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Rating Action: Moody's changes outlook of Atmos to negativeGlobal Credit Research - 25 Feb 2021Approx $5.2 billion in debt outstandingNew York, February 25, 2021 -- Moody's Investors Service, ("Moody's") changed the outlook of Atmos Energy Corporation (Atmos) to negative from stable. At the same time, Moody's affirmed all ratings of Atmos, including A1 senior unsecured rating and P-1 short-term rating for commercial paper. The unprecedented weather across Texas and other parts of Atmos' service territory resulted in significant increase in natural gas price and Atmos' purchase gas cost.RATINGS RATIONALE"Atmos' credit profile is pressured by the uncertainty surrounding the recovery timeline for the substantial gas costs incurred during the recent weather events," stated Edna Marinelarena, Moody's analyst. We see Atmos carrying a sizeable amount of incremental debt over the next few years, a result of the disruptions in the gas markets. According to the company, Atmos incurred between $2.5 billion and $3.5 billion in procurement costs in February when they typically spend about $1.2 million for the full year.Although Atmos is authorized to recover its fuel costs, there is uncertainty around the recovery timeline. We see rising social risks associated with customer relations because of the significant impact these costs will have on customer bills. We see state utility regulators weighing customer impact against the company's ability to manage the cost recovery over a medium to long-term period. As a result, the long-term financial profile for the company will change.Atmos' is working on a long-term financing strategy which will include a mix of debt, equity and cash to cover the costs associated with the weather event. Based on scenario analysis, Atmos' ratio of CFO pre-WC to debt could decline to between 14% (assuming $3.5 billion of new debt) and 16% (assuming $2.5 billion of new debt). Over time, the financial metrics should rebound based on the cost recovery timeline.Physical climate risks, customer relations, and financial strategy and risk management are three key elements of Moody's assessment of how environmental, social and governance factors respectively affect creditworthiness. The approved recovery timeline for the substantial amount Atmos spent to serve its customers, at a time when customers are under economic pressure caused by the coronavirus pandemic, will be important to the company's credit profile going forward. Furthermore, changes to Atmos' corporate finance policies to reduce the financial impacts of the weather-driven natural gas market disruption, and changes to the company's gas supply strategy to mitigate risks associated with extreme weather events will influence our view of Atmos' credit.Rating outlookThe negative outlook reflects the uncertainty surrounding the recovery period associated with the costs incurred by the procurement of natural gas during the extreme weather event and the impact on the company's financial profile. If the timeline of the cost recovery is several years, we expect Atmos' credit metrics to be pressured and fall below 23% on a sustained basis.LiquidityAtmos has about $800 million of cash and use of up to $2.2 billion credit agreements. As of the last twelve months ending 31 December 2020, the company produced about $1.0 billion in cash flow from operations, spent approximately $1.9 billion million in capital investment, and distributed $292 million of dividends, resulting in $1.1million in negative free cash flow.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors That Could Lead to an UpgradeAtmos' rating could be upgraded should its regulatory constructs improve and permit it to earn returns above industry averages and the company exhibits a ratio of CFO pre-WC to debt ratio above 26% on a sustained basis.Factors That Could Lead to a DowngradeAtmos' rating could be downgraded if its regulatory constructs deteriorate as evidenced by lower earned returns or a weaker equity capitalization, management deviates materially from its balanced fiscal policy, or the company generates a CFO pre-WC to debt ratio below 23% on a sustained basis. A rating downgrade could also occur should the accompany receive less than 100% recovery of the gas procurement cost.Affirmations:..Issuer: Atmos Energy Corporation....Senior Unsecured Shelf, Affirmed (P)A1....Senior Unsecured Commercial Paper, Affirmed P-1....Senior Unsecured Regular Bond/Debenture, Affirmed A1Outlook Actions:..Issuer: Atmos Energy Corporation....Outlook, Changed To Negative From StableHeadquartered in Dallas, Texas, Atmos is a fully regulated natural gas distribution and natural gas pipeline and storage businesses. The company serves over 3 million customers with operations in eight states (Texas, Louisiana, Mississippi, Tennessee, Kansas, Colorado, Kentucky and Virginia). Atmos' largest segment, its regulated natural gas local distribution company (LDC), accounted for approximately 66% of consolidated net income in 2020.The company's regulated pipeline and storage operations consist of approximately 5,700 miles of intra-state pipeline in Texas and 46 bcf of natural gas storage. The Atmos Pipeline Texas (APT) division is one of the largest intra-state pipeline operations in the state and transports natural gas to Atmos' Mid-Tex Division and other third parties. APT accounted for approximately 34% of net income in 2020.The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Edna Marinelarena Analyst Infrastructure Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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