Utility Modernization And LPG Exports Will Secure Future Energy Value

Key Takeaways

• Major investments in modernization and export infrastructure are set to drive stable, diversified revenue growth in response to rising energy and electrification demand.
  
• Operational efficiencies, capital recycling, and stronger balance sheet flexibility support margin expansion and increased free cash flow for reinvestment.
  
• Policy-driven decarbonization, high infrastructure costs, market reliance, debt exposure, and sector electrification threaten AltaGas's margins, revenue stability, and long-term growth prospects.

Catalysts

Operates as an energy infrastructure company in North America.

• Significant investments in utility modernization and infrastructure expansion (e.g., $2 billion since 2018, ongoing ARP and rate base growth, new customer connections, and projects like the Keweenaw Connector) position AltaGas to benefit from population growth, urbanization, and rising electrification demand; this should drive stable, inflation-protected revenue and long-term earnings growth.
  
• AltaGas's growing LPG export platform (RIPET, Ferndale, and REEF construction with proven commercial support and phased optimization/expansion plans) aligns with increasing Asian demand for low-carbon transitional fuels, creating diversified, higher-margin revenue streams and margin expansion opportunities.
  
• Robust demand for natural gas infrastructure from new segments (e.g., data centers, industrials, and coal-to-gas power switches) in core U.S. utility jurisdictions is expected to accelerate natural gas volume growth, supporting regulated rate base and earnings expansion.
  
• Ongoing capital recycling (e.g., planned monetization of Mountain Valley Pipeline) and deleveraging enhance balance sheet flexibility, lowering interest expense and enabling reinvestment in higher-return utility and export projects, supporting free cash flow growth.
  
• Systematic cost optimization, asset modernization, and increased operational efficiency (including opportunities from digitalization) are expected to control operating expenses and improve net margins across both the Utilities and Midstream segments.

AltaGas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AltaGas's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.1% today to 5.1% in 3 years time.
• Analysts expect earnings to reach CA$756.5 million (and earnings per share of CA$2.72) by about August 2028, down from CA$779.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.9x on those 2028 earnings, up from 16.0x today. This future PE is greater than the current PE for the CA Gas Utilities industry at 16.0x.
• Analysts expect the number of shares outstanding to grow by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.06%, as per the Simply Wall St company report.

AltaGas Future Earnings Per Share Growth

Risks

• Ongoing policy risks from decarbonization efforts and climate initiatives (such as Maryland's Next Generation Energy Act and potential gas bans) could restrict the future growth or shrink the customer base of AltaGas's gas utilities, risking long-term revenue growth and potential asset impairments if gas infrastructure becomes stranded.
  
• Heavy capital investment required for infrastructure modernization (over $2B since 2018 with 30% of the system still classified as "vulnerable pipes") exposes AltaGas to increasing capex and maintenance costs, pressuring net margins and raising the risk of regulatory scrutiny around the pace and rate recovery of these expenditures.
  
• AltaGas remains highly reliant on its Western Canada gas supply and Asian LPG export markets, making its midstream revenues vulnerable to potential commodity price volatility, changing regulatory requirements, and trade tensions with key export markets-factors that can cause revenue volatility or compress margins.
  
• While the company's deleveraging is progressing, continued high levels of debt and recurring refinancing needs expose AltaGas to rising interest rates, which could increase interest expenses and depress net earnings, particularly if access to capital tightens in a higher inflation environment.
  
• The utility sector's long-term trend toward electrification and the potential for stricter ESG-based investment mandates could gradually erode natural gas utility demand, resulting in structurally lower utility volumes, higher cost of capital, and potentially suppressed valuations impacting AltaGas's long-term earnings profile.

Valuation

• The analysts have a consensus price target of CA$43.727 for AltaGas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$48.0, and the most bearish reporting a price target of just CA$38.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$14.9 billion, earnings will come to CA$756.5 million, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 6.1%.
• Given the current share price of CA$41.58, the analyst price target of CA$43.73 is 4.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.