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Stock to watch: AltaGas poised for strong dividend growth

AltaGas acquiring Alaska natural gas assets

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AltaGas Ltd.

Last close: $35.93, down 7 cents, or 0.1 per cent

52-week trading range: $27.45 to $36.79 a share

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Annual dividend: $1.44 a share for a yield of 4 per cent

Analysts' ratings: There were 6 buys, 3 holds and no sell, according to Bloomberg data. Target prices ranged from $34 a share by Scotia Capital analyst Matthew Akman to $41 a share by Macquarie analyst Robert Catellier.

Recent history: Shares of the energy infrastructure company have gained about 24 per cent (including dividends) over the past year on the back of rising cash flow, and acquisitions contributing to earnings per share. Calgary-based AltaGas, which focuses on natural gas processing, power and regulated utilities, was formerly an income trust. Altagas acquired AltaGas Utility Group Inc. in 2009, and then converted to a corporation in 2010. Last year, it bought SEMCO Holding Corp., which owns natural gas utilities in Michigan and Alaska, for $1.1-billion (U.S.). It also negotiated a $515-million deal last month to buy U.S. power company Blythe Energy LLC, which operates a 507-megawatt natural-gas fired plant in southern California. AltaGas, which operates the only gas pipeline from resource plays in northeast British Columbia to the Pacific coast, signed a joint-venture agreement in January with Japan's Idemitsu Kosan Co. to pursue the export of liquified natural gas (LNG) to Asia from Canada.

Manager insight: AltaGas is becoming an increasingly attractive dividend growth story as it moves more aggressively into the power and utility businesses that will provide a steady stream of cash flow. "The business mix has really changed significantly," said Andy Nasr, a portfolio manager with Middlefield Capital Corp., which has owned the stock in diversified income funds for several years.

"Over time, I think there is a possibility that AltaGas gets reclassified from the energy to the utility sector in the TSX index as those assets make up a bigger component of their profitability, and its sensitivity to commodity prices from selling natural gas liquids declines," he said. The power and utility businesses are expected to contribute about 62 per cent of earnings before interest taxes depreciation and amortization [EBITDA] by 2015 compared with 45 per cent in 2011, he suggested.

A big catalyst for the AltaGas stock is the B.C.-based Forrest Kerr run-of-river hydro project that is set to begin operating in the first quarter of next year. Other hydro projects like McLymont Creek and Volcano Creek are expected to be in service by late 2015. "The benefit is that they have 60-year power energy purchase agreements with the British Columbia government," with the contracts indexed to inflation, he said.

As the Forrest Kerr project nears completion by year end, this potential growth will be factored into analysts' estimates, and "that is what is going to cause the stock to gradually lift higher," he said. "I expect the stock to appreciate to $42 a share within a year, and demonstrate above-average free cash flow growth during the next two to three years."

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The recent acquisition of the Blythe Energy gas-utility business also provides a stable source of cash flow to help fund more acquisitions or to expand gas-processing facilities, he added.

He expects AltaGas' EBITDA to increase to about $650-million by 2015 from $350-million last year as its hydro and also its Harmattan and Gordondale gas-processing projects come onstream, he said. "As growth materializes, the dividend should increase from $1.44 a share to over $1.70 a share by 2015."

That assumes the company's payout-ratio stays around 45 per cent, Mr. Nasr said. "As the cash flow goes up, they will maintain their payout ratio. If they do that, then you have very good visibility with respect to dividend growth."

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