ScotiaMost analysts' view the results as in-line and have maintained their ratings and price targets.
CIBC and Scotia maintain the Outperform/Buy ratings with $39/$36 price targets and Canaccord Hold with $33 price target.
February 24, 2017
Scotia Securities
AltaGas Ltd. With an In-Line Quarter, All Eyes on WGL
OUR TAKE:
Overall, we view AltaGas' 4Q16 results and 2017 outlook as in-line with our expectations and they do not change our view of the company's existing businesses. Not surprisingly, the conference call largely centered on AltaGas' proposed acquisition of WGL Holdings, though the incremental updates were limited. We maintain our Sector Outperform rating and $36 target price.
KEY POINTS
Limited WGL updates. Management noted on the conference call that they have engaged WGL regulators, as well as other stakeholders, in discussion. Additionally, the company expects to submit regulatory filings related to the acquisition in April. With respect to the asset sales, management stated that they would likely occur around the time of the closing of the acquisition, and highlighted select assets within their U.S. Power portfolio and minority interests in existing utilities as potential candidates. That being said, sales of some of their non-core gas assets would not be subject to that timeline, and could occur as early as the back half of 2017. We maintain our positive view on the WGL acquisition.
2017 outlook largely as expected. The company formally outlined its 2017 outlook, which includes EBITDA and normalized funds from operations growth in the high single digits. This is largely in line with our expectations of 8% EBITDA growth and 9% normalized funds from operations (FFO) growth. This outlook could be viewed as an increase from the messaging on its 3Q16 conference call when management spoke of mid- to high-single-digit EBITDA growth. Our EBITDA estimates are largely unchanged though our 2017 free cash flow per share estimate declines slightly to reflect the recent $300m preferred share offering (which can be seen as pre-funding growth and WGL) as well as slightly higher maintenance capital.
Maintain Sector Outperform rating. As a reminder we upgraded AltaGas to Sector Outperform in early February following the announcement of the WGL acquisition (link). We acknowledge that there are regulatory risks surrounding the deal and it is uncertain whether AltaGas can materially expand WGL's power and midstream businesses. That said, we see the transaction as being very accretive (9% to free cash flow per share) and driving 8%-10% dividend growth out to 2021. At an 8.9% 2018E free cash flow yield we see AltaGas trading at a ~150 bps discount to its Canadian utility peers and ~90 bps discount to its closest midstream peers.