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

DBRS Limited (DBRS Morningstar) confirmed ATCO Ltd.’s (ATCO or the Holdco 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 structural subordination of the Subordinated Notes to all senior indebtedness at ATCO and ATCO’s ability to defer interest on the Subordinated Notes for up to five consecutive years.

The confirmations reflect (1) ATCO’s solid consolidated and nonconsolidated financial profile, strong liquidity, and very low Holdco leverage, which is expected to remain stable over the medium term; and (2) the strong and stable credit profile at its sizable and diversified regulated subsidiaries owned indirectly through Canadian Utilities Limited (CU, rated “A” with a Stable trend by DBRS Morningstar). ATCO owns 52.2% of CU.

ATCO’s ratings are largely based on CU ratings, taking into account structural subordination and low leverage at the Holdco level. CU accounted for approximately 93% of ATCO’s segment adjusted EBITDA in H1 2020. CU’s credit risk profile has remained stable despite the ongoing Coronavirus Disease (COVID-19) pandemic reflecting its regulated utilities operations, based largely in Alberta, Canada and in Western Australia. CU has reduced its higher-risk nonregulated generation business and improved its liquidity through the sale of 100% its fossil fuel generation assets in Alberta in Q3 2019 and its 80% interest in Alberta Power Line (APL) in Q4 2019. In addition, CU owns a 50% interest in LUMA Energy, LLC (LUMA Energy), which, in June 2020, was selected by the Puerto Rico P3A to transform, modernize, and operate Puerto Rico’s electricity transmission and distribution system over a term of 15 years. DBRS Morningstar considers LUMA Energy a quasi-regulated operation and is of the view that transaction is credit-positive for CU as the LUMA Energy operation will provide CU with stable cash flow without additional debt at the Holdco or subsidiary levels. See DBRS Morningstar’s report on CU dated August 21, 2020, for more details.

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. ASL has consistently generated positive free cash flows and has contributed modest cash dividends to ATCO over the past several years and had only $25 million of credit facility outstanding as at June 30, 2020.

Based on ATCO’s current business and financial plan, CU’s ratings will likely continue to form the basis for determining the ratings of ATCO. DBRS Morningstar believes that even if the Company receives no dividends from ASL or from its Neltume Ports, 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. In addition, the Holdco leverage remained very low at approximately 5.5% as at June 30, 2020, and is not expected to increase significantly over the medium term. Besides the $200 million of Subordinated Notes, ATCO only had approximately $138 million of credit facility outstanding as at June 30, 2020.

DBRS Morningstar does not expect to take positive rating action on ATCO’s ratings because these are largely constrained by CU’s ratings. However, the following factors, should they occur, could place pressure on ATCO’s ratings: (1) a material increase in consolidated and nonconsolidated leverage, (2) a substantial increase in its exposure to nonregulated operations (which DBRS Morningstar deems unlikely, given the current business strategy), or (3) adverse changes in regulation in Alberta or in Australia that negatively affect CU’s ratings.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (September 16, 2019); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019); and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019), which can be found dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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