DBRS Confirms AltaGas Income Trust’s Medium-Term Notes at BBB (low), Trend Remains Positive; Confirms Stability Rating at STA-3 (middle)

DBRS has today confirmed the Medium-Term Notes and stability ratings of AltaGas Income Trust (AltaGas or the Trust) at BBB (low) and STA-3 (middle), respectively. DBRS has also confirmed the Issuer Rating of AltaGas Holding Limited Partnership No. 1 (AGHLP No.1) at BBB (low). The trends on the Trust’s Medium-Term Notes rating and AGHLP No.1’s Issuer Rating (collectively, the debt ratings) remain Positive. AGHLP No.1 is the borrower under the AltaGas credit facilities and guarantees the Medium-Term Notes issued by the Trust, thereby ensuring that all of the Trust’s senior debt ranks pari passu. The rating actions reflect the following factors:

(1) The Trust has maintained good financial performance, and has improved its financial flexibility and liquidity position as a result of its February 2009 actions: (a) issuance of $100 million of Trust units, the proceeds of which were used to reduce debt, and (b) closing of a new $250 million credit facility that will mature in August 2010, replacing the previous facility that was due to mature in September 2009.

As of December 31, 2008, pro-forma the Trust unit issue, AltaGas had $379 million in revolving credit facility availability, a level that DBRS believes is sufficient to fund the Trust’s normal business operations. DBRS expects that the Trust will seek to term out a portion of its remaining credit facility debt to further improve its liquidity position during 2009. Following the Trust unit issue, DBRS estimates that AltaGas’ debt-to-capital, cash flow-to-debt and EBITDA interest coverage ratios improved to 31%, 46% and 11.8 times on a pro forma basis at year-end 2008, respectively, compared with 38%, 37% and 8.9 times, respectively, on an actual basis. These ratios remain at strong levels for the current ratings, although likely to moderate, given potential migration of the debt-to-capital ratio to the Trust’s targeted 40% to 45% range in view of its planned $250 million capex program in 2009 (of which $200 million is committed) and weaker economic conditions expected in 2009.

(2) The Trust continues to make progress on its goal to diversify earnings and cash flow within its power generation business over the medium to long term, as demonstrated by expected commencement of operations at its $200 million Bear Mountain Wind Park project by November 2009. DBRS believes that the Trust’s significant portfolio of hydro and wind power development projects (total renewable energy capacity under construction and development of approximately 1,900 megawatts (MW)) could eventually result in substantial growth and diversification opportunities within its power generation segment as the Trust seeks to reduce its current dependence on the Sundance power purchase agreement (PPA) (which expires in 2020) for the vast majority of its current power segment EBITDA.

(3) DBRS expects that AltaGas will maintain its per unit distribution at a level that is consistent with its historically conservative payout policy. The Trust’s target payout ratio is 65% to 75% of cash flow (67% in 2008). This measure is likely rise from 2008 levels, although remaining at an acceptable level in 2009, following the recent Trust unit issue. Upon conversion to a corporation in the second half of 2010, AltaGas expects to adopt a dividend policy that is competitive with its corporate peers in the energy infrastructure industry.

In its September 17, 2008 press release, DBRS indicated that an upgrade of the Trust’s debt ratings would be contingent on continued development of its renewable power projects in a prudent manner, based on long-term contracts with creditworthy counterparties, in order to minimize incremental business and financial risk. DBRS also expected AltaGas to maintain its financial flexibility (as evidenced by the Trust’s $115 million Trust unit issue in June 2008 following the January 10, 2008, acquisition of Taylor NGL Limited Partnership and the February 2009 $100 million Trust unit issue), allowing the Trust to more easily manage its capital expenditure program and potential additional acquisitions within its total debt-to-capital ratio target range of 40% to 45%.

DBRS recognizes that AltaGas has made considerable progress on these objectives and has therefore maintained the Positive trend on the long-term debt ratings. However, given the sharp deterioration in global economic conditions and energy prices over the past few months, DBRS will review the potential impact of significantly lower oil and gas producer capital spending and the January 1, 2009 implementation of the new Province of Alberta royalty framework on the Trust’s natural gas segments. In addition, DBRS will review the potential impacts of reduced economic activity and natural gas price weakness on electricity prices in Alberta, which can affect the profitability of the Trust’s power generation segment.

While contractual and hedging arrangements reduce near-term commodity price exposure in the gas-related businesses, the vast majority of AltaGas’ FG&P contracts are fee-for-service based, with annual price escalations, which entails some exposure to volume risks. AltaGas has hedges in place for fractionation spread exposure, with 60% of exposed volumes fixed at more than $27 per barrel in 2009 (15% of exposed volumes hedged in 2010). DBRS notes that the proportion of the Trust’s EBITDA that is exposed to fractionation spread risk is relatively small. Similarly, while contractual and hedging arrangements reduce AltaGas’ power price exposure over the medium term, it remains exposed over the medium to long term as the hedges are rolled over. AltaGas has hedges in place for approximately two-thirds of 2009 PPA volumes at $76 per MWh, similar to hedges in 2008 (50% of PPA volumes hedged in 2010).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on the DBRS website under Methodologies.

This is a Corporate rating.