-- ATCO Gas continues to strengthen its financial profile by
suspending dividends and funding almost its entire capital works
through internal cash flows.
-- As a result, ATCO Gas' financial metrics are likely to
improve in the next 12 to 24 months to an extent that could
support a rating of one-notch higher, all else being equal.
-- We have therefore revised our rating outlook to positive
from stable, and affirmed the 'BBB' rating on ATCO Gas.
-- We may raise the rating if we believe ATCO Gas can
sustainably achieve FFO-to-interest coverage and FFO/debt of
better than 2.5x and 12% respectively.
On Jan. 11, 2013, Standard & Poor's Ratings Services revised
its rating outlook on Western Australia-based gas distribution
network company ATCO Gas Australia LP (ATCO Gas) to positive
from stable. At the same time, we affirmed the 'BBB' ratings on
The outlook revision is based on our expectation that ATCO
Gas Australia LP's financial metrics are likely to sustainably
strengthen from fiscal 2013 (ending Dec. 31) to a level
consistent with a rating one notch higher than the current
level. We expect the management's commitment to reduce leverage
through dividend suspension and the funding of nearly all of
capital expenditure through internal cash flows will drive the
improvement, as the company maintains steady business
ATCO Gas' operational performance in 2012 remains
satisfactory subsequent to its acquisition in mid-2011 by
Canadian Utilities Ltd. (A/Stable/A-1), a member of the ATCO
Ltd. group (A/Stable/--). Although gas volumes in 2012 have been
somewhat lower than our expectations due to lower organic growth
and consumption, revenues and EBITDA are expected to remain
largely in line with our expectations. In fiscal 2012, revenues
and EBITDA are forecast to be about A$190 million and A$115
million respectively, supported by the tariff adjustment due to
a favorable outcome from Australian Competition Tribunal (ACT)
regarding ATCO Gas' appeal.
In our view, ATCO Gas' financial metrics have improved and
will be stronger beyond 2013. The recapitalization at the time
of ATCO Ltd.'s acquisition, ongoing steps taken to reduce
gearing, and the tariff adjustment from the ACT appeal decision
implemented from July 2012 will drive the improvement. ATCO Gas
expects no dividend payments over the medium term and will
continue funding most of its capital works of about A$60 million
to A$90 million annually from internal cash flows. Consequently,
funds from operations (FFO)-to-interest coverage and FFO/debt
are likely to be about 2.4x (1.4x in fiscal 2011) and 11% in
fiscal 2012 (3% in fiscal 2011) respectively. Our forecasts for
2013 and beyond are based on:
-- Total annual gas volume of about 28 petajoules (PJ) to
29PJ over the next couple of years, marginally lower than
regulatory assumptions by about 4%-5%, reflecting recent volume
-- Regulatory parameters for approved tariffs and capital
-- An EBITDA margin of 60%-65%; and
-- No material increase in debt and no dividends.
We note that ATCO Gas is exposed to its next regulatory
reset from July 2014 and faces a A$450 million debt maturity in
July 2014. Key to a higher rating would be ATCO Gas' management
of these developments satisfactorily and maintenance of its
forecast financial profile.
The 'BBB' rating on ATCO Gas reflects our opinion of its
"excellent" business risk profile, which is supported by the
company's natural monopoly position, regulated cash flows, and
stable earnings profile. ATCO Gas faces low bypass risk and high
economic barriers to duplicate its assets, and has minimal
operational risks typical for underground gas-distribution
networks. Partly offsetting these strengths are its exposure to
gas volumes variation and high capital expenditure. ATCO Gas
operates the Western Australian gas-distribution network. The
parent company does not guarantee ATCO Gas' obligations, and
ATCO Gas currently provides a relatively small contribution
(about 9% of group EBITDA) to ATCO group earnings.
In our view, ATCO Gas' liquidity is "adequate". Our
liquidity assessment is based on the following factors and
-- We expect the company's liquidity sources (including
cash, FFO, and credit facility availability) over the next 12
months to exceed its uses by more than 1.2x.
-- No debt maturity until June 2014, when its A$450 million
bank facility matures.
-- No material additional debt requirement given internal
funding of capital works.
-- We believe the company has good relationships with its
banks and has a sound standing in the credit markets.
We expect the company to operate comfortably above its debt
covenant levels, including:
-- Interest cover ratio (ICR) to be at least 1.6x, against
the 1.2x covenant level; and
-- Gearing (defined as net senior debt to regulated asset
base) to be less than 70%, against a covenant of 95%.
The positive outlook reflects our view that ATCO Gas will
continue to sustain steady state business operations, and that
its financial metrics are likely to improve to levels consistent
with a 'BBB+' rating.
The ratings on ATCO Gas could be raised by one notch in the
next two years if we believe that ATCO Gas can achieve and
sustain financial metrics that are at, or better than, those
expected for fiscal 2013--at above 2.5x FFO interest cover and
12% FFO to total debt, and that the company will be able to
satisfactorily manage its regulatory reset due in 2014.
Conversely, if we believe that the financial profile was
unlikely to improve in line with our expectations for a higher
rating, we would revise the outlook back to stable.
Related Criteria And Research
2008 Corporate Criteria: Analytical Methodology, April 15,
ATCO Gas Australia LP
Senior Unsecured BBB
Ratings Affirmed; CreditWatch/Outlook Action
ATCO Gas Australia LP
Corporate Credit Rating BBB/Positive/-- BBB/Stable/--