Pat McKeough recently replied to a member of his Inner Circle who is looking for an opinion on AltaGas Ltd. The power generator has stabilized its cash flow with long-term contracts for its power plants. It has also agreed to sell non-core assets.
Q: Pat: Could you give me your opinion of AltaGas? Thanks.
A:ALTAGAS LTD. (symbol ALA on Toronto; www.altagas.ca) processes, transmits, stores and markets natural gas for producers; generates power from gas-fired, coal-fired, wind, biomass and hydroelectric plants; and operates natural gas utilities.
In the three months ended September 30, 2015, AltaGas’s cash flow per share rose 19.0%, to $0.75 from $0.63 a year earlier. That’s mainly due to the January 2015 acquisition of three gas-fired power plants in the U.S. for $33.6 million. Revenue gained just 1.8%, to $452.2 million from $444.2 million. Low selling prices for its natural gas offset the extra revenue from its new operations.
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In November 2015, the company completed its purchase of three gas-fired power plants in northern California for $642 million U.S. These facilities have long-term contracts to sell their power to Pacific Gas & Electric, which cuts their risk. The purchase should increase AltaGas’s annual cash flow per share by 5%.
To help pay for this acquisition, the company sold 8.8 million common shares at $34.25 each, for proceeds of $300.0 million.
Growth Stocks: Tidewater to buy AltaGas assets
In February 2016, AltaGas agreed to sell some of its less-important gas gathering and processing operations in Alberta to Tidewater Midstream and Infrastructure (symbol TWM on Toronto). The company will receive $30.0 million plus 43.7 million shares of Tidewater, which will give it a 20% stake in Tidewater. AltaGas expects to complete the sale by March 31, 2016.
AltaGas is also part of a consortium that plans to build a $600-million floating liquefied natural gas terminal on the Douglas Channel, near Kitimat, B.C. The project will convert gas into a liquid that tankers will ship to customers in Asia.
Low oil and gas prices have hurt LNG demand, so it’s unclear if the partners will go ahead with the project. If they do, it could start up in 2018.
Meanwhile, AltaGas has other growth projects underway, with a focus on regulated utilities and operations with long-term sales contracts in place. That should make its cash flow more stable.
The stock trades at a high 24.0 times the $1.36 a share AltaGas will likely earn in 2016, but at 8.6 times its forecast cash flow of $3.77 a share. The company recently raised its monthly dividend by 3.1%, to $0.165 a share from $0.160. The new annual rate of $1.98 yields a high 6.1%.
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