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AltaGas Ltd. has struggled to allay investor fears about its debt since it bought Washington’s gas-distribution franchise. Its plans for an initial public offering of some of its Canadian assets have not put worries to rest.

It’s turning into a referendum on the ability of the management to get the Calgary-based company’s financial house back in shape after an acquisition that’s reshaped the operation. An IPO, rather than straight asset sales, adds a new element of risk.

AltaGas announced on Sept. 13 that it will float shares in regulated gas-distribution and wind-farm assets in British Columbia, Alberta, Nova Scotia and Northwest Territories, an offering aimed at cutting debt by almost $1-billion. The debt in question is a bridge loan AltaGas took on to help fund its US$4.5-billion acquisition of WGL Holdings Inc., a deal that closed in July.

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Since AltaGas announced the IPO, its shares are down 13 per cent. It’s been a tough run for longer than that though – they have fallen 36 per cent since the company first announced the WGL acquisition in January, 2017. Adding to uncertainty was the abrupt and unexplained exit of its former chief executive officer, David Harris, on July 25. It has yet to name a new full-time successor. David Cornhill and Phillip Knoll are interim co-CEOs.

AltaGas’ WGL purchase was part of an $80-billion shopping spree in the United States by Canadian energy-infrastructure industry companies, fuelled by favourable interest and tax rates. That deal flow has since dried up and investors are wondering where the rewards from all the takeovers are.

The company expects to generate about $300-million from the IPO. The new company, AltaGas Canada Inc., will also assume $635-million of the parent company’s debt, which gets debt reduction to the advertised number. It has filed a preliminary prospectus for an initial public offering and has yet to price the shares.

The IPO surprised some analysts and investors, as the company had been expected to keep marketing assets to third-party buyers at decent prices. In June it sold a 35-per-cent stake in Northwest British Columbia Hydro Electric Facilities for $922-million, and in early September it announced a deal to sell Canadian and U.S. non-core natural gas processing and power assets worth $560-million. On Wednesday, it paid Black Swan Energy Ltd. $230-million for a 50-per-cent stake in B.C. gas plants.

AltaGas has said it would own between 37 per cent and 45 per cent of the new utility entity, depending on the number of shares that eventually get sold. The lower number would reflect the underwriters, led by the investment banking arms of Royal Bank of Canada, Toronto-Dominion Bank and JPMorgan Chase & Co., exercising an overallotment option.

The IPO, as well as proceeds from the other recent asset sales, would add up to about $2.5-billion for debt reduction, it has said. All that would be used to pay down its bridge loan to US$1.1-billion. The company plans to pay that off through a combination of other debt and an issuance of hybrid securities.

AltaGas management gave a presentation to the underwriters last Friday, and the deal is expected to be marketed to prospective institutional investors during the first two weeks of October. The shares will be priced after that effort and the IPO is expected to close on Oct. 22.

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Even with the IPO, AltaGas’ leverage remains a concern, said David Galison, analyst at Canaccord Genuity. He forecasts debt at more than six times earnings before interest, taxes, depreciation and amortization by the end of 2019. The company has a long-term goal of five times EBITDA. There is some uncertainty in the forecast however, Mr. Galison said.

“Most people have limited visibility, because they haven’t reported with WGL yet, so we don’t know yet the actual debt numbers that are on the books until they report [third-quarter results],” he said.

As a result, AltaGas stock could remain under pressure until that - and whether the IPO finds favour with investors - come into much sharper focus.

With a report from Tim Kiladze

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