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AltaGas Ltd. has announced:

that it and its indirect wholly owned subsidiary AltaGas Power Holdings (U.S.) Inc. have entered into a purchase and sale agreement with Highstar Capital IV, L.P. and certain of its affiliates to acquire GWF Energy Holdings LLC, which holds a portfolio of three natural gas-fired electrical generation facilities in northern California totalling 523 MW (the “Acquisition”), including the 330 MW Tracy facility, the 97 MW Hanford facility and the 96 MW Henrietta facility (collectively the “Facilities”). The purchase price of the Acquisition is US$642 million, subject to certain closing adjustments.
…
Acquisition Funding

AltaGas expects the cash to close the Acquisition will be provided from a combination of equity and debt, specifically from: (i) a portion of the proceeds of the Offering; (ii) AltaGas’ existing credit facilities; (iii) future debt and preferred share financings; and (iv) potential dispositions of non-core assets.

The Acquisition will be financed consistent with AltaGas’ current capital structure. AltaGas will continue to maintain its strong balance sheet and financial discipline and is committed to maintaining its investment grade credit rating.

Transaction Closing

The transaction is subject to customary approvals, including regulatory approvals from the Federal Energy Regulatory Commission of the United States government and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The acquisition is expected to close late in the fourth quarter of 2015.

Common Equity Offering

Pursuant to the Offering, AltaGas has agreed to sell, on a bought deal basis, an aggregate of 8,760,000 common shares at a price of $34.25 per common share (the “Offering Price”) for gross proceeds of approximately $300 million. The common shares will be offered through a syndicate of underwriters co-led by TD Securities Inc. and BMO Capital Markets as joint bookrunners. AltaGas has also granted the underwriters an option to purchase, in whole or part, up to an additional 1,314,000 common shares at the Offering Price to cover over-allotments, if any, for a period of 30 days following the closing of the Offering (the “Over-Allotment Option”). If the Over-Allotment Option is exercised in full, gross proceeds from the Offering will be approximately $345 million.

The Offering will be used, in part, to fund the Acquisition as well as to reduce indebtedness and for general corporate purposes.

DBRS comments:

DBRS views the Acquisition as modestly positive for the Company’s business risk profile as it would diversify AltaGas’ energy infrastructure portfolio through the addition of relatively low-risk, fully contracted and long-life gas-fired power assets in Northern California to its existing power generation assets located in Southern California (507 MW Blythe Energy Centre), thereby expanding its presence in the California power market. The PPAs with PG&E are structured as tolling arrangements for 100% of the energy, capacity and ancillary services, which eliminates price and volume risk. AltaGas benefits from a highly contracted portfolio of power assets, and the commissioning of Forest Kerr (195 MW in 2014) and Volcano Creek (16 MW in 2015) run-of-the-river projects supported by a 60-year PPA with British Columbia Hydro and Power Authority (rated AA (high), Stable, by DBRS) as well as the acquisition of three western U.S. gas-fired power assets (combined 164 MW in January 2015) have partially mitigated the impact of weaker realized Alberta power prices and volumes for the Company. DBRS estimates that, the Acquisition increases AltaGas’ power-generation capacity to 2,035 MW from the current 1,512 MW and, consequently, the Company’s EBITDA contribution from its Power segment is expected to increase to approximately 40% from 31%, resulting in a more diversified lower-risk asset portfolio. DBRS is moderately concerned that there is re-contracting risk on the GWF PPAs which expire in 2022. However, the California Renewable Portfolio Standard Policy requiring utilities to use 33% renewable energy by 2020 and state legislation to boost California’s greenhouse gas reduction target to 40% by 2030 could result in the retirement of coal-fired utilities, thereby supporting the continued existence of gas-fired utilities to ensure adequate power supply.

DBRS expects the Acquisition to have a neutral impact on the Company’s financial risk profile. DBRS notes that the funding for the acquisition is consistent with the Company’s current capital structure and that the Acquisition is expected to provide a stable stream of contracted EBITDA of approximately $95 million annually (approximately 17% of EBITDA for last 12 months ended June 30, 2015). While the Acquisition is being financed with an initial common share offering ($300 million to $345 million), the balance of the purchase price is likely to be financed by a combination of debt and preferred share issuance, resulting in minimal impact on leverage. DBRS does not expect the increase in dividends to $0.165 per share to have a meaningful impact on the Company’s cash flow.

DBRS estimates that, following the Acquisition, DBRS adjusted total debt-to-capital is likely to remain largely unchanged with cash flow and interest coverage ratios improving slightly on a 2015 full-year pro forma basis. Overall, the Acquisition is expected to maintain the Company’s credit metrics consistent with the current ratings.

AltaGas has three preferred share issues outstanding, all FixedResets: ALA.PR.A, ALA.PR.E and ALA.PR.G. ALA.PR.A will reset shortly at 3.38%.

I suspect a new issue will have to yield somewhere around 5.00%-5.25%, with a reset-floor-rate. The company is best known for having the most useless investor relations department on earth.

This entry was posted on Tuesday, September 22nd, 2015 at 10:36 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.