Fitch Ratings has assigned a 'BB+' rating to AltaGas Ltd.'s CAD300 million subordinated notes, series 1 due January 2082.
AltaGas' Issuer Default Rating is 'BBB'. The Rating Outlook is Stable.
AltaGas plans to use the proceeds from this issuance to pay-off series K preferred shares due March 2022.
The notes are eligible for 50% equity credit based on Fitch's hybrid methodology, dated Nov. 12, 2020 titled 'Corporates Hybrids Treatment and Notching Criteria,' available at www.fitchratings.com. Features supporting the equity categorization of these notes include their subordinate priority, the option to defer interest payments on a cumulative basis for up to five-years on each occasion and a 60-year maturity.
Key Rating Drivers
Strategic U.S. Utility/Canadian Midstream Focus: AltaGas acquired WGL Holdings (WGLH) in July 2018, thereby meaningfully increasing the size and scope of its U.S. natural gas distribution business. Since taking the helm at the company, President and CEO Randall Crawford has articulated and implemented a strategy focused on measured expansion of its U.S. gas utility and Canadian midstream business in the Montney shale, while divesting noncore midstream, power and utility assets.
Low Risk Business Profile: Fitch expects the majority of future consolidated AltaGas EBITDA to be contributed by its U.S. gas utilities, with the vast majority of the remainder coming from its Canadian midstream operation. AltaGas' utility operations are expected to represent approximately 52% of normalized 2021 EBITDA and its midstream business 48%. By 2023, Fitch expects utility operations will contribute up to 57% of the EBITDA.
AltaGas' diversified group of relatively low-risk U.S. gas distribution utilities serve 1.7 million customers in part of Maryland, Virginia, D.C., Michigan and Alaska with generally credit-supportive economic regulation, customer growth of approximately 1% and significant potential rate-base growth driven by infrastructure investment. Unexpected deterioration in rate regulation could result in future credit rating downgrades.
The company's midstream operations are highly contracted or hedged, integrated assets that provide value to customers across the energy value chain in the prolific Montney shale play. Approximately two-thirds of AltaGas 2021 midstream field services EBITDA, including 70% of Ridley Island Propane Export Terminal (RIPET) is hedged for 2021.
Focused Capex: Fitch expects AltaGas' future capex will primarily focus on its core, low-risk utility and, to a lesser degree, midstream segments. Capex in 2021 is expected to approximate $850 million. The utility segment is expected to account for 65%-70% of total capex in 2021, with vast majority of the remaining 30%-35% targeting the midstream segment. Projected capex over next three years after that is expected to average around $1.2 billion, with significant investment in utility and midstream operations, including optimization and subsequent expansion of the RIPET export facility.
Utility spend in 2021 is primarily driven by pipe replacement programs in Virginia, Maryland, D.C. and Michigan, system betterment and customer growth. In the midstream segment, 2021 capex is expected to be driven by the maintenance and administrative capital, spend on Petrogas and further business development. Capacity expansion at RIPET to 80,000 Bbl/d is achievable over the next several years with relatively nominal incremental capex, according to management.
RIPET Propane Export Terminal Growth Continues: RIPET, Canada's first marine propane export facility placed into service in 2Q19 and is expected to reach 60,000 Bbl/d by YE 2022. RIPET can ship propane to Japan in 10-11 days, compared with 25 days for propane shipped from alternative U.S. locations, while providing enhanced netbacks to producers. 70% of total expected 2021 RIPET volumes are hedged, split between financial hedges (at approximately USD10.25/Bbl FEI-Mt. Belvieu) and tolling arrangements. Approximately 35% of RIPET's 2021 propane export volume is currently contracted under tolling arrangements and AltaGas expects that proportion to increase to 50% over the next five-years.
Petrogas Investment: AltaGas recently increased its ownership in Petrogas to 74%. Fitch believes this is a constructive development that is consistent with its strategic focus on Western Canadian midstream and Asian export markets for liquid petroleum gas. Petrogas operates the Ferndale export terminal, which ships natural gas liquids to Asian markets. Located in northwest Washington State, Ferndale is capable of handling up to 50,000 Bbls/day with 750,000 Bbls of on-site storage capacity. Petrogas also operates various North American storage terminals. Its LPG export, distribution and domestic storage operations account for approximately 90% of its EBITDA.
Parent Subsidiary Rating Linkages: Two parent-subsidiary relationships have been analyzed as part of Fitch's assessment of AltaGas. In the first instance, AltaGas-to-WGL Holdings, the ratings are equalized on the basis of open legal ring-fencing and open access and control. Fitch expects future funding at the WGLH level will be facilitated at the AltaGas corporate parent and does not anticipate WGLH will access long-term debt capital markets directly. Fitch expects maturing WGLH debt will be refinanced at the AltaGas parent level as it matures.
