Jan 9 - Fitch Ratings has assigned an 'A-' rating to Atmos Energy
Corporation's (Atmos) issuance of $500 million 4.15% senior unsecured
notes due Jan. 15, 2043. The Rating Outlook is Stable.
The notes are senior unsecured obligations of Atmos and will rank pari passu
with all existing and future unsecured indebtedness.
The net proceeds from the offering will be used primarily to repay short-term
debt and for general corporate purposes.
Key rating factors include the following strengths:
--A constructive regulatory environment that includes annual ratemaking
mechanisms and weather normalization;
--A prudent management team that has focused on increasing and improving the
predictability of its regulated distribution segment's operating income;
--Large and geographically diverse regulated operations.
These strengths are tempered by the following concern:
--The higher risk non-regulated operations and commodity exposure at Atmos
Energy Holdings, Inc.'s (AEH).
Constructive Regulatory Mechanisms:
Several regulatory mechanisms, including annual ratemaking, weather
normalization, and purchased gas cost adjustments, reduce regulatory lag and add
stability to earnings and cash flows.
Annual ratemaking mechanisms in place in four states provide for an annual rate
review and adjustment to rates for approximately 77% of Atmos' natural gas
distribution gross margin.
Roughly 94% of the distribution segment's residential and commercial customer
gross profit is covered under weather normalization mechanisms, adding further
certainty to cash flows.
Purchased-gas cost adjustment mechanisms provide a dollar-for-dollar offset to
increases or decreases in the distribution segment's purchased gas costs, and
trackers cover the gas portion of customer bad-debt expense in most of Atmos'
Texas service territory and in several other states.
Obtaining these aforementioned regulatory mechanisms has been a key focus of
management, and Atmos has been effective in improving the regulatory environment
throughout its multi-state distribution service territory. These efforts have
led to organic growth in rate base, which, when combined with careful oversight
of O&M expenses and a manageable capital spending program, has strengthened the
company's financial profile.
Large Geographically Diverse Operations:
The ratings are further supported by the low-risk nature of Atmos' large and
geographically diverse regulated operations. Atmos also benefits from its large
Texas intrastate pipeline and associated storage assets, which provide access
from several natural gas basins to three of the major Texas hubs.
Atmos completed the sale of regulated distribution assets in non-strategic areas
and will complete the sale of its Georgia regulated distribution assets in late
2013, allowing management to focus on capital investments intending to grow rate
AEH's Non-regulated Operations:
Slightly offsetting these strengths are the company's non-regulated operations,
which include gas supply management, marketing, and gathering and storage
services that are mainly conducted at the company's AEH subsidiary. These
operations have a higher level of business risk than the company's regulated
operations, due to greater earnings volatility and commodity exposure. AEH has
been negatively affected in recent years by the extreme narrowing or elimination
of basis differentials, which is expected to continue. As a result,
contributions from these operations are expected to contribute less than 10% to
Net Income in the near term.
Strong Financial Performance:
Fitch expects Atmos to maintain its strong financial metrics, which have been
driven by organic growth in Atmos' regulated natural gas distribution segment.
For the next three years, Fitch expects funds from operations (FFO)-to-total
debt to average more than 20%, with total debt-to-EBITDA to range between
Liquidity is sufficient, primarily supported by Atmos' recently amended $950
million revolving credit facility expiring in 2016. The facility still has an
accordion feature that allows for an increase in borrowing capacity to $1.2
billion. At the same time, Atmos Energy Marketing, LLC (AEM) added two $25
million 364-day bilateral facilities and terminated its three-year facility,
which was due December 2014.
In addition to these third-party facilities, there are three intercompany credit
facilities that simulate a money pool and allow for the efficient management of
cash among Atmos, AEH, and AEM.
WHAT COULD TRIGGER A POSITIVE RATING ACTION:
The downsizing of Atmos' non-regulated operations, along with continued strong
performance of the regulated distribution and transmission and storage
businesses could result in a positive rating action.
WHAT COULD TRIGGER A NEGATIVE RATING ACTION:
--A significant increase in the size or risk of Atmos' non-regulated operations;
--A large or heavily debt-financed acquisition could also result in a negative
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Recovery Ratings and Notching Criteria for Utilities', Nov. 13, 2012;
--'Corporate Rating Methodology', Aug. 8, 2012;
Applicable Criteria and Related Research:
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Utilities