NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Atmos Energy Corporation's (Atmos) Long-Term Issuer Default Rating (IDR) to 'A-' from 'BBB+' and its Senior Unsecured Debt rating to 'A' from 'A-'. A complete list of rating actions is shown at the end of this press release.
The Rating Outlook is Stable.
These rating actions affect $2.46 billion of long-term debt.
The upgrade reflects Fitch's expectation of continued strong financial performance, which has been driven primarily by organic growth in Atmos' regulated natural gas distribution and pipeline segments. For the next three years, Fitch expects each of the leverage metrics total adjusted debt/EBITDAR and funds from operations (FFO) adjusted leverage to average less than 3.5x. Coverage metrics are also expected to remain robust and to strengthen over the next three years, with EBITDAR/interest expense and FFO fixed charge coverage to both increase to greater than 6.0x.
Atmos is a divisionally structured utility that operates in three business segments: regulated gas distribution through local distribution companies (LDCs); regulated pipelines through its Texas intrastate pipeline system; and non-regulated gas marketing and storage through subsidiary Atmos Energy Holdings, Inc.'s (AEH) operations.
KEY RATING DRIVERS
Constructive Regulatory Mechanisms
The majority of Atmos' LDC utility service territory benefits from several constructive regulatory mechanisms, including annual ratemaking, weather normalization, and purchased gas cost adjustments, which reduce regulatory lag and add stability to earnings and cash flows.
Approximately 77% of the distribution segment's operating income is subject to annual ratemaking without filing a formal rate case. Roughly 97% of the distribution segment's operating income is covered under weather normalization mechanisms, and Atmos has purchased gas cost adjustment mechanisms that provide a dollar-for-dollar offset of increases or decreases in purchased gas costs in all its distribution service territories. In addition, 76% of operating income is from jurisdictions with trackers that cover the gas portion of customer bad-debt expense.
Obtaining these aforementioned regulatory mechanisms throughout Atmos' multi-state service territory has made the distribution segment's operating income and cash flows more predictable, while improving system reliability and safety. These efforts have also led to strong organic growth opportunities, resulting in a greater share of operating income and cash flows from Atmos' stable, low-risk operations. Management's careful oversight of O&M expenses and its manageable capital spending program also have helped continue the multi-year improvement to the company's financial profile.
Large, Geographically Diverse Operations in High-Growth Markets
The ratings are further supported by Atmos' large and geographically diverse regulated operations, with LDC utility businesses in eight states, although roughly 80% of rate base is located in Texas, Louisiana, and Mississippi. Atmos also benefits from its regulated Texas intrastate pipeline system and associated storage assets, which provide access from several natural gas basins to three of the major Texas hubs. The 5,600-mile pipeline system has an authorized return on equity (ROE) of 11.8% and benefits from annual gas reliability infrastructure program (GRIP) filings, which allow for the recovery of capex, including pipe replacement associated with improving safety and reliability.
More than 60% of operating income is from operations in Texas, which remains a high-growth market benefitting from population and employment growth. Despite the dramatic decrease in oil prices that occurred in the second half of 2014, the Texas economy has remained vibrant, led by strong growth in the Dallas-Fort Worth area, which is Atmos' major service territory and focus for capex growth.
Capex Growth and Timely Recovery
Capex totaled $835 million in the fiscal year ended Sept. 30, 2014, and management has given guidance for capex in fiscal 2015 in the range of $900 million to $1 billion, with safety and reliability capex estimated at $750 million to $900 million. Fitch expects these system improvement programs to continue to drive growth well into the future and for capex to average $1.1 billion per year over the 2016-2018 timeframe. Regulatory mechanisms allow for timely recovery of capital spending, with 91% of expected 2015 capex to be added to rate base within six months (half of that with no lag) and only 4% subject to general rate case filings resulting in more than a 12-month lag.
Capital Structure and Sustained Improvement in Credit Metrics
Atmos has completed, or will have completed within Fitch's rating horizon, several measures that reduce leverage and lower the cost of debt. In February 2014, Atmos raised $390 million of new equity, substantially meeting the equity component of its large, five-year capital investment program. The equity raise improves Atmos' capitalization, which Fitch expects to be maintained over the next few years at close to a 50%/50% debt/equity mix similar to the average of the regulatory-approved capital structures in the various Atmos divisions.
Fitch expects Atmos' overall cost of debt to continue to decline as higher-coupon long-term debt matures and is replaced with lower-cost debt. Atmos' next long-term debt maturity is in June 2017, when $250 million of 6.35% notes mature, followed in March 2019, when $450 million of 8.5% notes mature. Atmos has forward starting interest rate swaps on the replacement of both these notes, effectively fixing the Treasury yields at 3.367% and 3.782%, respectively. Coverage metrics will benefit accordingly.
Non-regulated and Market-Sensitive 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 concerns. Over the past three fiscal years, non-regulated operations have contributed an average of 6% of consolidated net income, while requiring only a nominal amount of capex to support them.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Atmos include:
--Gross profit increases 2.5% in 2015 and 6.5% per year in 2016 through 2019;
--O&M expense increases 3%-4% per year through 2019;
--Regulated rate base CAGR of 9%-10% through 2019;
--Capex averaging $1.1 billion per year over the 2016-2018 timeframe;
--Normal weather;
--No asset divestitures or acquisitions.
RATING SENSITIVITIES
Positive: Given the upgrade and an already strong rating, near-term positive rating actions are unlikely. However, achieving adjusted debt-to-EBITDAR leverage of less than 3.0x and FFO adjusted leverage of less than 3.25x on a sustainable basis could lead to another positive rating action.
Negative: A negative rating action could result from the following:
--Failure to maintain the current capital structure while pursuing a relatively elevated capex program;
--Expansion of non-regulated business activities;
--An unexpected adverse regulatory decision;
--An increase on a sustainable basis of adjusted debt-to-EBITDAR leverage to greater than 3.75x and FFO adjusted leverage to greater than 4.0x.
LIQUIDITY
Liquidity is adequate, supported by sufficient availability under Atmos' $1.25 billion commercial paper (CP) program, which is backed up by an equal-sized revolving credit facility. The facility has an accordion feature that allows for an increase in borrowing capacity to $1.5 billion. The five-year facility matures Aug. 22, 2019. As of March 31, 2015, there was $225 million of CP outstanding, leaving $1.025 billion of availability under the facility.
Atmos Energy Marketing, LLC (AEM), the wholly owned subsidiary of AEH, has two 364-day bilateral credit facilities totaling $40 million, which mature in December each year and are used primarily to issue letters of credit.
In addition, there is a $500 million intercompany facility, which primarily enables the regulated operations to borrow directly from AEH, and indirectly from AEM, thus allowing for an efficient use of internal cash to fund operations.
FULL LIST OF RATING ACTIONS
Fitch has upgraded the following ratings:
Atmos
--Long-Term IDR to 'A-' from 'BBB+'; Stable Outlook;
--Senior unsecured debt to 'A' from 'A-'.
Fitch has affirmed the following ratings:
Atmos
--Short-Term IDR at 'F2';
--Commercial Paper at 'F2'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Recovery Ratings and Notching Criteria for Utilities (pub. 05 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987282
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987282
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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