Entering text into the input field will update the search result below

Should You Continue To Hold On To Altagas And Its 9.2% Yielding Dividend?

Mar. 06, 2018 9:32 AM ETAltaGas Ltd. (ATGFF), ALA:CA31 Comments
Ploutos Investing profile picture
Ploutos Investing


  • Altagas owns and operates a diversified energy infrastructure in North America.
  • The company is still waiting for the final regulatory approval to close its acquisition of WGL Holdings.
  • The company expects to increase its dividend by 8 to 10% through 2021.
  • Less than 10% of its EBITDA are directly related to commodity prices.

Investment Thesis

Altagas (OTCPK:ATGFF) (TSX:ALA) owns and operates a diversified energy infrastructure in North America. It has a low-risk business model as less than 10% of its EBITDA are directly related to commodity prices. The company expects to increase its dividend by 8 to 10% through 2021. While its shares continue to decline due to the uncertainty regarding the acquisition, its dividend remains safe and sustainable.

Source: Investor Presentation

Reasons why investors with a long-term horizon will be rewarded

Its Utilities Segment Offers Stable and Predictable EBITDA

After the closing of its WGL acquisition, about 50% of Altagas' EBITDA will come from regulated utilities (natural gas). This segment of its business is extremely low risk with stable and predictable EBITDA.

Source: Investor Presentation

Highly Contracted, Low-Risk Business Model

Beside its stable and predictable utilities segment, Altagas' power generation and midstream pipeline business are also highly contracted. As can be seen from the bottom left pie chart, the company's commodity based EBITDA is expected to only represent 9% if its total EBITDA in 2019 (after WGL acquisition). This means that 91% of its EBITDA in 2019 do not have any exposure to commodity pricing. In addition, 85% of its EBITDA will come from long-term agreements (see bottom right pie chart).

Source: Investor Presentation

RIPET to provide Significant Cost Advantages to Ship its propane to Asia

Altagas' Ridley Island Propane Export Terminal ("RIPET") is expected to be in-service in the first quarter of 2019. This C$450 to C$500 million project has a locational advantage given very short shipping distances to markets in Asia. As can be seen from the map below, to ship propane to Asia through its export terminal will take only about 10 days to reach Japan or Korea. On the other hand, to ship propane from the U.S. Gulf Coast will take about 25 days. Altagas' RIPET facility is designed

This article was written by

Ploutos Investing profile picture
I am a value focused investor. Stocks rise and fall for many different reasons that we often cannot predict. Eventually, it is those companies with a wide moat and the ability to generate cash flow that prevail. Therefore, my investment focus is to find value stocks that are able to generate cash flow, with sustainable dividends and provide growth over time. I focus my attention on analyzing large-capped dividend growth stocks, REITs and ETFs. I aim at providing a quarterly update and insights on stocks I follow. Please feel free to browse the articles that I wrote and provide any comments.

Analyst’s Disclosure: I am/we are long ATGFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (31)

waterlogger profile picture
A good comment above on infastructure costs. You need to look at Chicago and Peoples Gas for comparision of costs of rebuilding NATGAS pipelines in urban areas. The cost per mile is not the only expense. Their are always political entanglements. They add to the cost as well.
The Wash DC area certainly would have a few politicians to contend with as well.
In some ways it might be merciful if WGL just gets rejected.
No editorials just looking at the potential use of capital on other projects rather than WGL 's old pipes.
The California plants another potential expense. The gas ute NWN just wrote off gas storage facilities there due to price of gas and California legislation.
The bottom line here is their are many utes and facilities to aquire, just make sure the other tangibles don't eat all cash flow now and forever.
Esther F Freedom profile picture
Added more shares at C$23
09 Mar. 2018
I noticed one comment stating that China has built a number of NG terminals along its coast and that Altagas would benefit from the switch from coal to NG. The Ridley Island export terminal is being built to export Propane -not NG. Propane is cheap in Canada right now and there are markets for it in Asia for cooking fuel. Altagas management has managed to get all the approvals necessary to build the terminal and has managed to stay out of the headlines by choosing rail shipment which can handle the 50 cars a day which should supply the facility for its design capacity of 40,000 barrels/day. The trick now is to get long term contracts for the full export capability. On the supply side, propane is stripped out of nat gas during the upgrading process before the gas is put in the NG pipeline system and there is a lot of gas in northern BC and Northern Alberta..
The whole issue of "INFRASTRUCTURE" deterioration in America haunts WGL. This old time UTE has not kept up it's infrastructure at optimum levels and some of that is the political of the involved PUCs not approving ADEQUATE rate relief to the Company vs it's motivations to hold down the costs of service to users. So there is a giant over hang of required newly financed CAPEX coming in 2019 if the merger goes through. There are some dubious prospects for the company to be able to recover those costs over a reasonable time period. It is possible that when the upgrades to the infrastructure are under taken there will be some newer branch lines completed into some higher density potential NEW service areas.

