DBRS Places AltaGas Ltd. Under Review With Developing Implications Following Announcement of WGL Holdings Acquisition

DBRS Limited (DBRS) has today placed the BBB Issuer Rating and the Medium-Term Notes (MTNs) rating and the Pfd-3 Preferred Shares – Cumulative rating of AltaGas Ltd. (AltaGas or the Company) Under Review with Developing Implications. These rating actions follow the announcement that the Company has agreed to acquire WGL Holdings Inc. (WGL) for a total consideration of CAD 8.4 billion, including assumption of CAD 2.4 billion of debt (the Acquisition). The Acquisition is subject to WGL shareholders and certain regulatory and government approvals. The Acquisition is expected to close by the end of the second quarter of 2018.

WGL is a diversified energy infrastructure company. The company’s major subsidiary, Washington Gas Light Company (WG), is a regulated utility with natural gas distribution operations servicing approximately 1.1 million customers in the District of Columbia, Maryland and Virginia (contributed approximately 70% of 2016 EBIT). The Company’s non-utility subsidiaries operate distributed generation assets, energy midstream assets and provide energy marketing services (30% of 2016 EBIT).

AltaGas plans to fund the acquisition by (1) a fully committed USD 4.95 billion syndicated bridge credit facility, (2) concurrent CAD $2.1 billion subscription receipts public offering and an approximately CAD 400 million private placement of subscription receipts to OMERS. Furthermore, the Company also plans to finance the Acquisition with subsequent offerings of senior debt, preferred shares and hybrid securities, as well as select AltaGas asset sales. The USD 4.95 billion committed syndicated bridge facility has a USD 2.0 billion tranche allocated to covering asset sales. According to AltaGas, the timing of these subsequent offerings and assets sales is subject to prevailing market conditions, but they are expected to be completed prior to the closing of the Acquisition.

Based on its preliminary review, DBRS views the addition of WGL’s diversified and largely regulated utility distribution business to AltaGas’s existing portfolio moderately improves its business risk assessment (BRA). WG operates under supportive regulatory regimes serving residential and commercial customers in economically strong and growing service areas. The Acquisition provides diversification and increased size to AltaGas’s existing business both in terms of geography, regulatory regimes and product mix. DBRS considers the growth and economic outlook in Virginia, Maryland and the District of Columbia as relatively more favourable than the utility markets of Michigan and Alaska in which AltaGas currently operates. The Acquisition adds approximately CAD 2.3 billion in utility rate base assets in relatively attractive jurisdictions to the Company’s existing utility rate base of CAD 1.9 billion. However, WGL’s growing non-utility business, especially the retail energy marketing services and midstream operations, could add some volatility to earnings as volumes and margins could fluctuate. DBRS notes that WGL has forecast nearly USD 3.4 billion of capex in the next five years, a third of which is allocated to the non-utility segment. This is in addition to the estimated CAD 600 million to CAD 700 million of near-term capex requirements at AltaGas, mainly for midstream infrastructure and energy export initiatives.

DBRS notes that the Acquisition results in increased structural subordination of debt at the AltaGas level, offsetting some of the improvement in BRA, as approximately CAD 3.2 billion of debt at AltaGas at September 30, 2016, will be structurally subordinated to CAD 2.4 billion of debt at WGL (including CAD 1.5 billion at WG), in addition to approximately CAD 535 million of debt at AltaGas’s existing utility subsidiaries. DBRS expects the debt level at WGL to rise in the next two years, resulting from its capital programs. In addition to regulatory capital structure constraints and capex needs, the debt at the subsidiaries has to be serviced first before cash is available for distribution to AltaGas to service its debt. The planned divestiture of assets which have not been identified at this time could also have an impact on the Company’s BRA. DBRS notes that the current rating action assumes that the assets being sold will have a credit-neutral impact on the Company’s BRA. DBRS will review the details of the asset sales when available and take the appropriate rating action at that time.

DBRS notes that there is execution risk associated with the Acquisition. In addition to a shifting political climate in the United States, there is execution risk associated with regulatory, government hurdles and the financing plan. The expectation of the Acquisition closing in approximately 18 months considers the regulatory and political risks. Regulatory approvals are required from three separate public utility commissions in Virginia, Maryland and District of Columbia, the Federal Energy Regulatory Commission (FERC), the Committee on Foreign Investment in the United States (CFIUS), and expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the satisfaction of customary closing conditions. There is also execution risk with respect to generating expected proceeds from the proposed sale of AltaGas assets to finance the acquisition.

WGL has a reasonably healthy financial profile supported largely by its diverse and growing regulated utility operations. On a pro forma basis, DBRS expects initial pressure on AltaGas consolidated credit metrics at the close of the Acquisition in 2018 as a result of higher debt levels, including debt at WGL. Ratings could be pressured should the timing and amount of asset sales envisaged in the preliminary financing plan not materialize, as this could result in higher leverage. There is also currency risk associated with the USD 4.95 billion bridge credit facility. As the financing plan at closing of the Acquisition could change based on the timing, amounts and execution of the planned asset sales, the impact on the Company’s financial risk assessment (FRA) is uncertain at this time.

DBRS has placed the ratings of AltaGas Under Review with Developing Implications, considering the execution risks and uncertainties surrounding the financing plan. As noted in the latest DBRS rating report dated November 14, 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. DBRS will further review the Company’s ratings as more information becomes available and aims to resolve the Under Review status of the ratings once financing details are known and the Acquisition has closed.

Notes:
The applicable methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (December 2016), 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 DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016).