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Longtime favorite AltaGas operates three business lines:
Field Gathering & Processing, Extraction and Transmission
When Altagas converted to a corporation from an income trust, the firm’s midstream operations generated almost 90 percent of the firm’s annual operating income.
At that juncture, the company’s business mix entailed significant exposure to energy prices via its gathering and processing assets.
This segment of AltaGas’ midstream operations, which involves systems of small-diameter pipelines that transport field production to gas-processing plants, has struggled of late because low natural-gas prices (see Price Check on Canadian Oil and Natural Gas) have discouraged conventional drilling in Canada’s Western Sedimentary Basin.
But AltaGas has diversified its midstream business over the ensuing decade to bolster the proportion of fee-based income. Recently, the company acquired a 25 percent interest in privately held Petrogas Energy Corp, which owns and operates liquids storage, transportation and blending facilities. This deal included the option to purchase another 25 percent stake in the company.
Dominion Bond Ratings Services calls the transaction “credit neutral,” while noting the benefits of diversifying its asset base.
AltaGas has also made progress on two downstream projects that should drive cash flow and dividend growth: a joint venture with Petrogas Energy to ship propane and butane to overseas and a partnership with Idemitsu Kosan Co. (Tokyo: 5019, OTC: IDKOY) to export up to 2 million metric tons of liquefied natural gas (LNG).
Assuming that AltaGas and its partners reach permitting deals with the First Nations, the propane and butane export scheme could come onstream in 2015 and the LNG terminals could start commercial operations in 2017.
The company also announced an expansion of it Cold Lake transmission system to deliver the natural gas needed to generate steam for two heavy-oil projects in a remote part of Alberta.
Electricity Generation and Gas Distribution
AltaGas has expanded its electricity-generation asset base in recent years and has a number of growth projects under way, including the construction of a co-generation power plant slated and several hydropower installations in British Columbia. All these facilities are slated to come onstream over the next two years.
In recent years, depressed natural-gas prices have weighed heavily on the price of wholesale electricity. AltaGas has sought to mitigate this volatility through strategic hedges and inking long-term contracts with provincial authorities. The firm has hedged about 67 percent of its wholesale power sales for the remainder of 2013.
Factor in the company’s regulated utility operations and you have a diversified energy company that generates extraordinarily steady streams of cash flow, regardless of trends in commodity prices.
A conservative dividend policy that targets a payout ratio of 40 percent to 50 percent of funds from operations likewise provides a cushion in difficult times, while steady growth in this non-GAAP measure of cash flow has enabled AltaGas to raise its dividend on four occasions since converting to a corporation in mid-2010.
With a dividend yield of almost 4.3 percent and the potential to deliver shareholders a windfall if management elects to spin off its renewable-energy operations, AltaGas offers conservative investors an enticing combination of reliable income and potential capital gains.
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Elliott and Roger on Mar. 30, 2017
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