Altagas Ltd.(TSX: ALA) is an intriguing stock for investors because of its struggles in the past few years. Over the last year though, the company has begun a turnaround, and has been facing its problems head on as they became exacerbated by the acquisition of WGL. Reducing debt has become the top priority for management going forward, and so far they have done a decent job.
Altagas has done a number of things to help delever the company. The spin-off of its Canadian unit into an IPO was important for two reasons. It raised close to $240 million in proceeds, but also relieved the company of over $600 million in debt. Additionally, Altagas still holds a significant minority position.
The dividend was also cut from an annual rate of $2.09 down to $0.96, although it still yields more than 5% at today’s prices. Just recently the company also announced the sale of its 30% interest in the Stonewall Gas Gathering System, which will bring in another $370 million. The asset sales have been a step in the right direction in terms of deleveraging; however, more is needed to get the debt to a more sustainable level.
Altagas operates through three main segments: midstream, power and utilities. The midstream segment transports, stores, processes and markets natural gas and NGL’s. The acquisition of WGL in 2018 gave Altagas access to four pipelines in the north eastern United States. It also acquired a gas supply agreement for the Cove Point LNG terminal in Maryland.
The company also provides producers access to more competitive pricing in Asia through its propane terminals on the west coast. The new Ridley Island Propane Export Terminal (RIPET) will begin shipping this month, adding cashflow immediately, but also being a key driver for future growth.
The utilities segment is mainly responsible for delivering natural gas to residential and commercial users. The company delivers to customers across five different regions in the U.S. Additionally, Altagas operates two regulated natural gas storage facilities in the U.S.
The power segment operates energy distribution assets coming from natural gas, biomass and solar. Furthermore, it operates energy storage facilities across Canada and the United States. Together with the energy distribution and energy storage facilities, the power business also includes energy efficiency and retail power marketing assets.
These three segments account for Altagas’ steady cash flow. Altagas makes it a mission to operate high-quality assets with long-term contracts and commitments. Currently about 75% of EBITDA comes from medium- and long-term contracts. This adds a degree of stability, which is especially important for dividend paying companies.
From a financial standpoint the company still has some major deleveraging to be done. Net debt/EBITDA is still quite high at 6.3 times earnings. Management believes they can reduce net debt by almost $3 billion in 2019, which will help keep its investment grade credit rating. If all goes well, the turnaround will be heading in the right direction.
In terms of growth, the company is positioned well for an increase in the demand for natural gas in North America. Additionally, Altagas believes it is positioned in markets that will present growth opportunities themselves with reduced capital investment. Finally, the introduction of the RIPET should also bring major growth, as many producers will be eager to have access to other markets.
As a long-term investor, Altagas looks promising. If it can continue to sell non-core assets at reasonable valuations, and make the business more efficient, it’ll be worth an investment.
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