Scotia Bank Take On AltagasAltaGas Ltd. Strength in 2020 Likely to Continue into 2021 OUR TAKE: Positive. AltaGas' core utility and midstream assets performed well in Q4 and results beat our estimates as well as 2020 EPS guidance. We expect this strength to continue into 2021 and we increase our estimates slightly. Our 2021 EPS estimate is now two pennies above the company's guidance range. AltaGas' utility segment is seeing strong growth, and we believe these assets are not properly reflected in the share price. At 14.4% 2023E free cash flow yield, AltaGas is trading like a midstream company (in fact, at a discount to its midstream peers, which are trading at an average of 12.5%). At 11.1x 2023E P/E, we view AltaGas as a way for investors to get exposure to high-growth utility assets at a discounted valuation (the other Canadian utilities are trading in the 15x-19x range). We reiterate our $24 target price and Sector Outperform rating. KEY POINTS A strong 2020, and lots of tailwinds to 2021 guidance. In 2020, AltaGas generated EPS of $1.42, which was well ahead of the guidance range of $1.20-$1.30. The company reiterated its 2021 EPS guidance of $1.45-$1.55 (versus us at $1.57) and EBITDA of $1.4b-$1.5b (versus us at $1.48b). Management made a point of noting that it is seeing various tailwinds across its operations. Its Midstream business is well situated to benefit from the recent run-up in NGL prices and wide Q1/21 spreads between Asian and Edmonton propane prices (Exhibit 4 - though we note they have come in recently). The timing of the Petrogas acquisition appears to be favourable as the purchase price was negotiated during a period of low commodity pricing. Once the acquisition closed, pricing dramatically improved. There were limited hedges at Petrogas so we expect to see management further lock in pricing at advantageous levels. The recent cold snap is a tailwind and we now see heating degree days at its utilities with exposure to weather well ahead of levels seen last year. Partially offsetting this would be a stronger Canadian dollar. Utility ROEs improvement has been greater than expected. In 2020, management estimates that the achieved ROE at its WGL utilities improved by 150 bp. Through 2021, the company expects a further 150 bp of improvement, allowing it to achieve near its allowed ROE of 9.5% in 2022. Driving this improvement is a variety of factors including new rates in Washington, which is a geography that has had weaker results historically. A focus on operating costs and lower leaks is also improving returns.
Q4/20 Recap: Strong Quarter and Outperformance Across AltaGas’ Businesses AltaGas' core utility and midstream assets performed well in Q4, driving results ahead of our estimates and above 2020 EPS guidance. AltaGas' Q4 EBITDA of $392m was above our estimate of $381m, but in line with consensus of $393m (range $381m-$405m). Adjusted EPS of $0.53 was well ahead of our $0.44 estimate (and consensus of $0.46; range $0.42-$0.52) largely due to the higher EBITDA but also lower-thanexpected taxes and interest. Strong utilities growth is core to our thesis. Utilities EBITDA for Q4 (seasonally, the second strongest quarter) of $259m was ahead of our $247m estimate. The segment benefited from new rates and continued improvement in operating costs. At WGL, the company was able to improve ROEs by 150 bp in 2020, with a further 150 bp improvement expected through 2021. With a rate base annualized growth outlook of 8% through 2025, as well as improving ROEs, we see significant earnings growth potential at its utilities. Midstream results better than expected. Midstream Q4/20 EBITDA of $128m was ahead of our $124m estimate. Ridley Island Propane Export Terminal (RIPET) exports of ~38 kbpd were in line with our estimate. So far in Q1/21, five ships have departed from RIPET (Exhibits 2, 3) and realized spreads have been strong despite rising Edmonton propane pricing (Exhibit 4). During Q4/20, RIPET and Petrogas generated $38m of EBITDA, which was largely in line with our $39m estimate.