DBRS Confirms ATCO Ltd. at A (low) and R-1 (low)

DBRS has today confirmed ATCO Ltd.’s (ATCO or the Company) Issuer Rating and Short-Term Issuer Rating at A (low) and R-1 (low), respectively, with Stable trends. The confirmations reflect the strong operational and financial performance of ATCO’s principal subsidiary, Canadian Utilities Limited (CU), which accounts for approximately 80% of the Company’s earnings, and no financial obligations at the parent level offset by moderate exposure to higher-risk business in the ATCO Structures & Logistics segment. To further streamline its organizational structure, ATCO transferred its wholly-owned subsidiary, ATCO Resources, to CU for $82.5 million at the beginning of 2011.

ATCO’s ratings are based on the underlying strength of CU’s credit profile (52.8% owned by ATCO), as the Company continues to maintain a stable capital structure and strong liquidity position, as well as generate consistent cash flow growth underpinned not only by its regulated businesses, but also by its complementary non-regulated operations, which provide a source of earnings growth and diversification benefits. DBRS expects earnings and cash flow over the medium term to continue to grow effectively, in line with growth at CU, reflecting the increased capital investment in its electric transmission and electric distribution systems and in ATCO Structures & Logistics. Increased capital expenditures at CU will be funded with external financing primarily raised at CU Inc. (CUI), and equity injections from CU and/or dividend management, thus preserving the utility’s credit profile.

ATCO Structures and Logistics (approximately 20% of earnings) continues to provide stable earnings and cash flows as it benefits from increased business activity in its rental fleet segment. With higher levels of development activity in the natural resource and energy industries sector, this segment is expected to remain a source of earnings growth in the medium term. DBRS expects ATCO to continue to manage these operations selectively in such a way that they will not represent a significant portion of consolidated earnings but will rather provide incremental benefits.

Although ATCO’s balance sheet in the medium term – through its subsidiary CU – could see some pressure due to potentially significant capex, in the long term, we expect financial metrics to remain within a range supportive of the assigned ratings, given the Company’s moderate level of business risk, strong financial profile and strong balance sheet.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas and Pipelines), which can be found on our website under Methodologies.