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) modest exposure to nonregulated utility activities, which are not expected to increase significantly in the medium term. ATCO owns 52.8% of CUL as at June 30, 2023.
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 90% to 95% of ATCO’s consolidated adjusted EBITDA (DBRS Morningstar estimates) based on 2020–22 and is projected to remain within that range in the medium term. CUL’s business risk profile remained stable in 2022 and to date in 2023, reflecting the nature of regulated electricity transmission, electricity distribution, natural gas transmission, and natural gas distributions. Most of CUL's regulated operations are in Alberta, which has a reasonable regulatory regime and good cost recovery despite having low regulated return on equity and equity thickness in the capital structure. See DBRS Morningstar’s press release on CUL dated August 29, 2023, for more details.
The ATCO ratings also incorporate the Holdco’s very modest exposure to the higher-risk business at ATCO Structures & Logistics Ltd. (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, 2023. Currently, the acquisition of the renewable power generation from Suncor Energy Inc. has no material impact to ATCO's credit. However, should the proportion of nonregulated business continue to increase, a negative rating action is possible.
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 as at June 30, 2023 (less than 10%), and is not expected to increase significantly over the medium term. Besides the $200 million Subordinated Notes, ATCO had only approximately $84 million of credit facility outstanding as at June 30, 2023.
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, 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/416784 (July 4, 2023).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616)
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 26, 2022; https://www.dbrsmorningstar.com/research/404334)
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404248)
The credit rating methodologies used in the analysis of this transaction can be found at:
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
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.
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