It's nice to hear some sanguine observations about the ATGFF dividend.
Esther F Freedom profile picture
Has the share price bottomed out? Any thought? Anyone?
Should I buy the US or Canadian stock.... currency gain?
As a Canadian.....am I better to buy buy buy b
I hold a 2/3 position at $18.70 USD. I am not sure I want to add any further. is there any chance of ALA walking away on this deal?
George Fisher profile picture
Found this from 2 days ago on TDA site, from CS:

"In the ALA-WGL deal saga, the Maryland Public Service Commission Staff, in
part, stated they "will not be able to make the required findings… …that the
Merger is in the public interest, provides benefits to consumers, and results in
no harm to consumers."

May be the reason for the recent weakness. More goodies for both Washington DC and Maryland? Could they be in a "competition" to see who can get the most out of AltaGas before approval? I knew the Wash DC regulators were going put their grubby hands in the pie, but Maryland also? Did a bit more ATGFF nibbling at these levels
Ploutos Investing profile picture
Hi George,

Thanks for sharing. ALA is attractive at this level....waiting to see where the bottom is...
No one, not analysts, commentators nor media, focus on the fact that ALA has, by virtue of it's coming acquisition, needed to positioned its' balance sheet in a manner that will necessarily look ugly, until the WGL asset is plugged-in, and that's what we're seeing. This is an episodic balance sheet imbalance.
Jeff B profile picture
A couple of eyecatchers in passing, but note that I have not gone through the financials end-to-end, and my general DD on ALA is not far along yet:

(1) Growth in shareholder equity was essentially zero YoY.
(2) Interest expense grew substantively YoY, well in advance of the planned WGL closing date. [Addendum - I also noticed the increase in preferred-share payout, which is akin to interest expense. I like to see earnings increase when leverage from debt and pseudo-debt increases.]

If anyone with deeper knowledge of the company feels able to comment on these two points, please do. The drop in earnings has been discussed and modeled elsewhere, but it's worth some time as well.
Matthew Brown profile picture
Thanks for the article. Other authors mention capex needs as being unsustainable. Do you have a view on that?
I agree with the Author that: "There are several reasons why I believe might have contributed to the recent share weakness:"
However, I don't agree with reason #2: "2) Paying a premium for WGL Acquisition"
The price was a known fact, way before the recent Q4 release and subsequent selloff.

I like the co's assets but I am not sure about the portfolio of gas-fired power plants in CA. I understand there are no long term power purchase agreements and let's face the reality: Gas is a fossil fuel, a Taboo in CA.
Best case scenario if kept alive, gas plants may be given a part-time job to back up renewables, cannibalizing the high efficiency of combined-cycle power plants.
What may help is a drought or low water levels which will cut power production of California dams. But this is an unknown factor as well as hot summer weather.

