DBRS Morningstar Confirms Ratings on ATCO Ltd. at A (low) and BBB, Stable

DBRS Limited (DBRS Morningstar) confirmed ATCO Ltd.’s (ATCO or the Holdco) 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.

The confirmations reflect (1) ATCO’s stable and solid consolidated metrics, strong nonconsolidated financial profile, strong liquidity, and very low Holdco leverage, which is expected to remain stable over the medium term; (2) the strong and stable credit profile at its sizable and diversified regulated subsidiaries owned indirectly through Canadian Utilities Limited (CUL; rated “A” with a Stable trend by DBRS Morningstar); and (3) very modest exposure to nonregulated utility activities, which are not expected to increase significantly in the medium term. ATCO owns 52.9% of CUL.

ATCO’s ratings are largely based on the ratings of CUL, taking into account structural subordination and low leverage at the Holdco level. CUL accounted for approximately 92% to 95% of ATCO’s consolidated adjusted EBITDA (DBRS Morningstar estimates) based on 2019–21 and is projected to remain within that range in the medium term. CUL’s business risk profile remained stable in 2021 and to date in 2022, reflecting the nature of regulated electricity transmission, electricity distribution, natural gas transmission, and natural gas distributions. Most of CUL's regulated operations are located in Alberta, which has a reasonable regulatory regime and good cost recovery despite having low regulated return on equity and the equity thickness in the capital structure. See DBRS Morningstar’s press release on CUL dated August 30, 2022, for more details.

The ATCO ratings also incorporate the Holdco’s very modest exposure to the higher-risk business at ATCO Structures & Logistics (ASL) and a 40% equity investment in Neltume Ports in Chile. There was only a small amount of credit facility outstanding at ASL as at June 30, 2022. Although both ASL and Neltume Ports have been very resilient to the impact of the pandemic and have consistently generated positive free cash flows over the past several years, DBRS Morningstar considers these businesses as having higher risk than the regulated utility operations.

Based on ATCO’s current business and financing plans, CUL’s ratings will likely continue to form the basis for ATCO’s ratings. DBRS Morningstar believes that even if the Holdco receives no dividends from ASL and from Neltume Ports, ATCO’s ratings would not likely be affected, provided that CUL’s ratings remain unchanged and ASL continues to require no equity injections from ATCO, as has been the case over the past several years. In addition, the Holdco leverage remained very low at June 30, 2022 (under 10%), and is not expected to increase significantly over the medium term. Besides the $200 million of Subordinated Notes, ATCO had only approximately $128 million of credit facility outstanding at the end of 2021.

DBRS Morningstar does not expect to take a positive rating action on ATCO because its ratings are largely constrained by CUL’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 CUL’s ratings.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 24, 2021; https://www.dbrsmorningstar.com/research/384922), and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

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

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

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