Section 109 Public Utilities Act – Sections 26 and 27 Gas Utilities Act
In this decision, the AUC approved and authorized AltaGas Canada Inc. (“AltaGas Canada”), pursuant to section 27 of the Gas Utilities Act (“GUA”), to sell and transfer and to make on its books the transfer of all of its outstanding shares or capital stocks to PSPIB Cycle Investments Inc (“Cycle Investments”). The AUC also confirmed that it would request that the Lieutenant Governor in Council designate AltaGas Canada as an owner of a gas utility to which sections 26 and 27 of the GUA apply and as an owner of a public utility to which Section 109 of the Public Utilities Act (“PUA”) applies. The AUC found the no-harm test was met.
Introduction
On October 20, 2019, AltaGas Canada and Cycle Investments agreed that Cycle Investments would acquire all issued and outstanding common shares of AltaGas Canada for $33.50 in cash per common share (the “Transaction”). On November 18, 2019, AltaGas Canada and Cycle Investments filed a joint application with the AUC pursuant to section 27 of the GUA seeking authorization and approval for the Transaction.
Background
AltaGas Canada indirectly and wholly, through AltaGas Utility Group Inc., owns AltaGas Utility Holdings Inc., which, in turn, directly and wholly owns AltaGas Utilities Inc., as well as other non-Alberta utility investments. AltaGas Utilities Inc. owns and operates natural gas utility facilities in Alberta. The operations of AltaGas Utilities Inc. are confined to Alberta, and as an operating gas utility, it is regulated by the AUC pursuant to the GUA.
Cycle Investments was formed by the Public Sector Pension Investment Board (the “Pension Board”) on September 20, 2019, solely to complete the Transaction. The Alberta Teachers’ Retirement Fund Board (the “Teachers’ Retirement Fund”) was also involved in the Transaction; and at the completion of the Transaction, it will, indirectly, through a holding company, hold an approximate 20 percent economic interest in Cycle Investments, while the Pension Board, indirectly, will hold an approximate 80 percent economic interest in Cycle Investments.
AltaGas Canada stated that it and Cycle Investments entered into an agreement where Cycle Investments will acquire all issued and outstanding common shares of AltaGas Canada for $33.50 per share. The Transaction implies an enterprise value for AltaGas Canada of approximately $1.7 billion.
AUC Findings
No-harm Test
The AUC noted it has historically applied the no-harm test in determining whether it will approve internal corporate reorganizations and asset dispositions, as well as external transactions that result in a change of ownership of an operating utility company.
In Decision 2014-326, the AUC examined the following factors in determining whether customers would be harmed if the sale of AltaLink Management Ltd.’s operating utility company, AltaLink, to Berkshire Hathaway was approved:
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the impact on the rates and charges passed on to customers; and
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the operational benefit or risk related to the acquiring party’s utility experience, based on certain considerations.
The AUC also stated that the test involves the following additional considerations:
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protection of customers to the maximum extent;
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customers are not entitled to a level of post-transaction regulatory certainty they would not have realized if the transaction had not been approved; and
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after consideration of the potential positive and negative impacts of the proposed share transactions, customers are at least no worse off after the transaction is completed.
The AUC considered three basic factors in assessing whether there would be harm to customers from the share transaction: operational impacts on continued reliable service to customers; financial impacts to customer rates; and, sufficient regulatory oversight of the operating utility after the Transaction has been completed.
Operational Effects on Continued Reliable Service
AltaGas Canada submitted the following additional reasons as to why the Transaction would not cause harm to customers of AltaGas Utilities Inc.:
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following the completion of the Transaction, AltaGas Utilities Inc. would continue to own and operate its natural gas utility facilities on a stand-alone basis;
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upon the closing of the Transaction, the corporate structure of AltaGas Canada would be unaffected except that Cycle Investments will be its sole shareholder; and
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the Transaction would have no effect on the structure or management of AltaGas Canada, AltaGas Utilities Inc., or AltaGas Canada’s other investments. The Transaction also would have no effect on the services provided by the affiliates of AltaGas Utilities Inc. Therefore, the level of managerial and operational expertise currently available through AltaGas Utilities Inc. through inter-affiliate services would remain unaffected.
The AUC found that approval of the proposed Transaction will not have a negative effect on the management and operation of AltaGas Utilities Inc. and that the current reliability of the service and integrity of the gas distribution system would most likely be unaffected.
Financial Effects on Customer Rates
AltaGas Canada submitted that there would be no negative financial effects as a result of the Transaction. AltaGas Canada submitted the following:
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the Transaction would not result in any changes to the management or operations of AltaGas Utilities Inc. and will not result in any impact to its rate base or operating costs;
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the subsidiaries of AltaGas Canada, including AltaGas Utilities Inc., would continue to receive debt financing from AltaGas Canada at the completion of the Transaction as its subsidiaries received previously;
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as of the date the application was submitted to the AUC, AltaGas Canada retained a credit rating of BBB (high) with a stable trend by DBRS Limited (DBRS Morningstar). On October 21, 2019, DBRS Morningstar issued a press release stating that it considered that the Transaction would not affect AltaGas Canada’s credit rating; and
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upon the closing of the Transaction, the ownership of AltaGas Canada would change from a publicly listed company to a privately held company with publicly traded debt. After the completion of the Transaction, AltaGas Canada would seek equity financing from Cycle Investments and, in turn, Cycle Investments would seek financing from the Pension Board and the Teachers’ Retirement Fund as required. The strong financial position of the Pension Board and the Teachers’ Retirement Fund would provide Cycle Investments and, in turn, AltaGas Canada, with dependable access to equity financing and would not negatively affect the financing costs of AltaGas Canada.
The AUC found that after consideration of the potential positive and negative effects associated with the Transaction, customers would be at least no worse off after the Transaction is completed when considering the future cost of debt, rate base and operating costs.
Regulatory Authority
The AUC stated that in Decision 23010-D01-2018, the AUC indicated it would recommend to the Lieutenant Governor in Council that AltaGas Utility Holdings (Pacific) Inc. (now AltaGas Canada Inc.) be designated as an owner of a utility under sections 26 and 27 of the GUA and section 109 of the PUA. The AUC noted that it continued to hold this view and would make this recommendation to the Lieutenant Governor in Council.
The AUC found that all of its considerations in the assessment of the no-harm test as a result of the Transaction were met, and the AUC approved the Transaction as applied for by AltaGas Canada.
