AltaGas moves forward with global export strategy
AltaGas Ltd. has announced that AltaGas Idemitsu Joint Venture Limited Partnership and SAM Holdings Ltd. have entered a definitive agreement with respect to the put process surrounding Petrogas Energy Corp., which was originally announced on January 2, 2020.
Pursuant to the agreement, AltaGas is indirectly acquiring an additional 37% of Petrogas' equity for total consideration of approximately $715 million. This consideration includes the acquisition of 4,751,733 shares of Petrogas and incorporates working capital normalization and certain other factors. Post-closing, AltaGas' indirect ownership in Petrogas will increase to approximately 74% with Idemitsu Kosan Co., Ltd. owning the remaining approximate 26%. Upon closing AltaGas plans to fully consolidate Petrogas' financial results, where previously the company only captured Petrogas' historical performance through an equity pick up via AltaGas' non-controlling interest and preferred dividends received.
AltaGas plans to initially fund the transaction with short-term debt from the Company's approximate $4 billion of current estimated liquidity, and to later repay such draw through the strong free cash flow from the asset base and expected proceeds from non-core asset sales targeted over 2021. The transaction, based on initial financing, is expected to be accretive to AltaGas' credit metrics on a run-rate basis, with any potential subsequent asset sales expected to further improve the Company's credit metrics. The transaction is also anticipated to be immediately accretive to earnings and cash flow per share. Subject to regulatory approvals and customary closing conditions, the transaction is expected to close in the fourth quarter of 2020 or first quarter of 2021. The transaction is subject to clearance under the Competition Act (Canada) and the Canada Transportation Act.
"We are excited about the opportunity to increase our ownership interest in Petrogas. This acquisition is consistent with our global export strategy, growing Midstream operations, and corporate focus on building a diversified, low-risk, high-growth Utilities and Midstream business that is set to deliver resilient, durable and compounding value for our stakeholders. The transaction provides AltaGas with operational responsibility of strategic assets that, along with our Ridley Island Propane Export Terminal ("RIPET") and our existing Midstream assets, positions the company to capture efficiencies that will accrue to our shareholders and customers. The capital-intensity of the Petrogas asset base is very low with small annual maintenance capex requirements, and the platform should produce strong and recurring free cash flow over the coming years that will allow us to continue to de-leverage and fund our low-risk growth in our Utilities platform and continue optimization and grow our Midstream business" said Randy Crawford, AltaGas' President and CEO.
"In addition to increasing our interest in the Ferndale Liquified Petroleum Gas ("LPG") export terminal with additional propane export capacity, we are adding a butane option for our customers. The acquisition will also provide AltaGas with greater access to NGL supply and storage, including Fort Saskatchewan, Alberta. It will expand our logistics capabilities with a significant complementary and contracted asset base in key regions across North America and add a large network of additional customer relationships, along with operational expertise across these regions. The continuous improvement of our logistical capabilities along with low capital investments in additional storage and rail improvements, will provide the opportunity for cost reductions that will accrue directly to the bottom line.
"The Ferndale LPG export terminal and wharf are located on the west coast in Washington State, which provides the same structural advantage related to reduced shipping days to Asian markets as RIPET, and has capacity to export in excess of 50,000 Bbls/d of combined butane and propane. Combined with AltaGas' RIPET, our export capacity will increase to approximately 100,000 Bbls/d, with the ability to ultimately achieve in excess of 130,000 Bbls/d over the medium-term once RIPET is increased to nameplate capacity. This transaction will further position AltaGas as an industry-leader in exporting clean lower-carbon North American energy to Asia. More specifically, the combined current LPG export capacity of RIPET and Ferndale currently has the potential to reduce the equivalent of approximately 500,000 average Asian citizens' total carbon footprints per year, when compared to burning more carbon-intensive fuels like thermal coal. As our LPG exports increase, so will our positive impact as a company that provides optionality to global markets for affordable and cleaner energy sources that are capable of reducing global carbon emissions.
"Consolidating Petrogas will better highlight the platform's strong, steady and recurring free cash flow. On a run-rate basis, we anticipate that this transaction will be approximately 10% accretive to earnings per share, approximately 15% accretive to cash flow per share while improving our pro-forma run-rate leverage metrics, despite being entirely debt financed. Post-closing, we will embrace the best practices for the combined organization, along with our partner Idemitsu, and will be acutely focused on integrating Petrogas' midstream infrastructure, logistics and service offerings within AltaGas. We estimate, in the short-term, there to be approximately $30 million of annual synergies within the combined platform, which we expect will deliver meaningful value for our stakeholders. In the longer term, the addition of the Petrogas assets will position AltaGas with the opportunity to make investments to facilitate the full utilization and capacity of our combined platform to export additional LPG cargoes to Asia.
"We're excited to be increasing our investment in Petrogas and what we believe can be achieved through optimization opportunities. We're also excited to be continuing our long-term partnership and working alongside Idemitsu, a partner we hold in the highest of regards. We look forward to leveraging the best practices of our company and Idemitsu, an organization that has been involved in the global energy sector for more than a century. "
"After operating Petrogas for nearly 35 years, I'm excited about what the future will bring for this company", said Stan Owerko, Petrogas' Founder, President & CEO. "I have had the rare privilege of growing Petrogas into one of the largest privately held midstream and logistics companies in North America. It is a business that I'm proud to have assembled alongside the strong management team and experienced employees that are part of the company, including the approximately 300 employees that are part of the company today. However, it's an appropriate time to have AltaGas and Idemitsu assume full ownership of the company. I intend to continue as a consultant over the next 12-18 months to ensure a seamless transition for the company, our employees and the communities where we operate. I look forward to being part of the ongoing transition."
