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

DBRS Limited (DBRS) confirmed ATCO Ltd.’s (ATCO or the Company) Issuer Rating and Short-Term Issuer Rating at A (low) and at R-1 (low), respectively, with Stable trends. The confirmations reflect solid and stable consolidated credit metrics at June 30, 2017, supported by strong earnings and cash flow at the Company’s regulated businesses. The ratings reflect the strong credit profile of ATCO’s principal subsidiary, Canadian Utilities Limited (CU; rated “A” with a Stable trend by DBRS), which has accounted for over 90% of the Company’s consolidated cash flow over the past few years. The ratings also incorporate the following factors: (1) ATCO does not wholly own CU and is not entitled to all cash dividends from CU, (2) no debt outstanding at ATCO’s corporate level (the Holdco) and (3) ATCO has a moderate exposure to the higher-risk business of the ATCO Structures & Logistics (ATCO S&L) segment (less than 10% of consolidated cash flow).

Key considerations in assessing the credit profile of ATCO include the following: (1) The credit strength of the companies controlled by ATCO. This includes the Company’s 52.8% ownership of CU, and approximately 88.4% direct and indirect ownership of ATCO S&L. (2) The strength of the balance sheet and liquidity position at the Holdco level. (3) The ability of CU, the principal subsidiary, to pay dividends to ATCO. (4) Equity injection requirements by ATCO S&L to finance its operations.

Based on the review of the above factors, DBRS is of the view that CU’s ratings will continue to form the basis for determining the ratings of ATCO. DBRS believes that even if ATCO receives no dividends from ATCO S&L, the ratings of ATCO would likely not be affected, providing that the rating of CU remains unchanged and ATCO S&L continues to require no equity injections from ATCO, as has been the case over the past several years. Thus, the rating of ATCO is one notch lower than CU, largely reflecting the Holdco’s structural subordination.

DBRS noted in its CU report dated August 14, 2017, that there is a limited opportunity for upside movement of CU’s ratings due to its exposure to non-regulated activities. As a result, the ratings of ATCO also have limited upside movement. However, should the following factors occur, ATCO’s ratings would be negatively impacted: (1) a significant weakening of the credit quality of CU; (2) a material debt issuance at the Holdco level; or (3) ATCO S&L’s operations increase significantly such that it requires equity injections or loans from ATCO.

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 principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other related internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.