DBRS Confirms ATCO Ltd. at A (low), R-1 (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Short-Term Issuer Rating of ATCO Ltd. (ATCO or the Company) at A (low) and R-1 (low), respectively, both with Stable trends. ATCO’s credit profile is largely based on the credit rating of Canadian Utilities Limited (CU, rated “A”) given that the majority of the Company’s earnings and operating cash flow come from its 53.0% equity investment in CU. ATCO’s exposure in the higher-risk non-regulated operations remains manageable. DBRS expects ATCO to continue to manage these high-risk operations selectively in such a way that they will not represent a significant portion of consolidated earnings, but will rather provide a source of complementary earnings growth and diversification benefits. The one-notch differential in the ratings of ATCO and CU reflects structural subordination at ATCO with respect to CU.

Consolidated earnings for the six months ended June 30, 2016 (H1 2016), improved approximately 50% to $202 million from $135 million in H1 2015, largely because of continued capital investment and growth in rate base within the regulated utility business segment, business-wide cost reduction initiatives, and better results in Structures & Logistics, supported by the BC Hydro Site C project and higher occupancy levels in the lodging business. However, earnings contributions from Structures & Logistics remains weak, largely because of a global slowdown in resource-based economies. In addition, ATCO’s other non-regulated businesses are affected by continued bearish wholesale power fundamentals that negatively affect merchant power plants in Alberta.

Credit metrics have remained reasonable for the current rating category, with the debt-to-capital at approximately 56%, EBIT interest coverage at 3.0 times and the cash flow-to-debt at 13.4% on a consolidated basis for the twelve months ended June 30, 2016. On a non-consolidated basis, the balance sheet has remained strong, with ATCO carrying no debt as at June 30, 2016. ATCO has no bonds/debentures issued at the parent level and is not expected to have any long-term debt or preferred securities at this level in the foreseeable future.

Liquidity has been strong, reflecting ATCO’s available credit facilities and cash balances. ATCO is committed to maintaining minimum cash balances equivalent of one year of common dividends, plus one year of preferred share dividends and interest payments not covered by the regulated utilities businesses. As a result, ATCO is expected to maintain cash balances of around $150 million at the parent level over the next several years, providing significant sources of liquidity.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Criteria: Rating Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.