AltaGas' consideration for SAM's Petrogas equity is $715 million, which will be settled in cash at the time of closing and incorporates working capital normalization and other certain factors. There is also a small earnout over the next two years payable at a subsequent time, subject to fulfilment of certain conditions.
Upon closing AltaGas plans to fully consolidate Petrogas' financial results, where previously the Company only captured Petrogas' historical performance through an equity pick up via AltaGas' non-controlling interest and preferred dividends. Over the past three years (2017-2019), Petrogas' average normalized annual EBITDA has been approximately $186 million, with 2019 being a strong year, which reflects the enhancements in safety and the efficiency of the Ferndale operation over the past couple years that should underpin durable increases in sustainable export capacity. This includes the acquisition of the wharf and other optimization initiatives. Over the trailing twelve months as of June 30, 2020 normalized EBITDA was approximately $218 million. Within these normalized figures, the positive impact of contract settlements or other factors have been backed out to not overinflate the trailing average for any one-time events that are unlikely to repeat in the future. These trailing financial figures compare to AltaGas recording average normalized three-year equity earnings and preferred share dividends of $34 million. Had AltaGas owned its new pro-forma 74% equity interest over 2017-2019, the Company's higher ownership position would have generated approximately $152 million higher average three-year normalized annual EBITDA over this same period.
Assuming reasonable LPG exports from Ferndale in 2021, the current forward curves and other logical assumptions, coupled with Petrogas' fixed fee-based contracts, Petrogas is expected to earn an estimated $185 million of normalized EBITDA in 2021, prior to operational synergies. In addition, by optimizing the marketing contract portfolios and logistics, together with supply chain efficiencies and potential cost savings, AltaGas also estimates there to be an opportunity for approximately $30 million of annual synergies, which the Company will plan to take steps to substantially achieve in the first year and be fully realizing these on a run-rate basis at the end of 2021.
Assets and Operations
Petrogas is one of the largest privately held midstream and logistics companies in North America with operations dating back to 1986. The company operates a large scale fully integrated natural gas liquids ("NGLs") and crude oil platform that provides sourcing, storage, marketing, and transportation services of NGLs and LPGs for customers throughout Canada, the U.S. and Asia and crude oil throughout Canada and the U.S.
Petrogas' business is principally underpinned by four core divisions:
- LPG Exports & Distribution: Comprised of the Ferndale LPG export facility and engages in the purchase, sale, and distribution of NGLs and LPGs throughout North America and Asia.
- Domestic Terminals: Operates various North American storage terminals that support the LPG Exports and Distribution activities. The division also enters into long-term take or pay contracts for management, logistics and optimization services.
- Wellsite Fluids and Fuels: Operates two production facilities focused on the development and production of proprietary drilling fluids, jet fuel, furnace fuel and heating oil.
- Trucking and Liquids Handling: Provides internal and third-party trucking services in Western Canada and the Pacific Northwest. Includes hauling LPGs, crude, drilling fluids and produced water.
The LPG Exports & Distribution and Domestic Terminals are Petrogas' largest segments and represent greater than 90% of Petrogas' trailing EBITDA.
The Ferndale terminal is an LPG export terminal located on the U.S. west coast near Ferndale, Washington, which is approximately 100 miles north of Seattle. Shipping times to Asia average approximately 11 days using Very Large Gas Carriers from the facility and, as such, the terminal has a similar structural shipping advantage as AltaGas' RIPET facility compared to various LPG export terminals located on the U.S. Gulf Coast. Ferndale has refrigerated storage capacity, and is pipeline connected to the BP Cherry Point and Phillips 66 Ferndale refineries. Similar to AltaGas' RIPET export facility, LPG export volumes being shipped from Ferndale are delivered into various Asian markets and provide a cleaner, lower-carbon option for these key importing regions.
Petrogas' Fort Saskatchewan Rail Loading and Truck Facility together with other storage facilities in Canada and the U.S., expands AltaGas' NGL supply capture area and will enhance the Company's NGL storage and logistics capabilities. Upon closing, AltaGas will have access to a fleet of approximately 3,000 additional rail cars, five incremental rail and pipeline connected terminals, and approximately 6.2 million barrels of additional above ground and cavern storage, including Ferndale. Fort Saskatchewan is pipeline connected to fractionation facilities and to above-ground and cavern multi-product storage facilities in Canada. Petrogas' Canadian storage facilities, which are located in Fort Saskatchewan, AB, Sarnia, ON and Strathcona, AB have a combined capacity of approximately 4.3 million barrels of on-site storage handling for crude, propane, butane and ethylene and are pipeline connected to refiners. Petrogas' largest U.S. storage and terminal facility, located in Indiana, has two underground storage caverns for propane and butane. This facility is situated near several refineries and crude oil refined product tank farms, is pipeline connected to area refiners and chemical facilities, and has inbound and outbound truck and rail capabilities.