In the second instance, WGL Holdings-to-Washington Gas Light Company, the relationship is deemed to be a weak parent/strong subsidiary. In this case, the conclusion to use a standalone credit profile is based on determination that the legal ring-fencing is insulated and access is porous (the middle condition between open and insulated). Key ring-fence provisions include establishment of a bankruptcy-remote special purpose entity (SPE) with an independent director and golden share rights, non-consolidation opinion and separate board, treasury, books and records.
Coronavirus Pandemic Impacts: AltaGas' ratings consider uncertainty regarding the impact of the coronavirus on its midstream and U.S. gas utility business. Fitch believes AltaGas is reasonably well-positioned to weather the economic fallout from the pandemic. Asian demand for NGL exports remains solid and the utilities high proportion of residential customers, in Fitch's view, mitigate economic pressure from the global pandemic.
Derivation Summary
AltaGas Ltd., is well positioned at its 'BBB' rating. With total assets of approximately CAD22 billion YE 2020, it is smaller than Canadian holding company peers TC Energy Corp., formerly known as TransCanada (TC; A-/Stable) and Emera Incorporated (Emera; BBB/Stable) but larger than Algonquin Power & Utilities Corp. (APUC; BBB/Stable). By way of comparison, TC, Emera and APUC had total assets of CAD100 billion; CAD31 billion and CAD13 billion, respectively, at YE 2020. Fitch estimates AltaGas FFO leverage will average 5.4x during 2022-2023 comparable with APUC's 4.9x-5.3x range over the same time period and stronger than Emera's 6.0x in 2021 and 5.7x in 2022.
Canadian utility holding company, APUC, with $13 billion of total assets, benefits from regulatory diversification but owns utilities that operate in somewhat less constructive regulatory environments, in Fitch's view, with APUC's largest utility operating in Missouri. Utility operations are expected to account for approximately 75%-80% of consolidated APUC EBITDA. Emera in recent years has deemphasized unregulated investment to focus on utility operations in the U.S., Canada and the Caribbean. Fitch believes regulation in Emera's two largest jurisdictions, Florida and Nova Scotia, are balanced from a credit perspective. Emera, with $31 billion of total asset at YE 2020, derives more than 95% of its earnings from regulated operations. By comparison, AltaGas generates only 57% of its cash flows from regulated utility operations.
Like Emera and APUC, AltaGas' operations include significant, low risk, utility operations. AltaGas through WGL, provides gas utility services to affluent populations in parts of Virginia, Maryland and D.C. with prospective customer growth estimated at 1% per year. AltaGas also provides gas distribution service to parts on Michigan and Alaska. Collectively, AltaGas' U.S. utilities have experienced customer growth of 1%, and approximately 70% of its customers are residential. Emera and APUC, unlike AltaGas, also have meaningful electric utility operations.
TC Energy's diverse operating base encompasses a wide-range of regulated and highly contracted unregulated assets that span the energy value chain across North America, including Mexico. Fitch believes AltaGas' competitive profile in the midstream sector lacks the scale of, and is weaker than, TC Energy's midstream business profile. However, in Fitch's view, AltaGas has carved out a reasonably competitive, highly contracted, integrated business in Western Canada's Montney shale formation that includes gathering, processing, extraction, fractionation and transportation of natural gas and natural gas liquids and highly competitive export capabilities to Asian markets.
Key Assumptions
Continuation of reasonable economic regulation across AltaGas' jurisdictional service territory;
One-percent annual customer growth at AltaGas' U.S. gas utility segment on average;
RIPET exports 50,000 Bbl/d on average in 2021, while increasing the proportion of export volumes from the facility to take or pay contracts from merchant;
Mountain Valley Pipeline Project is completed in 2022;
A 1% reduction to WGL sales due to the impact of the coronavirus.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Continuation of credit supportive regulatory trends and better than expected final decisions at AltaGas' and WGLH's U.S. utility subsidiaries compared to Fitch's rating case;
Stronger than expected performance at AltaGas' Canadian midstream businesses;
Sustained FFO leverage of 4.5x or better on a consistent basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Significant deterioration across AltaGas' jurisdictional service territory;
Unexpected delay to capacity expansion targets at RIPET;
FFO leverage above 5.5x post 2023 on a sustained basis could cause a negative rating action;
Failure to raise financing from assets sales or other sources, if required to lower leverage;
Greater than expected impact on utility and midstream operations due to coronavirus effects.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: In Fitch's opinion, liquidity is adequate at AltaGas Ltd and WGL. AltaGas has negotiated consolidated credit facilities with total borrowing capacity of CAD3.7 billion. As of Sept. 30, 2021, AltaGas had drawn CAD978 million and had remaining borrowing capacity of about CAD2.7 billion. AltaGas had cash and cash equivalents of CAD163 million on its balance sheet as of Sept. 30, 2021. Maturities are generally well spaced out with larger scheduled maturities in 2023 and 2025 of $1.2 billion and $858 million, respectively.
Issuer Profile
AltaGas Ltd. is a Canada-based energy infrastructure company with operations in the U.S. and Canada with CAD22 billion of total assets. The company has two primary business segments: Utilities and Midstream.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
ALTAGAS LTD. 
