Fitch Affirms Atmos Energy at 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Atmos Energy Corporation (Atmos) at 'A-' and senior unsecured debt rating at 'A'. The Short-Term IDR and commercial paper (CP) rating have been affirmed at 'F2'. A complete list of rating actions follows at the end of this release.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Constructive Regulatory Environment

Atmos operates in constructive regulatory jurisdictions that allow the company to recover its capex in a timely manner, reducing regulatory lag and adding stability to earnings and cash flow. The local distribution company (LDC) business benefits from the use of annual rate-making, weather normalization, and purchased gas cost adjustments. Atmos' Texas intrastate pipeline system has an authorized return on equity of 11.8% and annual gas reliability infrastructure program filings.

Solid Financial Metrics

Atmos' financial metrics are solid and are likely to remain a supportive aspect of the company's credit quality. Through 2019, Fitch expects funds flow from operations (FFO) fixed-charge coverage to average 6.5x-7.5x, FFO adjusted leverage to average 3.3x-3.6x, and adjusted debt/EBITDAR to average 3.4x-3.7x.

Large, Geographically Diverse Operations

The ratings are further supported by Atmos' large and geographically diverse regulated operations with exposure to above-average service territories. More than 60% of operating income is from operations in Texas, which continues to benefit from population and employment growth. Atmos' LDC utility business operates in eight states, although roughly 78% of its rate base is located in Texas, Louisiana, and Mississippi. The company's regulated Texas intrastate pipeline system and associated storage assets provide access from several natural gas basins to three of the major Texas hubs.

Capex Growth and Timely Recovery

Capex is expected to total nearly $1.1 billion in the fiscal year ended Sept. 30, 2016, with safety and reliability capex estimated to account for 80%-85% of the total. Fitch expects system improvement programs to continue to drive growth and for total capex to average close to $1.25 billion per year over 2016-2019. Regulatory mechanisms allow for timely recovery of capital spending, with greater than 90% of annual capex earning a return within six months of test year-end and only 4% subject to general rate case filings resulting in more than a 12-month lag.

Declining Average Cost of Debt

Fitch expects Atmos' average cost of long-term debt, currently at 5.7%, to continue to decline as higher-coupon notes mature and are replaced with lower-coupon notes. Atmos' next long-term debt maturity is in June 2017, when $250 million of 6.35% notes mature, followed in March 2019 with $450 million of 8.5% notes. Atmos has forward-starting interest rate swaps on the replacement of both notes, effectively fixing Treasury yields at 3.367% and 3.782%, respectively. Excluding these relatively high-coupon notes, Atmos' long-term cost of debt is 4.9%; coverage metrics should 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 storage services that are mainly conducted at the company's Atmos Energy Holdings, Inc. (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 7% 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:

--Regulated rate base CAGR of 9%-10% through 2019;

--EBITDAR CAGR of 8.5%-9% through 2019;

--O&M expense CAGR of 3% through 2019;

--Capex increasing from nearly $1.1 billion in 2016 to nearly $1.4 billion in 2019;

--Normal weather;

--No asset divestitures or acquisitions.

RATING SENSITIVITIES

Positive Rating Action: Near-term positive rating actions are unlikely. However, achieving adjusted debt/EBITDAR leverage of less than 3.2x and FFO adjusted leverage of less than 3.5x on a sustainable basis could lead to another positive rating action.

Negative Rating Action: A negative rating action could result from a sustained increase of adjusted debt/EBITDAR leverage to greater than 3.7x and FFO adjusted leverage to greater than 4.0x. A negative rating action could also result from an unexpected adverse regulatory decision, expansion of non-regulated business activities, or failure to maintain the current capital structure while pursuing a relatively elevated capex program.

LIQUIDITY

Fitch considers Atmos' liquidity to be adequate. Atmos primarily meets its short-term liquidity needs through the issuance of CP under a $1.25 billion CP program, which is supported 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 Sept. 25, 2020. As of June 30, 2016, there was $670.5 million of CP outstanding, leaving $579.5 million of availability under the facility.

In addition, Atmos maintains a $25 million facility for general corporate purposes that matures on April 1 each year and a $10 million facility for letters of credit that matures on September 30 each year.

AEH is a wholly owned subsidiary that houses Atmos' nonregulated gas marketing operations. AEH's subsidiary, Atmos Energy Marketing, LLC (AEM), has a committed $15 million credit facility and an uncommitted $25 million credit facility. Both are 364-day bilateral facilities, with the $15 million facility maturing on September 30 each year and the $25 million facility maturing on December 31 each year. These facilities are used primarily to issue letters of credit.

There is also 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.

Atmos' operations require modest cash on hand to fund their daily business needs. At June 30, 2016, the company had $66 million of unrestricted cash and cash equivalents.

Long-term debt maturities over the next five years are manageable, with $250 million of 6.35% unsecured notes maturing in June 2017 and $450 million of 8.5% unsecured notes maturing in March 2019. Atmos has a very long-dated maturity profile that is more conservative than that of most other utilities.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Atmos Energy Corporation

--Long-Term IDR at 'A-', Stable Outlook;

--Senior unsecured debt at 'A';

--Short-Term IDR at 'F2';

--Commercial Paper at 'F2'.

Disclosure: There were no financial statement adjustments made that were material to the rating rationale outlined above.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016)

https://www.fitchratings.com/site/re/886557

Recovery Ratings and Notching Criteria for Utilities (pub. 04 Mar 2016)

https://www.fitchratings.com/site/re/878227

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011608

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011608

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Kevin L. Beicke, CFA
Director
+1-212-908-0618
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Committee Chairperson
Steven Marks
Managing Director
+1-212-908-9161
or
Media Relations
Alyssa Castelli, 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kevin L. Beicke, CFA
Director
+1-212-908-0618
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Committee Chairperson
Steven Marks
Managing Director
+1-212-908-9161
or
Media Relations
Alyssa Castelli, 212-908-0540
alyssa.castelli@fitchratings.com