DBRS Morningstar Confirms Ratings on AltaGas Ltd. at BBB (low), Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Medium-Term Notes rating on AltaGas Ltd. (AltaGas or the Company) at BBB (low) as well as its Preferred Shares - Cumulative rating at Pfd-3 (low). All trends are Stable.

The ratings reflect AltaGas’ diversified portfolio of regulated utilities and midstream business in the U.S. and Canada. The Company’s utilities segment generates stable cash flows that are supported by natural gas distribution rates approved under cost-of-service models; however, structural subordination at AltaGas’ U.S. regulated utilities and earnings volatility and weaker counterparties in its Canadian midstream business weaken the Company’s credit profile.

Non-consolidated debt at AltaGas is structurally subordinated to debt at its subsidiaries: WGL Holdings, Inc. (WGL); Washington Gas Light Co. (Washington Gas); and SEMCO Energy Inc. (SEMCO). AltaGas is both a holding and operating company and depends on dividends from its subsidiaries to service its debt. Debtholders and preferred shareholders at AltaGas rank behind debtholders at its subsidiaries and have recourse to the subsidiary assets and cash flows after subsidiary creditor claims have been satisfied.

DBRS Morningstar expects the Company’s capital expenditures (capex) for 2019 to be approximately $1.4 billion and to remain high in the medium term. DBRS Morningstar anticipates that AltaGas’ annual capex will be in the $1.0 billion to $1.3 billion range for the next two to three years with a major portion allocated to the utilities segment. DBRS Morningstar also expects AltaGas’ utility capex program to require debt issuance at Washington Gas and SEMCO and an equity infusion from the Company to maintain its regulatory capital structure. Upstream dividends from the utilities to WGL and AltaGas will need to be recycled back to the utilities to partly fund AltaGas’ equity share.

DBRS Morningstar notes that the Company’s consolidated credit metrics continue to improve as it deleverages through asset sales, reduced its dividend in late 2018, realized the full-year cash flow benefit from acquiring WGL, and commissioned Ridley Island Propane Export Terminal — the first Canadian West Coast propane export terminal — in May 2019. In addition to the proposed sale of its minority interest in AltaGas Canada Inc. (rated BBB (high) with a Stable trend by DBRS Morningstar), which will likely close in H1 2020, AltaGas announced and completed approximately $2.2 billion in asset sales at Q3 2019.

DBRS Morningstar could consider upgrading the ratings if the Company maintains a consolidated debt-to-capital ratio at or less than 40% for a sustained period of time and executes its capital program. DBRS Morningstar could downgrade the ratings if AltaGas’ consolidated debt-to-capital ratio remains higher than 50% for a sustained period or adverse regulatory changes affect its business risk profile.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry; Rating Companies in the Pipeline and Diversified Energy Industry; DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships; and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at [email protected].

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

DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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