DBRS Morningstar Confirms Ratings on AltaGas Canada Inc. at BBB (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed AltaGas Canada Inc.’s (ACI or the Company) Issuer Rating and Unsecured Medium-Term Notes (Senior Notes) rating at BBB (high). All trends are Stable. The rating confirmations reflect ACI’s stable business risk profile underpinned by its ownership of regulated natural gas distribution utilities, diversified asset base, and support from unleveraged cash flow generated at its long-term contracted renewable power assets. Key challenges include the relatively small size and operational risks at the Company’s regulated utilities and the impact of weather on natural gas consumption and electricity generation.

In November 2019, ACI announced that it had concluded a definitive agreement with the Public Sector Pension Investment Board (rated AAA with a Stable trend by DBRS Morningstar) and the Alberta Teachers' Retirement Fund Board (together, the Sponsors) whereby the Sponsors will acquire the outstanding common shares of ACI for a total consideration of approximately $1.7 billion (the Transaction). DBRS Morningstar considers the Transaction to be neutral to the Company’s credit ratings and expects the Company to continue to pursue a self-funded financing model to fund organic growth capital at its regulated utilities.

The regulatory environment at the Company’s utilities remained relatively stable over the last year with no changes in deemed equity or return on equity parameters. The outlook for growth in rate base has improved over the last year due to positive momentum for energy export projects out of Western Canada. In June 2019, Pacific Northern Gas Ltd. (PNG) filed an application with the British Columbia Utilities Commission seeking approvals in connection with its proposed plan to reactivate spare transmission capacity and allocate it under long-term contracts. PNG estimates the total cost of the reactivation to be up to approximately $120.0 million. Consequently, ACI increased its capital expenditure (capex) outlook between 2019 and 2023 to between $425.0 million and $500.0 million from $330.0 million, which includes the potential reactivation of PNG’s transmission pipeline and the Etzikom lateral pipeline project at AltaGas Utilities Inc.

ACI’s financial performance has remained relatively stable, underscoring the regulated and contractual nature of its earnings. DBRS Morningstar expects the Company’s operating cash flow (OCF) to increase due to the growth in rate base. The Company has refinanced most of the debt raised at the time of the initial public offering with Senior Notes, which have longer maturity dates and lower interest rates. ACI is expected to fund its capex and dividend payments from OCF and debt to maintain the regulatory capital structure at the utilities. The Stable trends reflect DBRS Morningstar’s expectation that the Company’s key credit metrics will improve modestly and remain supportive of the current rating. ACI is expected to continue to be the primary debt issuer with no material external debt at the operating companies. ACI’s liquidity profile is also deemed to be adequate.

Given that ACI’s rating is constrained by its small size, a positive rating action would require a material improvement in scale at its regulated utilities. While unlikely, an adverse change in the regulatory environment could lead to a negative rating action.

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 and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, 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 info@dbrs.com.

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 info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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