DBRS Confirms ATCO Ltd. at A (low), Stable Trend

DBRS Limited (DBRS) confirmed ATCO Ltd.’s (ATCO or the Company) Issuer Rating at A (low) with a Stable trend. The confirmation reflects solid and stable consolidated credit metrics for the six months ended June 30, 2018 (although weaker than for H1 2017), supported by strong earnings and cash flow at the Company’s regulated businesses. The rating reflects the strong credit profile of ATCO’s principal subsidiary, Canadian Utilities Limited (CU; rated “A” with a Stable trend by DBRS), which accounts for over 95% of the Company’s consolidated cash flow. The rating also incorporates the following factors: (1) ATCO does not wholly own CU and is not entitled to all cash dividends from CU; (2) there is no debt outstanding at ATCO’s corporate level (Holdco); and (3) the Company has a modest exposure to the higher-risk business at ATCO Structures & Logistics (ATCO S&L), which is now 100.0% owned by ATCO following the transfer of the 24.5% owned by CU to the Company at the end of 2017.

Key considerations in assessing the credit profile of ATCO include the following: (1) the credit strength of the companies controlled by ATCO, including the Company’s 52.4% ownership of CU; (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; and (4) equity injection requirements by ATCO S&L to finance its operations.

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

DBRS noted in its CU report dated August 28, 2018, that there is limited opportunity for upside movement of CU’s ratings due to its exposure to non-regulated activities. Accordingly, the rating of ATCO also has limited upside movement. However, should the following factors occur, ATCO’s rating would be negatively affected: (1) a significant weakening of the credit quality of CU, (2) a material debt issuance at the Holdco level or (3) a significant increase in the Company’s investments in higher-risk operations.

Notes:
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 under Related Documents 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.