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

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

The ratings reflect the Company's diversified portfolio of regulated utilities and midstream business in the U.S. and Canada. The Company’s regulated utilities in the U.S. generate stable cash flow supported by natural-gas distribution rates approved under cost-of-service models; however, this strength is moderated by the structural subordination at the utilities and the earnings volatility in the Canadian midstream business.

Nonconsolidated debt at AltaGas is structurally subordinated to debt at its subsidiaries, Washington Gas Light Co. (Washington Gas), SEMCO Energy Inc. (SEMCO), and WGL Holdings, Inc. AltaGas is a holding and operating company that relies on dividends from its subsidiaries to service its debt. Debtholders and preferred shareholders at AltaGas rank behind debtholders at the utility subsidiaries and have no recourse to the ring-fenced utility assets.

DBRS Morningstar expects the Company’s capital expenditures (capex) for 2020 to be approximately $1.0 billion and believes that this is likely to stay elevated at the $1.0 billion to $1.3 billion range in the medium term. A major portion of the capital spending is allocated for the utilities to replace aging infrastructure and improve reliability. Washington Gas and SEMCO need to raise third-party debt to fund their capex programs, and Washington Gas, in particular, depends on AltaGas to infuse equity in order to maintain its regulated capital structure. AltaGas does not have the full benefit of the dividends it receives from its utility subsidiaries as the Company's equity infusion obligations need to be funded using the dividends it receives.

DBRS Morningstar notes that, apart from the lower volumes in the midstream and the U.S. gas sales business, the volatile market conditions and demand disruption caused by the Coronavirus Disease (COVID-19) pandemic have not materially affected the Company's earnings and cash flow. Utility regulators in the jurisdictions in which AltaGas operates have directed the establishment of regulatory asset accounts to track coronavirus-related costs for recovery through future rates. However, there is uncertainty as to the duration of the pandemic and its financial impacts.

The Company has adequate liquidity with approximately $4.2 billion available in its credit facilities. Consolidated credit metrics at Q3 2020 improved modestly from deleveraging using proceeds from the sale of the Company’s interest in the Canadian regulated utility business in Q1 2020 and some U.S. power assets in Q3 2020. Leverage is expected to trend higher as AltaGas agreed to increase its ownership in Petrogas Energy Corp. (Petrogas), a midstream and logistics company, to 74% for approximately $730 million, including closing costs. The transaction is expected to close at the end of Q4 2020 or early Q1 2021. AltaGas plans to fund the transaction with debt and plans to repay the debt through a combination of free cash flow and proceeds from noncore asset sales in 2021. Furthermore, the Company expects to consolidate approximately $100 million of debt at Petrogas when the transaction closes. For more details, please see the press release titled "DBRS Morningstar Comments on AltaGas Ltd.’s Agreement to Increase Ownership in Petrogas Energy Corp." published on October 19, 2020.

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 while maintaining its business risk profile. The ratings could be pressured if consolidated debt-to-capital ratio remains higher than 50% for a sustained period and the volatility in cash flow from the midstream business or adverse regulatory changes in the utility business affect the Company's business risk profile.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (October 27, 2020); Rating Companies in the Pipeline and Diversified Energy Industry (November 19, 2020); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020); and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide addi¬tional 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.dbrsmorningstar.com or contact us at [email protected].

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