OREANDA-NEWS. S&P Global Ratings affirmed its long-term ratings and outlook on Calgary, Alta.-based ATCO Ltd. (ATCO), and its subsidiaries Canadian Utilities Ltd. and CU Inc., including its 'A' long-term corporate credit rating on ATCO. The outlook is negative. At the same time, S&P Global Ratings revised its liquidity assessment on ATCO to strong from adequate. Because we consider CU Ltd. and CU Inc. core to ATCO under our group rating methodology criteria, we have equalized the ratings on the subsidiaries with those on the parent.

"The liquidity revision reflects our view that ATCO's reduced capital program along with growth in its rate base and revenue will improve its liquidity cushion," said S&P Global Ratings credit analyst Stephen Goltz. We now expect liquidity sources to exceed uses by more than 1.5x over the next 12 months; and, in the unlikely event of a 30% drop in the company's EBITDA, we believe the company would have sufficient liquidity sources to cover uses.

We are maintaining our negative outlook. Although ATCO has reduced its capital program materially over the outlook period, the company still has some capital intensive projects upcoming, such as the Fort McMurray West transmission project, which will pressure near-term credit metrics.

Our view of ATCO's excellent business risk profile is unchanged. This mainly reflects the company's regulated utilities operations, which accounts for 70%-75% of ATCO's cash flows. CU Inc. contains the majority of ATCO's regulated operations and is predominantly exposed to a single regulatory regime in Alberta, which we believe continues to provide a supportive regulatory framework. However, regulatory decisions such as the 2016-2017 generic cost of capital and recovery of prudently incurred stranded assets might pressure credit metrics.

We expect the economic downturn in Alberta to have a limited impact on ATCO's regulated operations because electricity transmission and distribution rates are regulated by the Alberta Utilities Commission, the provincial regulator, under a cost-of-service based framework that allows utilities to recover prudently incurred operating and capital costs in a timely manner. The negative outlook on ATCO continues to reflect S&P Global Ratings' view that, although the company has reduced its capital programs, credit metrics remain weak. The outlook also reflects the challenging Alberta operating environment that could continue to stress ATCO's financial metrics, which could cause us to remove our positive CRA modifier on the company.

We could lower the rating on ATCO during our 18-24 month outlook period by removing our positive CRA modifier on the company if FFO-to-debt were to fall below 14%, with no prospect for improvement. This could be as a result of a weak Alberta operating environment characterized by sustained lower power prices in Alberta, a material negative change in the regulatory framework or government energy policy, a change in ATCO's financial policy, or a change in business strategy. This could also be as a result of capital expenditures that continue to pressure metrics.

An outlook revision over the next 18-24 month to stable would require the company to improve its financial position, with adjusted FFO-to-debt approaching 18%. This could occur because of the company managing its capital program through the current operating environment and uncertainty or the divestiture of assets.