AltaGas Ltd T.ALA

Scotia comments

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Sale of Alaskan Utilities Supportive of a Higher Valuation and the Balance Sheet

OUR TAKE: Positive. We resume coverage following AltaGas’ announcement regarding the sale of its Alaskan utilities, ENSTAR and CINGSA, to TriSummit Utilities Inc. The sale does not come as a surprise as we had previously highlighted this as a possible transaction in March (link). The US$800m sale price is quite a bit higher than we expected, and is a positive for the company’s balance sheet and funding plan. We estimate that the transaction is ~$0.03 dilutive to 2024E EPS, but more importantly, is ~$1/sh accretive to our valuation and helps de-lever the balance sheet. Leverage has been a concern for some investors (not us though) and this transaction will move down debt-to-EBITDA in 2024E by ~0.4x.

KEY POINTS

Non-core asset sale at a strong valuation. We never viewed AltaGas’ Alaskan assets as core given their small size (~US$350m rate base), location, and relatively muted growth profile. That said, we do view them as good quality assets with favourable ROEs of 11.875% / 10.25% and equity thicknesses of 51.81% / 53.04% for ENSTAR and CINGSA, respectively. The US$0.8b purchase price, which represents a 29x on 2021 allowed earnings and 2.3x 2021 rate base, was well ahead of the $0.6b we were carrying the assets at (1.5x rate base). We view it as a strong valuation for a lower growth utility. After tax, the company sees net proceeds of $985m, which will be used to pay down debt and help fund the capital plan. The transaction will require a number of regulatory approvals, but we do not expect any material issues. We assume the transaction closes mid Q1/23. The sale of its Alaskan utilities helps to de-lever the balance sheet much quicker than previously expected. Mountain Valley Pipeline (MVP) had long been talked about as an asset sale candidate, but with the regulatory challenges and timing delays it has experienced so far this year, we believe it was looking less and less likely to occur in the near-term. This transaction is a good alternative for AltaGas, and gives it the flexibility to pursue other growth opportunities within both its Midstream business and higher growth Utilities.

Another example of strong gas utility valuations. The TriSummit transaction is another example of the private market putting a strong valuation on gas utility assets. Earlier this year, South Jersey Industries (SJI-N, not covered) received a take-out offer representing a 2023E P/E of 20.1x and an EV / 2023E rate base of 1.8x (Exhibit 4). Another example is the acquisition of Dominion Energy’s Hope Gas by Ullico Inc. for 26.2x 2021 earnings and 2.0x 2021 rate base. We believe these private market bids for gas utility assets is a reason we have seen public gas utilities perform strongly so far this year. As a reminder, we value AltaGas’ utility assets at 19.5x P/E, which implies a 1.6x EV / 2024E rate base. Moving our P/E to 21.0x would increase our valuation by $2/sh. Moving our implied EV / rate base to 1.85x would add ~$6 to our valuation.