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Should You Buy Altagas Ltd. Shares or the Subscription Receipts?

Altagas Ltd. (TSX:ALA) is making efforts to acquire WGL Holdings Inc. (NYSE:WGL) — a fitting addition to Altagas’s existing portfolio. They own similar types of assets, but WGL has a high S&P credit rating of A+, while Altagas has an investment-grade rating of BBB.

Altagas processes and moves about two billion cubic feet of natural gas and natural gas liquids each day. It has five regulated gas-distribution utilities, which deliver clean and affordable natural gas to more than 565,000 customers (22% in Canada and 78% in the U.S.). It also has 1,688 MW of power-generation capacity across clean fuel sources: natural gas, hydro, wind, and biomass.

WGL consists primarily of regulated gas utilities which represent roughly 77% of its assets. The company also provides retail gas and electricity to roughly 275,000 customers in Washington D.C., Maryland, Virginia, Delaware, and Pennsylvania. WGL also has some distributed generation and midstream assets.

WGL will make Altagas’s dividend safer

The Altagas management believes the WGL acquisition will be accretive to its earnings and cash flows.

The acquisition will make Altagas’s dividend safer by improving the energy infrastructure company’s payout ratio. WGL will also allow Altagas to grow its dividend by 8-10% per year through 2021.

To raise a part of the capital to fund the WGL acquisition, Altagas sold 67.8 million subscription receipts for gross proceeds of about $2.1 billion.

16-9 dividend growth 2

Should you buy the shares or the subscription receipts?

Here’s how the subscription receipts work.

Investors can buy them at a brokerage using the ALA.R symbol.

Holders of the receipts will receive cash payments, which are the same as the dividends declared by Altagas on its common shares. Once the WGL acquisition closes, the receipts will turn into common shares of Altagas.

Currently, the receipts trade at $29.80 per receipt, while Altagas trades at $30.82 per common share. In other words, the receipts trade at about a 3% discount to the common shares.

There’s still a long way off before the expected closing of the WGL transaction in Q2 2018. There’s a possibility that the acquisition won’t go through.

If you like Altagas but don’t want to own Altagas shares without the WGL deal, then you would want to buy the subscription receipts instead of the common shares.

In so doing, you’ll get a yield of about 7% until the transaction goes through or falls through. If it falls through, you’ll get your money back. If it goes through, your receipts will be converted to common shares.

If you like Altagas regardless of what happens with the WGL transaction, then you might want to use the recent pullback as an opportunity to get Altagas shares at a yield of roughly 6.8%.

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Fool contributor Kay Ng owns shares of ALTAGAS LTD. Altagas is a recommendation of Stock Advisor Canada.

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