DBRS Confirms Ratings on ATCO Ltd. at A (low) and BBB with Stable Trends

DBRS Limited (DBRS) confirmed ATCO Ltd.’s (ATCO or the Company) Issuer Rating at A (low) and Fixed-to-Floating Rate Subordinated Notes (the Subordinated Notes) rating at BBB. Both trends are Stable. The rating of the Subordinated Notes is two notches lower than ATCO’s Issuer Rating, reflecting its deep subordination to all senior indebtedness at ATCO. The confirmations reflect ATCO’s (1) stable business risk profile; (2) solid consolidated credit metrics for the 12 months ended June 30, 2019; and (3) low leverage and strong cash flow metrics on a non-consolidated basis.

ATCO’s ratings are based on the ratings of ATCO’s principal subsidiary, Canadian Utilities Limited (CU; rated “A” with a Stable trend by DBRS), which has accounted for approximately 95% of the Company’s segmented adjusted EBITDA in the past several years. ATCO owns 52.2% of CU and receives its pro-rata share of CU dividends, which has been strong over the past few years. The ATCO ratings also incorporate the Company’s modest exposure to the higher-risk business at ATCO Structures & Logistics (ASL) and a 40% equity investment in Neltume Ports (in Chile), which was acquired in 2018. ASL has consistently generated positive free cash flows and has contributed modest cash dividends to ATCO over the past several years and had only a $38 million drawing on credit facility as at June 30, 2019.

Based on ATCO’s current business and financial plan, CU’s ratings will continue to form the basis for determining the ratings of ATCO. DBRS believes that even if the Company receives no dividends from ASL, the ratings of ATCO would not likely be affected, providing that the ratings of CU remain unchanged and ASL continues to require no equity injections from the Company, as has been the case over the past several years. Besides the $200 million of Subordinated Notes, ATCO only had approximately $138 million drawn on credit facility as at June 30, 2019. Thus, with low leverage at ATCO’s corporate level, the Issuer Rating of ATCO is one notch lower than CU’s Issuer Rating, largely reflecting structural subordination of ATCO’s debt.

The ratings of ATCO are unlikely to be upgraded over the medium term because they are constrained by the ratings of CU (see DBRS’s rating report on CU dated August 21, 2019 for details). However, a negative rating action on ATCO may be taken if (1) the ratings of CU are downgraded by DBRS, (2) there is a material increase in ATCO’s corporate debt or (3) ATCO substantially increases its investments in higher-risk non-regulated operations.

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

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

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 rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide addi¬tional 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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada