Fitch Upgrades Atmos Energy's Ratings; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Atmos Energy Corporation's (Atmos) long-term Issuer Default Rating (IDR) to 'BBB+' from 'BBB' and its senior unsecured debt rating to 'A-' from 'BBB+'. A full list of rating actions is shown at the end of this release.

The Rating Outlook is Stable.

These rating actions affect approximately $1.8 billion of long-term debt.

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:

--A greater degree of earnings volatility and commodity exposure at Atmos Energy Holdings, Inc.'s (AEH) nonregulated operations.

The ratings upgrade reflects Fitch's expectation of continued strong financial performance, which has 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 22%, with total debt to EBITDA near 3.5 times (x).

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.

Two-thirds of the distribution segment's operating income is subject to annual ratemaking, which allows for the recovery of both capital expenditures and O&M expenses without filing a formal rate case. Roughly 94% of the distribution segment's operating income is covered under weather normalization mechanisms, lessening the effect of abnormal weather. Purchased gas cost adjustment mechanisms provide a dollar-for-dollar offset of increases or decreases in purchased gas costs, and trackers cover the gas portion of customer bad-debt expense in most of Atmos' Texas service territory.

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 improved the company's financial profile over the past few years.

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.

AEH's Nonregulated 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 gas distribution and pipeline operations, in the form of greater earnings volatility and commodity exposure. AEH's physical hedges and few net open positions help mitigate these risks.

AEH stands to benefit from its asset optimization business when natural gas market fundamentals improve, although it has been negatively impacted by the narrowing of basis differentials during the past two years.

Adequate Liquidity:

Liquidity is adequate, supported by sufficient availability under Atmos' new five-year, $750 million revolving credit facility that serves as a backup for the commercial paper program. The facility has an accordion feature that allows for an increase in borrowing capacity to $1 billion.

Atmos Energy Marketing, LLC (AEM), the wholly owned subsidiary of AEH, has its own $200 million revolving credit facility, which matures on Dec. 8, 2013. AEM's operations could require a significant amount of liquidity if natural gas prices were to increase, but Fitch considers AEM's revolving credit facility, with the ability to increase borrowing capacity to $500 million, adequate to meet future needs.

Company Profile:

Atmos is one of the largest natural gas-only distributors in the U.S., currently serving over three million natural gas distribution customers in 12 states, primarily in the South. Atmos also has natural gas pipeline and storage assets, including a 6,000-mile intrastate natural gas pipeline system in Texas. In addition, AEH provides natural gas marketing and procurement services to industrial, commercial, and municipal customers, with a focus in the Midwest and Southeast.

Fitch has upgraded the following ratings:

Atmos

--Long-term IDR to 'BBB+' from 'BBB';

--Senior unsecured debt to 'A-' from 'BBB+'.

Fitch has affirmed the following ratings:

Atmos

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 16, 2010);

--'Recovery Ratings and Notching Criteria for Utilities' (May 12, 2011);

--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628491

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

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