DBRS Confirms ATCO Ltd. at A (low) and R-1 (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Short-Term Issuer Rating of ATCO Ltd. (ATCO or the Company) at A (low) and R-1 (low), respectively, both with Stable trends. ATCO’s credit profile is largely based on the credit rating of Canadian Utilities Limited (CU, rated “A”) given that the majority of the Company’s earnings and operating cash flow come from its 53.2% equity investment in CU. ATCO’s exposure in the higher-risk non-regulated operations remains manageable and relatively unchanged over the past year. DBRS expects ATCO to continue to manage these high-risk operations selectively in such a way that they will not represent a significant portion of consolidated earnings but will rather provide a source of complementary earnings growth and diversification benefits. The one-notch differential in the ratings of ATCO and CU reflects structural subordination at ATCO with respect to CU.

Earnings for the six months ended June 30, 2015 (H1 2015), were down approximately 22% to $135 million from $172 million in H1 2014, largely because of a sharp decline in earnings contribution from ATCO’s non-regulated operations. Negative earnings drivers were a global slowdown in resource-based economies and lower spark spreads and price volatility that negatively affected merchant power plants in Alberta, which more than offset the improved operating performance of the regulated utility operations in Alberta.

Despite the weak operating performance in H1 2015, credit metrics have remained reasonable for the current rating category, with the debt-to-capital at approximately 56%, EBIT interest coverage at 2.7 times and the cash flow-to-debt at 12.9% on a consolidated basis. On a non-consolidated basis, the balance sheet has also remained reasonable with ATCO carrying minimal amounts of debt. ATCO’s non-consolidated debt-to-capital was well within DBRS’s 20% threshold over the past five years (0% as at June 30, 2015; 0.3% as at December 31, 2014). ATCO has no bonds/debentures issued at the parent level and is not expected to have any long-term debt or preferred securities at this level.

Liquidity has been strong, reflecting ATCO’s available credit facilities and cash balances. ATCO is committed to maintaining minimum cash balances equivalent of one year of common dividends, plus one year of preferred share dividends and interest payments not covered from regulated utilities businesses. As a result, ATCO is expected to maintain cash balances of around $100 million to $150 million at the parent level over the next several years, providing significant sources of liquidity.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2014), and DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.