I think, unless Alta or the combined company can secure a good long term future in CA, these plants are better to go.
What has changed the original plan to sell these assets? It could be no willing buyers, or it could be that WGL said they can deal with greens and socialists in CA - we can only speculate.
George Fisher profile picture

It could be due to the new opportunity of supplying battery backup to gas plants and then I expect the battery installations to expand to renewable sites as well.

From my article of Jan 2017: A new opportunity is creeping into the electricity generating business - power storage. AltaGas operates a small, but growing, business in storage of electricity at its plants, and has a current 10-yr Energy Storage Agreement ESA to provide 20 MW of storage from its Pomona facility. There are California mandates for the three largest utilities to acquire 1,300 MW of storage capacity over the next three years. The Pomona storage facility, which just came on-line, is a battery installation with a four-hour capacity with an energy discharging capacity of 80MWh. AS sample of the batteries is pictured above. Investors should hear more about ESAs over the next few years as a new source of revenue for California power generators, and could spread to other states as well.

More on ESA's: https://seekingalpha.c...
George Fisher,

I am aware of Pomona 20 MW Energy Storage facility, actually built and operated by Altagas. This is very good.
But Altagas also owns about 5 or 6 gas-fired plants in CA. The largest, 507 MW Blythe has a PPA expiring in 2020 and 330 MW Tracy in 2022. Relatively short term power purchase agreements and there is only hope that these plants will be welcomed to stay in CA and be given at least a minimum share to operate with a profit.
I still like the original plan to sell these assets and use proceeds to finance the acquisition. In general, I like the efficiency and flexibility of combined-cycle power plants and their important role in retiring coal. But I would stay away from CA - bad place to own and operate gas plants.
George Fisher profile picture

I agree that CA may not be the best place for utilities to profitably operate.
To Veritas1010:

Altagas is a corporation not a MLP. No K-1. Canadian govenment has a 15% withholding tax on dividends not held in a retirement account. Altagas is a diversified energy infrastructure business operated collectively by its operating subsidiaries. The Company offers natural gas, power and regulated utilities and has three operating segments: - Gas, Power and Utilities Power generation is by natural gas and renewable energy. Altagas is not a Yieldco because they were not created or dropped down by a parent company, and are more diversified then most Yieldco.
Veritas1010 profile picture

Thank you for your kind and exact clarification.

Stock Market Mike profile picture
They have qualified dividends if you're a Canadian investor, so that's quite nice even in taxable accounts.

Veritas1010 profile picture
Is altgas a K-1 or qualified dividend?

Is altgas other 50% in renewables, wind, solar?

How would you compare altgas to PEGI, another beaten down renewable (yieldco).

Is altgas a drop down yieldco?

Thank you!

Esther F Freedom profile picture
An interesting stock. I wonder if its share price will continue its free fall.
anthonymaw profile picture
They say the market can be irrational longer than you can remain solvent, but in this case the market is just plain irrational and a great buying opportunity. China is pushing hard to replace coal with nat gas and has built massive seaport gas terminals on their side to receive shipments. Asian gas prices are more than twice AECO pricing so Altagas will profit well once the Prince Rupert export terminal is complete next year and you can collect the now generous annually increasing dividend in the meantime. Buy it cheap and tuck it away for some passive income! http://bit.ly/2FWNxHX
Ploutos Investing profile picture
Yes, it is on sale right now. However, investors may want to wait till its share price stabilizes before buying.
Shouldn’t the analysis include the increase in the number of shares the company has issued and the amount of cash needed to provide for the dividends that need to be paid in connection with these new shares?
I don’t own this one. I hope the acquisition works out for them. But I have concerns.
check-mate profile picture
buy the Ala-r, then if deal does not go ala will pay out 31.00 for each -R
Ploutos Investing profile picture
Yes, ALA.R is a much more safe bet.
Although the common share price would rocket if the merger is called off.
And if the deal goes through you are losing $1 on your shares overnight if you buy the receipts...
fintax profile picture
I'm still dripping for now. I hope your analysis is correct!
Ploutos Investing profile picture
Hi fintax,

I hope so too as I am also dripping.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.