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The mechanism used by Katello to determine if a host is atomic is flawed at the provisioning time. 
https://github.com/Katello/puppet-certs/blob/master/templates/rhsm-katello-reconfigure.erb#L27 
Katello checks for  
<pre>
if [ -e "/run/ostree-booted" ] at the provisioning time, which doesnot exist.
then
  #atomic setup
</pre>

This needs to be  replaced with

<pre>
grep -i 'Atomic Host' /etc/os-release 2>&1> /dev/null
 if [ $? -eq 0 ]
 then
   #atomic setup
</pre>

Created from redmine issue http://projects.theforeman.org/issues/14223

Upstream bug assigned to paji

Moving to POST since upstream bug http://projects.theforeman.org/issues/14223 has been closed

Ok, I confirmed with dev (Partha) on iRC, the comment8 covered everything required for bz. And IS_ATOMIC var is set by template.

Based on that conversation and comment 8, moving this to verified.

Since the problem described in this bug report should be
resolved in a recent advisory, it has been closed with a
resolution of ERRATA.

For information on the advisory, and where to find the updated
files, follow the link below.

If the solution does not work for you, open a new bug report.

https://access.redhat.com/errata/RHBA-2016:1500