Fitch Ratings has assigned a 'BB+' rating to AltaGas Ltd.'s CAD250 million subordinated notes, series 2 due August 2082. AltaGas' Issuer Default Rating is 'BBB'.
The Rating Outlook is Stable.
AltaGas plans to use the net proceeds from this issuance to pay off series C preferred shares due September 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, Inc. (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 55% of normalized 2022 EBITDA (up from 52% in 2021) and its midstream business 45%. 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 parts 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' 2022 midstream field services EBITDA, including 70% of Ridley Island Propane Export Terminal (RIPET) is hedged for 2022.
Slower Than Expected Improvement in Leverage: In 2021, leverage was lower than the previous year but still higher than expected, largely due to higher gas purchase costs, delayed late fee collections and slightly higher O&M costs than expected. A portion of the capex programs was also delayed at the utilities, which resulted in lower cashflows than previously expected.
AltaGas announced the sale of all its assets in Alaska with the resulting proceeds of approximately USD800 million going toward reduction of debt. In Fitch's view, this transaction, which is likely to close in 1Q2023 is key in achieving leverage that is below the downgrade threshold for the company.
Focused Capex: Fitch expects AltaGas' future capex will primarily focus on its core, low-risk utility and, to a lesser degree, midstream segments. Projected Capex in over the next three years is expected to approximate $1.1 billion/year. The utility segment is expected to account for 70%-80% of total capex in 2022, with vast majority of the remaining 20%-30% targeting the midstream segment, including optimization and subsequent expansion of the RIPET export facility.
RIPET Propane Export Terminal Growth Continues: RIPET, Canada's first marine propane export facility, placed into service in 2Q19 and is expected to reach approximately 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. 85% of total 2021 RIPET volumes were hedged, split between financial hedges (at approximately USD10.25/Bbl FEI-Mt. Belvieu) and tolling arrangements. Approximately 35% of RIPET's 2022 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 100%, acquiring the remaining 26% interest for approximately CAD285 million. 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 (handling up to 50,000 Bbls/day with 800,000 Bbls of on-site storage capacity), which ships natural gas liquids to Asian markets.
Parent Subsidiary Rating Linkages: Two parent-subsidiary relationships have been analyzed as part of Fitch's assessment of AltaGas. Fitch considers the relationships between AltaGas and WGLH as weak parent and strong subsidiary. Fitch determined the standalone credit profile of AltaGas on a consolidated basis. The ratings are consolidated 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.
Derivation Summary
AltaGas Ltd., is weakly positioned at its 'BBB' rating. With operating EBITDA of approximately CAD1.4 billion at YE 2021, it is smaller than Emera Incorporated (Emera; BBB/Stable), but larger than Algonquin Power & Utilities Corp. (APUC; BBB/Stable). By way of comparison, Emera and APUC had operating EBITDA of approximately CAD1.8 billion and CAD1.0 billion, respectively, at YE 2021. Fitch estimates AltaGas' FFO Leverage will average 5.2x during 2023-2024 comparable with APUC's 4.9x-5.3x range over the same time period and stronger than Emera's 5.7x in 2022.
Canadian utility holding company APUC, 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 derives around 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.
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 about 60,000 Bbl/d on average in 2022, while increasing the proportion of export volumes from the facility to take or pay contracts from merchant;
Sale of all Alaskan assets for USD800 million in 1H 2023;
Maintaining normalized annual sales at WGL in 2022-2024;
Capex averages CAD1.1 billion per annum during 2022-2024.
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 with 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 and WGL. AltaGas has negotiated consolidated credit facilities with total borrowing capacity of CAD3.7 billion. As of June 30, 2022, AltaGas had drawn CAD416 million and had remaining borrowing capacity of about 3.34 billion. AltaGas had cash and cash equivalents of CAD229million on its balance sheet as of June 30, 2022. The company has CAD500 million notes due December 2022. Thereafter, maturities are generally well spaced out with larger scheduled maturities in 2024 and 2025 of CAD550 million and CAD858 million, respectively.
Issuer Profile
AltaGas 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.
Date of Relevant Committee
12 April 2022
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. 
