DBRS Maintains AltaGas Ltd. Under Review with Developing Implications

DBRS Limited (DBRS) maintained its status of Under Review with Developing Implications on the Issuer Rating, Medium-Term Notes rating and the Preferred Shares - Cumulative rating of AltaGas Ltd. (AltaGas or the Company). The ratings were placed Under Review with Developing Implications following the announcement that the Company agreed to acquire WGL Holdings, Inc. (WGL) for a total consideration of $8.4 billion, including the assumption of $2.4 billion of debt (the Acquisition). Please refer to the DBRS press release, “DBRS Places AltaGas Ltd. Under Review with Developing Implications Following Announcement of WGL Holdings Acquisition,” published on January 26, 2017. The Acquisition is expected to close by the end of Q2 2018.

AltaGas plans to fund the acquisition by (1) a USD 4.95 billion ($6.2 billion) syndicated bridge credit facility; (2) a $2.6 billion subscription receipts offering, comprising a $2.2 billion bought deal and $400 million private placement, which closed Q1 2017 (held in escrow); and (3) offerings of senior debt, preferred shares and hybrid securities, as well as select AltaGas asset sales of approximately $2.0 billion expected to be completed prior to the closing of the Acquisition.

The Company received the State of Virginia regulatory approval on October 20, 2017, and expects approvals from Maryland and Washington by Q4 2017 and Q2 2018, respectively. The Company identified Blythe Energy Center and Tracy Combined Cycle Power gas-fired power generation facilities in California as the first phase of the asset sale process, which is expected to close in early 2018. Subsequent asset sales are expected to be announced in conjunction with the regulatory certainty for approval of the Acquisition.

DBRS views the addition of WGL’s diversified and largely regulated utility gas distribution business to the Company’s existing portfolio to moderately improve its business risk assessment (BRA). WGL’s major subsidiary, Washington Gas Light Company (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 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 $2.6 billion in utility rate-base assets in relatively attractive jurisdictions to the Company’s existing utility rate base of $1.9 billion (at December 31, 2016). 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 forecasted nearly USD 3.4 billion of capital expenditure (capex) for 2017 to 2021; a third of which is allocated to the non-utility segment. This is in addition to the estimated $600 million to $700 million near-term capex at AltaGas (Q4 2017 and 2018), 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 the BRA, as approximately $3.1 billion of debt at AltaGas as at September 30, 2017, will be structurally subordinated to $2.5 billion of debt at WGL (including $1.4 billion at WG) as at June 30, 2017, in addition to approximately $512 million of debt at AltaGas’s existing utility subsidiaries. DBRS expects the debt level at WGL’s regulated business to rise in the next two years, resulting from its capital programs; however, all non-utility debt, including debt maturities at WGL are expected to be funded at AltaGas. The proposed asset sales 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.

Although the Acquisition has received shareholder and federal regulatory approvals, DBRS notes that there is financing risk with respect to generating expected proceeds from the proposed asset sales to fund the Acquisition and execution risk associated with pending state regulatory approvals. Regulatory approvals are required from public utility commissions in Maryland and District of Columbia.

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 Q2 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; this could result in higher leverage. There is also currency risk associated with the subscription receipts and to the extent asset sales are denominated in Canadian dollars in the financing plan. Since the financing plan at closing of the Acquisition could change based on the timing, amount and execution of the planned asset sales, the impact on the Company’s financial risk assessment is uncertain at this time.

DBRS maintained the Under Review with Developing Implications for the Company’s ratings considering the execution risks and uncertainties surrounding the financing plan. DBRS notes that the Company’s existing diversified portfolio of contracted power, regulated utility and gas gathering and processing assets in Canada and the United States continue to perform as expected at Q3 2017. 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 with Developing Implications status of the ratings once financing details are known, and the Acquisition has closed.

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 principal 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 Methodology (September 2017), Rating Companies in the Independent Power Producer Industry (May 2017) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016), which can be found on dbrs.com under Methodologies.

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.

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