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Investing.com -- S&P Global Ratings has revised its outlook for ATCO Gas from stable to positive, citing an expected strengthening of the company’s cash flow and credit metrics in the coming years. The rating agency has also affirmed its ’BBB+’ long-term issuer credit ratings for ATCO Gas Australia Networks Pty. Ltd. and ATCO Gas Australia Pty Ltd.
The change in outlook follows the final regulatory tariff determination at the end of 2024. The new tariffs for gas distribution, which came into effect on Jan. 1, 2025, have resulted in revenue allowances that are nearly 65% higher than the previous regulatory period. This increase is largely due to rising inflation and interest rates.
S&P Global Ratings forecasts that ATCO Gas’ funds from operations (FFO) to debt ratio will rise to above 13% by the end of fiscal 2027, up from the near-term forecast of 10%-11%. This improvement supports the revised positive outlook, despite the possibility of a modest increase in debt.
The company’s cash flow is expected to remain strong and could potentially increase with the addition of more customers or increased gas volumes. Gas distribution revenue, which comprises about 95% of ATCO Gas’ total revenue, is tied to actual consumption volume.
While ATCO Gas may consider recapitalizing the business with additional debt, the timing and amount of such an increase remain uncertain. The company has maintained strong credit metrics over the last two years, even with very modest dividend payments.
ATCO Gas, a 100%-owned subsidiary of Canadian Utilities Ltd (TSX:CU)., is viewed as an insulated subsidiary of the group. As such, it could be rated up to one notch above the ’bbb+’ group credit profile, provided its stand-alone credit profile strengthens.
The company’s liquidity remains adequate, with no debt maturities for the next 12-18 months. Its debt obligations consist of two tranches of bank debt, with maturities in August 2026 and June 2027. The company is expected to continue its prudent approach of refinancing upcoming maturities in advance.
The positive outlook for ATCO Gas is also supported by a stable regulatory regime and cash flow visibility, with known tariffs for the company’s gas distribution business until 2029. Despite the possibility of a modest recapitalization, the company is expected to maintain an FFO to debt ratio of 10%-11% over fiscal years 2025 and 2026, after which it is forecasted to improve to above 13%.
If ATCO Gas’ FFO-to-debt ratio is forecasted to remain within 9%-13%, due to higher recapitalization of the business than forecasted, the outlook could be revised back to stable. Similarly, if the ’bbb+’ group credit profile were to weaken by one notch, the outlook could also be revised back to stable. However, the rating could be raised if the company’s FFO-to-debt ratio improves to well above 13% and the group credit profile remains steady.
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