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

DBRS Limited (DBRS Morningstar) confirmed ATCO Ltd.’s (ATCO, 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.

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; and (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). ATCO owns 53% 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 93% to 95% of ATCO’s consolidated adjusted EBITDA in 2020 and H1 2021. CUL’s business risk profile improved in 2020 following the sales of its fossil fuel generation assets in Alberta in Q3 2019 and its 80% interest in Alberta Power Line (APL) in Q4 2019. DBRS Morningstar expects CUL’s contribution to ATCO’s consolidated adjusted EBITDA to remain in the 93% to 95% range over the medium term, given that most of ATCO’s growth capex will be spent on its regulated utilities. The ongoing Coronavirus Disease (COVID-19) pandemic has had only limited impact on CUL. See DBRS Morningstar’s rating report on CUL dated August 19, 2021, for more details.

The ATCO ratings also incorporate the Company’s very 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. There was only a small amount of credit facility outstanding at ASL as at June 30, 2021. Both ASL and Neltume Ports have been very resilient to the impact of the pandemic.

Based on ATCO’s current business and financing plans, CUL’s ratings will likely continue to form the basis for the ratings of ATCO. DBRS Morningstar believes that even if the Holdco receives no dividends from ASL and from Neltume Ports, the ratings of ATCO would not likely be affected providing that the ratings of CUL 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, 2021 (approximately 5.5%), 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, 2021.

DBRS Morningstar does not expect to take positive rating action on ATCO’s ratings 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.

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/373262.

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 (October 27, 2020); DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020); and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), 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 (https://www.dbrsmorningstar.com/research/373262; February 3, 2021).

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 info@dbrsmorningstar.com.

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 additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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