Fitch Rates Atmos Energy's Senior Notes 'A-'; Outlook Stable
by Business Wire
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 base.
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 3.8x-3.6x.
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 rating action.
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