POSITIVE FID ON REEF
THE TD COWEN INSIGHT
The positive FID on REEF is an expected significant project milestone that demonstrates ALA's focus on executing its strategy, in our view, with the next anticipated milestone MVP being put in service. We believe the company should provide investors above-utility- average potential returns, albeit at slightly higher execution risk relative to pure-play utility peers.
Event
AltaGas Ltd. (ALA) announced that it has reached a positive FID on its Ridley Island Energy Export Facility (REEF) project considering the 50/50 JV with Royal Vopak has completed all major gating items, including a Class III capital cost estimate and front-end engineering design. Site clearing is more than 95% complete, and the project is expected to enter service near the end of 2026. This announcement is consistent with expectations as ALA previously communicated that it expected to reach FID on REEF in Q2/24.
Impact: SLIGHTLY POSITIVE
Project Extends Visibility of Growth: ALA expects gross capital costs of $1.35bln, and once completed, the JV expects gross EBITDA contributions of $185mln-$215mln, indicating a 6-7x build multiple, which we believe is appropriate for an LPG facility. Risk-reducing measures will be taken as the JV expects to lock in ~60% of the Phase 1 capital costs through fixed-priced and lump-sum contract agreements. Further, ~90% of the equipment, packaging, and pipes are being fabricated off-site in a controlled environment. ALA expects construction to start in 2024, with the bulk of the construction occurring in 2025 and 2026. Following the announcement, ALA increased its 2024 capital spend guidance by $100mln to $1.3bln and expects to adjust capital spending elsewhere to provide capacity for this new project. The JV expects to split the project funding in line with its 50/50 ownership with no leverage at the partnership level.
Structural LPG Export Advantage: Recall, REEF is a large-scale LPG and bulk liquids terminal located on Canada's west coast. The project should provide a structural advantage for delivering LPG to Northern Asia markets with only ~10 days shipping time, which is favourable versus Gulf Coast alternatives. The project should allow for easy VLGC access and multi-vessel loading capabilities.
Financial Forecast Updated: We have updated our financial forecast to incorporate REEF- related capex estimates and other select refinements, and when combined with our updated outlook, our target price remains at $34.00.