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Streetwise AltaGas prices Canadian IPO below marketing range, will raise $239-million

AltaGas Ltd.'s attempt to spin out its Canadian utility business has drummed up enough investor demand to move forward, but the initial public offering has been priced below its marketing range and the deal size will shrink.

Under the terms set on Wednesday, AltaGas will raise $239-million from the IPO, pricing the 16.5 million shares at $14.50 each, according to people familiar with the sale.

The company initially set out to sell the same number of shares for the new entity, called AltaGas Canada Inc., but at a price between $15.50 and $18. At the mid-point of that marketing range, AltaGas would have raised $276-million.

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The IPO follows AltaGas’s US$4.5-billion takeover of Washington, D.C.-based WGL Holdings, which saddled the buyer with debt. WGL runs the gas utility in Washington, D.C., as well as natural gas gathering and processing assets in the Marcellus shale-gas region of the northeastern United States. Since the deal was announced in January, 2017, AltaGas’s shares have dropped 38 per cent.

In response, Calgary-based AltaGas has started taking action to reduce its leverage, including the recent sale of Canadian and U.S. non-core natural gas processing and power assets for $560-million. Shortly after, in September, the company announced plans to spin out its Canadian regulated gas-distribution assets into a new publicly traded company, with the proceeds to be used for debt repayment.

The holdings being spun out include gas-distribution and wind-farm assets in British Columbia, Alberta, Nova Scotia and Northwest Territories. Going forward, AltaGas will continue to own between 37 per cent and 45 per cent of the newly traded company, depending on whether the IPO’s overallotment option is exercised.

The offering, when combined with the $635-million in debt the new company will assume, is designed to reduce AltaGas’s leverage by almost $1-billion. However, its debt remains a concern for some, and analyst David Galison at Canaccord Genuity recently forecast that even after the IPO, the company’s debt would amount to more than six times its earnings before interest, taxes, depreciation and amortization (EBITDA) by the end of 2019. AltaGas has a long-term goal of five times EBITDA.

Still, the IPO remains a positive development, because its success was not guaranteed. The deal surprised some analysts and investors, considering the company had been expected to keep marketing assets to third-party buyers at decent prices. The investment community had also questioned whether there would be ample demand, causing AltaGas’s shares to take a hit. The stock has dropped 12 per cent since the IPO was announced.

“I’m not too surprised with the [IPO] price,” said Chris Cox, analyst at Raymond James. “The brokers were too aggressive with the pricing from the start of it."

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