Investment Thesis
AltaGas Ltd. (TSX:ALA:CA) (OTCPK:ATGFF) is leveraging the stable earnings from its regulated utility business to fund ambitious growth projects in its midstream segment. AltaGas is advancing a new Pacific coast energy export facility and has continued to invest in export efficiency through additional very large gas carrier vessels. The company has recently confirmed a new CEO with a strong midstream background. In addition to reporting solid Q1 results, AltaGas has reiterated its full year guidance and 5-7% dividend growth target. The company’s rate base growth on its utility segment and its investments in new LPG export infrastructure provides a clear line of site to the EBITDA growth required to support this dividend goal.
New Leadership
Following the retirement announcement of CEO Randy Crawford in November of last year, AltaGas has provided an update that his replacement will be long time Enbridge Inc., (ENB) executive Vern Yu. Yu will take over as AltaGas President and CEO effective July 1, 2023. Most recently, Yu served as Executive Vice President, Corporate Development and has been Chief Financial Officer and President, New Energy Technologies prior to that. Before joining Enbridge, Yu also held roles at TC Energy (TRP). With over thirty years at Enbridge, Yu brings experience from both midstream operations and regulated utilities. The Board’s decision to select a chief executive from North America’s largest midstream operator is a nod to trajectory of growth ahead for AltaGas.
Solid Q1 2023 Results
For the quarter, AltaGas posted normalized EPS of $0.98 compared to $1.02 in the first quarter of 2022. Q1 2023 normalized EBITDA came in at $582M, up from $574M in the first quarter of 2022. With the Q1 results announced in April, AltaGas reiterated its on track to achieve its previously announced guidance range of normalized EPS of $1.85 to $2.05 and normalized EBITDA of $1.5B to $1.6B for FY 2023.
AltaGas Q1 2023 Results (AltaGas)
AltaGas’s midstream segment reported normalized EBITDA of $183M in the first quarter compared to $174M in the first quarter of 2022. The utility segment was essentially flat with Q1 2023 EBITDA of $401M. On its recent earnings call, AltaGas expressed it confidence in positive outcomes in two pending rate proceedings: Virginia where proceedings are expected to wrap up this summer, and Washington DC where a rate decision is expected in Q4, 2023. Across the utilities segment, the company’s rate base is expected to grow at a CAGR of 8-10%through 2027.
Ridley Island Joint Venture
AltaGas has announced a 50/50 joint venture with Royal Vopak to develop a new liquefied petroleum gas “LPG” and bulk liquids terminal adjacent to its RIPET facility, on Ridley Island in Northern British Columbia. This proposed project called REEF (Ridley Island Energy Export Facility) would significantly expand the company’s energy export capacity.
The joint venture has secured a long-term lease on a 190-acre site through the Prince Rupert Port Authority. In advance of the company’s final investment decision, AltaGas was granted federal permits in 2022 and an Environmental Assessment Certificate from the Government of British Columbia in 2023 that enables the building of storage tanks, a new jetty and rail connections. Engineering and design work is expected to be completed in late 2023.
REEF Project Rendering (Prince Rupert Port Authority)
Phase one of REEF will be all LPG, with future phases adding in methanol and other essential bulk liquids. Within the joint venture, AltaGas will develop and operate the proposed export facility and will be responsible for determining feed stock and export volumes in the first LPG phase.
Prince Rupert, British Columbia where Ridley Island is located is at the terminus of the CN Rail line and is the deepest natural harbour in North America. This year round ice-free port, positions the terminal 14 days closer to key Asian export destinations compared to port on the U.S. Gulf Coast. Co-locating the facility adjacent to the existing RIPET terminal offers synergies for feedstock arriving by rail along the existing Prince Rupert utility corridor.
New VLGC Capacity
AltaGas is further expanding its gas export capacity and transport efficiency through the acquisition of additional Very Large Gas Carriers “VLGCs” with the announcement of a seven-year time charter on a new 86,700 cubic metre dual-fuel VLGC expected to be delivered in 2026. This additional capacity is on top of two new vessels expected in late 2023 and early 2024.
VLGC (AltaGas)
Last summer, AltaGas completed its 100th VLGC pick up from RIPET. This new incremental capacity allows for export volume growth by building on a record of exporting almost 100,000 barrels a day of LPGs to Asia, delivered across 16 VLGCs. AltaGas now connects more than 12% of Japan’s annual propane and 12% of South Korea’s annual LPG inputs. In addition to reducing shipping costs by approximately a quarter compared to other freight options, this agreement helps to add cost stability and predictability through vertical integration.
Risk Analysis
Two risk factors that were prominent in the most recent earnings results and related announcement were: CapEx spending to develop the REEF project, and the increased use of hedging in the midstream sector to flatten out commodity price fluctuations. For a deeper look at AltaGas’s risk factors, please see my previous analysis here.
AltaGas is anticipating a CapEx EBITDA multiple of roughly 6-8X during the estimated three-year capital-intensive portion of the REEF project. Should AltaGas move ahead with development, the 50/50 nature of the project helps to derisk the enterprise and would allow AltaGas to maintain its credit rating throughout development spending. Other tools the company can use to manage its leverage include divesting non-core assets such as the Mountain Valley Pipeline or its Blythe energy facility. Equally, management noted an opportunity to be more conservative on its utility Capex while this project is being advanced. With the utility business having a more linear CapEx profile and the midstream CapEx being fairly lumpy, it would be prudent to exercise for capital increased discipline across the utility business during this build.
On its recent Q1 2023 earnings call, AltaGas spoke about hedging as a way to ensure that they were on target to meet their 2023 full year guidance. For 2023, 68% of AltaGas’s expected exports volumes are either covered by tolling contracts or financial hedges. This hedging strategy will add more stability and predictability to future quarters for the midstream segment.
Investor Takeaways
I view AltaGas as a utility company with stable earnings torqued to some exciting midstream opportunities. The REEF project is a promising development that would act as a critical piece of midstream infrastructure serving a market with growing energy needs. The capital intensity of the project may push AltaGas’s leverage ratio above its current levels as the company builds out the asset.
With improving efficiency in the midstream business supported by new VLGCs coupled with 8-10% CAGR on its regulated utilities rate base through 2027,I see a credible path forward on the company’s dividend growth target of 5% to 7% compounded annually through to 2027. With a 4.8% dividend at current levels, this dividend growth trajectory supports a strong total return opportunity.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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