SEMCO Energy Inc.

The stable outlook on SEMCO Energy Inc. reflects our expectation that it will maintain an FFO-to-debt ratio of comfortably above 18% over our forecast period. We also do not expect there to be any deterioration in the overall credit quality of its parent, AltaGas, over this period. We could lower our ratings on SEMCO over the next 24 months if it materially depends on AltaGas for its funding needs and financial performance, which would suggest that it is insufficiently separate from the group. We could also lower our ratings over this period if adverse regulatory outcomes suggest elevated business risk or if SEMCO's financial measures materially weaken such that it maintains an FFO-to-debt ratio of consistently below 11%. Furthermore, we

...We expect SEMCO to effectively manage its regulatory risk, which will bolster its business risk profile. Although the company has a smaller-than-average customer base, which makes it susceptible to localized weather and adverse economic conditions, it benefits from numerous constructive mechanisms that provide it with cash flow stability and allow it to recover commodity costs and infrastructure investments. However, there is some potential for regulatory lag due to COVID-19 because it does not have a revenue decoupling mechanism and derives about 45% of its sales from commercial and industrial customers. Forecast credit metrics remain entrenched at the higher end of our significant financial risk profile category. We forecast that SEMCO's funds from operations (FFO) to debt will be in the 20%-23% range over our forecast period, which we assessed using our medial volatility financial benchmark table. We view SEMCO as a highly strategic insulated subsidiary of AltaGas Ltd.. The cumulative...

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