Topic: Spinoffs

AltaGas split produces two buys

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AltaGas is now focused on high-growth U.S. opportunities. That follows the company’s move to set up its Canadian businesses as AltaGas Canada and sell shares in the new firm to the public. The proceeds helped AltaGas pay for a big U.S. utility to spur its cash flow.

The company will likely sell its remaining stake in AltaGas Canada rather than hand it to shareholders as a special dividend. The additional cash will help AltaGas continue to pay down its debt and strengthen its balance sheet. The split has also benefited AltaGas Canada: It’s jumped 72% since its initial share offering but still has solid takeover appeal.

ALTAGAS LTD. $20 (Toronto symbol ALA; Utilities Sector; Shares outstanding: 275.9 million; Market cap: $5.5 billion; Dividend yield: 4.8%; Takeover Target Rating: Medium; processes, transports, stores and markets natural gas for producers. The company also operates natural gas utilities as a power generator as well as coal-fired, wind, biomass and hydroelectric plants.

AltaGas’s revenue fell 9.0%, from $2.41 billion in 2014 to $2.19 billion in 2016. That’s due to the February 2016 sale of its gas-gathering and processing operations in Alberta to Tidewater Midstream and Infrastructure (Toronto symbol TWM). AltaGas received $30.0 million plus $64.9 million worth of Tidewater shares.

Revenue improved 16.7% in 2017, to $2.56 billion, and jumped 66.5% to $4.26 billion following AltaGas’s $9.3 billion acquisition of Washington, D.C.-based utility WGL Holdings Inc. (that price included $3.3 billion of WGL’s debt and $41 million worth of preferred shares). As a result, the U.S. now supplies over 60% of overall revenue.

The company’s cash flow slipped 0.4%, from $472 million in 2014 to $470 million in 2015. With more shares outstanding, cash flow per share fell 8.3%, from $3.72 to $3.41. Cash flow then rose to $3.52 a share (a total of $554 million) in 2016, and then climbed to $3.60 (or $615 million) in 2017. In 2018, WGL lifted AltaGas’s cash flow 6.8%, to $657 million. The company sold shares to help pay for WGL, which is why cash flow per share fell 18.1%, to $2.95.

The company also bundled some of its Canadian utility and renewable energy assets into a separate firm called AltaGas Canada (see below). On October 25, 2018, it sold 16.5 million shares of the new firm to the public at $14.50 a share. AltaGas held onto 37% of AltaGas Canada’s shares.

Under the terms of the AltaGas Canada share issue, AltaGas must maintain that 37% interest in the firm until October 2019. While it has yet to announce its intentions, the company is unlikely to hand out that 37% stake to its shareholders. Instead it’s more likely to sell the shares and use the proceeds to keep paying down its debt.

For the quarter ended March 31, 2019, AltaGas’s overall revenue jumped 116.2%, to $1.90 billion from $878 million a year earlier. Revenue was higher mostly as a result of the WGL acquisition. Overall cash flow soared 115.0%, to $301 million from $140 million. Per-share cash flow was up 38.0%, to $1.09 from $0.79, on more shares outstanding.

The company ended the quarter with cash of $108.5 million. However, its total debt (including short-term loans) was $8.5 billion, or a high 1.5 times its market cap.

To pay down that debt, AltaGas recently sold its remaining 55% in the Northwest Hydro Facilities (three run-of-river hydro power generating stations) in B.C. for $1.37 billion. Later this year, it aims to sell a further $1.5 billion to $2.0 billion in other non-core assets.

The company also cut its monthly dividend to free up cash for debt repayment. Starting in February 2019, investors received $0.08 a share, down 56.2% from $0.1825. The new annual rate of $0.96 still yields a high 4.8%.

The stock is down 6% since the AltaGas Canada IPO. However, it trades at just 4.6 times the company’s projected 2019 cash flow of $4.36 a share. That’s especially attractive in light of its high quality assets and its expanded U.S. growth opportunities.

AltaGas is a buy.

ALTAGAS CANADA LTD. $25 (Toronto symbol ACI; Utilities Sector; Shares outstanding: 30.0 million; Market cap: $750.0 million; Dividend yield: 3.8%; Takeover Target Rating: Medium; owns several Canadian rate-regulated natural gas distribution utilities and contracted wind power assets. It also holds a 10% stake in the Northwest Hydro Facilities in B.C.

In the quarter ended March 31, 2019, the firm’s revenue rose 8.0%, to $118.6 million from $109.8 million a year earlier. AltaGas Canada’s cash flow gained 8.7%, to $1.00 a share (or a total of $30.1 million) from $0.92 a share (or $27.6 million). Those gains reflect colder-than-normal winter weather, which lifted demand for gas utilities in Alberta and Nova Scotia.

AltaGas Canada’s long-term debt was $636.9 million, or 85% of its market cap, as of March 31, 2019. The company’s steady cash flow from its regulated operations lets it service that debt.

The stock has jumped 72% since the IPO, and trades at 7.6 times AltaGas’s likely 2019 cash flow of $3.30 a share. The company pays a quarterly dividend of $0.2375 a share; the annual rate of $0.95 yields 3.8%.

AltaGas Canada is a spinoff buy.


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