ALA : DBRS Downgrades to Pfd-3(low)

DBRS has announced:

downgraded the Issuer Rating and the Medium-Term Notes (MTNs) ratings of AltaGas Ltd. (AltaGas or the Company) to BBB (low) from BBB, and the Preferred Shares – Cumulative rating to Pfd-3 (low) from Pfd-3. The trends on the ratings are now Stable.

The downgrade removes the ratings from Under Review with Developing Implications where they were initially placed following the announcement that the Company had agreed to acquire WGL Holdings Inc. (WGL) in January 2017. Please refer to the DBRS press releases “DBRS Places AltaGas Ltd. Under Review with Developing Implications Following Announcement of WGL Holdings Acquisition,” January 26, 2017; “DBRS Maintains AltaGas Ltd. Under Review with Developing Implications,” November 6, 2017; and “DBRS Comments on AltaGas Ltd. Closing Its Acquisition of WGL Holdings, Inc.,” July 9, 2018.

DBRS’s rating action reflects the significant structural subordination and the weaker credit profile of the Company. Stand-alone debt at AltaGas is structurally subordinated to debt at its subsidiaries: WGL, Washington Gas Light Co. (Washington Gas) and SEMCO Energy, Inc (SEMCO). As at Q3 2018, $6.4 billion of debt at AltaGas, the parent, was subordinated to $3.5 billion of debt at WGL (including $1.8 billion at Washington Gas) and $469 million at SEMCO. Although the acquisition has added scale and diversification to the Company’s utility footprint in the United Sates, it does not mitigate the structural subordination caused by the acquisition. Following the close of the WGL acquisition, certain ring-fencing provisions were implemented whereby Washington Gas became a wholly owned subsidiary of a bankruptcy-remote entity, Wrangler SPE LLC, to insulate the utility and protect it from the financial policies of AltaGas and the financial risk from the rest of the Company’s operations, including the non-regulated operations of WGL. Regulatory conditions for the acquisition provide for restrictions on dividends should equity level fall below 48% of total capitalization at Washington Gas and a restriction on special dividends for the next three years. DBRS is of the opinion that while these ring-fencing provisions are credit positive for Washington Gas, they are credit negative for AltaGas, the parent.

DBRS notes that the credit profile of AltaGas has weakened since the sale of its unencumbered and contracted Northwest B.C Hydroelectric facilities, the San Joaquin gas-fired generation facilities in California and the monetization of its Canadian utility assets through the IPO of AltaGas Canada Inc. (rated BBB (high), Stable by DBRS) to primarily fund the acquisition of WGL. The acquisition of WGL has resulted in higher debt at AltaGas: non-consolidated debt at the parent company was $6.4 billion at Q3 2018 compared with $3.6 billion at Q3 2017. DBRS estimates that the non-consolidated debt-to-capital ratio at AltaGas was approximately 50% at Q3 2018, which is considered high. As part of the funding plan for the acquisition of WGL, the Company completed the sale of $2.4 billion of assets in 2018 with an additional $1.5 billion to $2.0 billion of asset sales to be completed in the first half of 2019, including the remaining 55% interest in the Northwest B.C. Hydroelectric facilities for $1.39 billion that is expected to close in Q1 2019. The Company recently announced additional asset sales of $1.5 billion to $ 2.0 billion and a 56% dividend cut to repay debt and to fund capex in 2019. DBRS is of the view that should the execution, timing and amount of asset sales not materialize as contemplated, the Company’s leverage could remain high and further pressure its credit profile. DBRS notes that the Company has indicated that new debt and debt maturities at WGL (excluding Washington Gas) will be funded at the parent company, while the utilities, Washington Gas and SEMCO, are expected to access the debt markets directly.

While an upgrade to the rating is not contemplated in the near term, DBRS could consider upgrading the rating should the Company’s consolidated debt-to-capital ratio improve and stay at or below the 40% level for a sustained period while AltaGas executes on its capital programs. DBRS could revise the rating down should (1) consolidated debt-to-capital remain at or above 50% for a sustained period; (2) the Company fails to execute on the planned asset sales in 2019; or (3) adverse regulatory changes at Washington Gas or SEMCO affect the Company’s business risk profile.

This follows the S&P one notch downgrade to P-3 reported yesterday.

Affected issues are: ALA.PR.A, ALA.PR.B, ALA.PR.E, ALA.PR.G ALA.PR.I and ALA.PR.K.

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