaGas Ltd. at BBB, Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Medium-Term Notes (MTNs) rating of AltaGas Ltd. (AltaGas or the Company) at BBB, and its Preferred Shares – Cumulative rating at Pfd-3, all with Stable trends. The ratings reflect the Company’s well-diversified energy infrastructure portfolio; approximately 90% of the Company’s earnings are supported by predictable regulated utility returns and fee-based medium- to long-term contacts in the Power and Gas segments.

AltaGas continues to benefit from a diversified portfolio of contracted power, regulated utility and gas gathering and processing assets in Canada and the United States. AltaGas generates and sells 1688 megawatts (MW) of power from diversified fuel sources contributing 38% of EBITDA (last 12 months ended September 30, 2016). In Q1 2016, AltaGas reduced its merchant risk exposure to the Alberta power market by terminating 353 MW of Sundance B power purchase agreements (PPAs). The Utilities segment (40% of EBITDA) has benefited from rate base and customer growth and provides a reasonably predictable cash flow stream to the Company. However, AltaGas is exposed to volume and commodity risk from its Gas (22% of EBITDA) and Power segments, which causes variability in earnings. The Company’s earnings continue to be negatively affected by lower realized fractionation spreads and lower volumes processed in the gas segment.

DBRS notes that AltaGas faces re-contracting risk in 2020 from the 507 MW Blythe gas-fired plant (Blythe) contract with Southern California Edison and in 2022 from the 523 MW San Joaquin Facilities (San Joaquin; formerly GWF) gas-fired plants contract with Pacific Gas and Electric Company, when the respective PPAs expire. However, San Joaquin operates in the high demand, densely populated San Francisco area where no new gas fired generation plants are being built and permitting is difficult. Blythe is ideally located in Southern California with access to excess transmission capacity that provides the Company optionality to deliver power to Nevada, Arizona and New Mexico markets. Furthermore, the California Renewable Portfolio Standard Policy requiring utilities to use 50% renewable energy by 2030 and state legislation to boost California’s greenhouse gas reduction target to 40% by 2030 have resulted in significant coal power capacity being retired in the region, supporting the continued use of gas-fired utilities to ensure adequate power supply.

DBRS views the Company’s credit metrics as reasonable for the current rating and commensurate with the Company’s business risk profile. DBRS expects the Company’s capital expenditures (excluding acquisitions) for 2017 to be similar to the capital expenditure program in 2016 of approximately $600 million. Full-year earnings from the 523 MW San Joaquin Facilities, the service start of McLymont Creek Hydroelectric Facility and stronger performance at Forrest Kerr Hydroelectric Facility as well as the issuance of equity combined with a strong U.S. dollar resulted in meaningful improvement in credit metrics in 2016. DBRS expects leverage to marginally improve in 2017 resulting from the full-year cash flow contribution from the Townsend midstream complex (in service July 2016) and Pomona battery storage (in service December 2016). DBRS expects AltaGas to fund its growth projects and acquisitions with a prudent mix of debt and equity in order to maintain the company’s debt-to-capital ratio in the low 50% range.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (December 2015), Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2016), Rating Companies in the Independent Power Producer Industry (June 2016) and Preferred Share and Hybrid Security Criteria for Corporate Issuers (January 2016).

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.