RE:RE:Scotia upgrades ALA to sector outperform, target $20High-Quality Utility Trading at a Midstream Multiple – Upgrading to Sector Outperform OUR TAKE: Positive. We are upgrading AltaGas to Sector Outperform from Sector Perform. We view the shares as attractively valued at 10.5x 2021E PE, well below the 2021E utility average of 18.3x, and at a 16.4% free cash flow yield, it trades at a slight discount to the midstream average of 16.0%. We expect the valuation gap to the utilities to narrow as the market gets more comfortable with AltaGas' utility growth outlook and the balance sheet continues to strengthen. Our target price moves to $20 from $22, largely to reflect a lower midstream valuation in our sum of the parts analysis. KEY POINTS High-growth gas distribution utilities. AltaGas sees its rate base growing at a 8%-10% CAGR from 2018-2021. This would be above the majority of utilities in our coverage universe, which is not surprising given that gas distribution assets are generally higher growth. Further accelerating EPS growth for AltaGas would be improving utility returns. Through new rates and cost containment, AltaGas should narrow the significant gap between allowed and achieved ROEs (~200 bps). We see AltaGas' EPS increasing at a 7% CAGR from 2020-2022, which would be in line with the utility group average. Significantly improved balance sheet. Over the last year AltaGas has significantly strengthened its balance sheet, largely through its asset sale program. The company is moving forward with a capital plan that is largely focused on its low-risk utility business. We see AltaGas being well positioned to fund this plan with free cash flow and a limited amount of incremental debt and without the need for additional equity. We also see its credit metrics improving and investment-grade credit ratings being easily maintained with 2020 adjusted FFO-to-adjusted debt of 12.6%. Some midstream exposure. AltaGas' shares have significantly underperformed the utilities in the downturn, which we attribute to concerns about leverage and its midstream exposure. Its Midstream assets represent slightly less than 40% of its 2020 EBITDA and has exposure to non-investment grade customers. While there is stress in the energy market we believe that AltaGas' assets are well positioned given they facilitate the export of propane to higher-value offshore markets. We also like the geographies of its gathering and processing assets and while some counter-parties are under stress we expect that there is demand for the facilities longer term. That said, we have slightly reduced our Midstream EBITDA estimates moving forward.