Why Is AltaGas Ltd. (TSX:ALA) Revisiting its Lows?

The market has been watching how AltaGas (TSX: ALA) will pay down its enormous debt after the big acquisition of WGL Holdings, which had key assets that deliver natural gas to more than one million customers throughout Washington, D.C. The roughly $9 billion acquisition was completed in July 2018.

How much debt does AltaGas carry on its balance sheet?

At the end of June, AltaGas had total liabilities of about $5.3 billion, including long-term debt of roughly $3.25 billion. In comparison, the energy infrastructure and utility company generated about $613.7 million of operating cash flow in the past 12 months that ended on June 30. However, to be fair, the WGL assets didn’t start contributing until July.

AltaGas’s debt-reduction strategy

Last week, AltaGas announced a string of moves to help the company significantly reduce its debt levels.

To date, it has announced or completed $1.5 billion of asset sales, which included the sales of non-core midstream and power assets for total proceeds of about $560 million that were announced early last week.

The proceeds will be used to repay the bridge facility that was used for the WGL acquisition. AltaGas is targeting total asset sales of at least $2 billion by Q4 2018.

The non-core asset sales include the San Joaquin gas-fired power assets in California, which is expected to close in Q4, and a 13.3% stake in Tidewater Midstream and Infrastructure, which was completed on Friday. AltaGas sold its Tidewater shares to the private equity firm, Birch Hill Equity Partners Management, for $1.45 per share.

As another way to raise capital and reduce its debt, AltaGas is spinning off some Canadian assets. Specifically, the spun-off company will hold Canadian rate-regulated natural gas distribution utility assets and contracted wind power in Canada, and roughly 10% indirect equity interest in the Northwest Hydro Facilities in British Columbia. At the close of the initial public offering, AltaGas will hold about 37-45% of the spin-off.

Capital raised from the initial public offering combined with the debt repayment by the spin-off company to AltaGas are expected to bring in close to $1 billion to help repay the bridge facility in a meaningful way.

Investor takeaway

With AltaGas’s rapid debt reduction via non-core asset sales and a spin-off of its Canadian assets, the company will have a focus on gas and U.S. utilities. This is a lot of change that’s happening in a very short time. In 2019, we should have a clearer picture of AltaGas’s new normal.

In the meantime, AltaGas seems committed to its monthly dividend. Last week, it announced its September dividend of $0.1825 per common share, which it has maintained since its November 2017 dividend. In August, management had also indicated that there’s visible dividend growth for 2019-2021.

The market doesn’t like AltaGas’s recent news, and the stock is revisiting its recent low and currently offers a whopping dividend yield of about 9.6%. So, it’d be prudent to not bet the farm on the stock. Cautious investors should see if the stock will hold at its 52-week low of $22.78 per share before considering it.