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Atmos Energy Corporation -- Moody's revises Atmos' outlook to stable; affirms ratings

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Rating Action: Moody's revises Atmos' outlook to stable; affirms ratingsGlobal Credit Research - 22 Feb 2022Approximately $7.6 billion in debt securities affectedNew York, February 22, 2022 -- Moody's Investors Service ("Moody's") affirmed the ratings of Atmos Energy Corporation (Atmos) including its senior unsecured rating at A1 and short-term rating for commercial paper at Prime-1. The outlook is revised to stable from negative.A complete list of rating actions is included below.RATINGS RATIONALE"The heightened credit risk at Atmos resulting from last February's severe winter weather event has been largely mitigated with the approval of the securitization financing order [1] in Texas," stated Edna Marinelarena, Assistant Vice President. The company incurred a total of about $2.1 billion in fuel costs as a result of the storm event of which about $2 billion was in Texas, its largest service territory. We believe the securitization of the extraordinarily high fuel costs will help to minimize the social risk related to rate increases and customer affordability concerns.We expect the newly formed Texas Natural Gas Securitization Finance Corporation to issue securitization bonds on behalf of Atmos with proceeds used to repay the interim debt issued (matures in 2023) to finance the costs. The securitization bonds will be repaid over a period not to exceed 30 years via a charge on customer bills. The remaining $100 million in storm costs were incurred in Kansas, where Atmos has filed to recover through securitization, and Colorado, where Atmos is recovery the costs over the next two years. We expect the company to recover the remaining costs over the next several years.The rating affirmation reflects Atmos' track record of steady cash flow production that benefits from various credit supportive cost recovery mechanisms throughout its multiple jurisdictions. The company has enjoyed historically high financial metrics including a ratio of cash flow from operations before changes in working capital (CFO pre-WC) to debt in the mid 20% range, one of the strongest track records within the natural gas LDC rated portfolio. However, following the securitization, we see CFO pre-WC to debt at a weaker 22% through 2023 and returning to above 23% in 2024. The weaker metrics over the next two years are driven by the repayment of excess deferred income tax to customers and the remaining storm costs that are pending recovery proceedings in Kansas.Atmos' credit rating is benefited by management's strong financial track record, where the company maintained a healthy amount of financial cushion above 23%, its established rating downgrade financial threshold. The near-term weaker metrics provide little financial cushion for unforeseen events particularly as the company continues its high capital spending program, which is estimated between $13 billion and $14 billion over the next five years. Given ongoing credit supportive regulatory decisions and management's track record we see the company's financial metrics returning to the higher healthy levels. Any deviation from expectation could result in downward rating pressure.The A1 rating is supported by the company's low risk nature of its business, which is fully regulated LDC and pipeline and storage business operating in constructive regulatory jurisdictions. The rating also incorporates Atmos' scale and diversity, operating across eight states. The company has benefitted from a strong track record of credit supportive rate case outcomes.ESG considerationsAtmos' ESG Credit Impact Score is moderately negative (CIS-3), indicating that its ESG attributes are overall considered as having a limited impact on the current rating, with greater potential for future negative impact over time. Its scores reflect a combination of moderately negative exposure to environmental and social risks balanced with a neutral to low exposure to governance risk.Atmos' exposure to environmental risk is moderate (E-3 issuer profile score) driven by its moderately negative carbon transition because of its emissions associated with its natural gas operations and to physical climate risks including damage to physical assets and, as experienced during the February 2021 winter storm event, the negative financial impacts of unusually high commodity and wholesale power prices that can result from extreme weather events. These risks are offset by a neutral to low exposure to water management, waste and pollution and natural capital.Exposure to social risks is moderately negative (S-3 issuer profile score) reflecting the higher risk to responsible production and demographics and societal trends that increase public concern over environmental, social, or affordability issues that could lead to adverse regulatory political intervention. The swift action in Atmos' states of operation to allow for the securitization of winter storm Uri costs helps to offset acute rate pressure for the company's customers, a credit positive. These risks are balanced by neutral to low exposure to health and safety, human capital, and customer relations.Governance is broadly in line with other utilities and does not pose a particular risk (G-2 issuer profile). This is supported by neutral to low exposure to financial strategy and risk management and management credibility and track record. We view Atmos' financial policy of maintaining about to $3 billion in liquidity, including four revolving credit facilities as an example of credit supportive financial policy.LiquidityAtmos' Prime-1 short term rating is supported by the company's adequate liquidity. As of 31 December 2021, the company had $264 million of cash on hand, about $295 million in net proceeds from their ATM program and use of up to $2.5 billion in credit facilities, including a $1.5 billion revolver, which expires on 31 March 2026 and contains a $250 million accordion feature. The facility has a financial covenant stating that Atmos must maintain a total debt to capitalization ratio under 70%. Atmos was comfortably in compliance with the covenant on 31 December 2021, with a debt to capitalization ratio of 59%.The other $1.0 billion in available external liquidity is comprised of a $900 million three-year unsecured revolver (expires 31 March 2024) that has a $100 million accordion feature providing up to $1.0 billion in capacity, a $50 million 364-day unsecured facility expiring 31 March 2022, and a $50 million 364-day unsecured revolver that was renewed in April 2021 and supports the issuance of letters of credit, which as of 31 December 2021 reduced the amount available to $44.4 million. The company also maintains a $1.5 billion commercial paper program supported by its credit facility. There were no amounts outstanding under the commercial paper program at the end of December 2021.For the last twelve months ending 31 December 2021, Atmos' generated a negative free cash flow position of $3.7 billion, due to costs incurred during the February 2021 winter storm event. The company issued a total of $2.2 billion in senior unsecured notes due in 2023 as interim financing and plans to repay the notes with securitization proceeds.OutlookThe stable outlook incorporates the expectation that the majority of the costs associated with the 2021 winter storm event will be fully recovered over the next 12 to 18 months and that the company's expected weak credit metrics including a ratio of CFO pre-WC to debt will return to above 23% in 2024. The outlook also reflects our expectation that the company will continue to receive credit supportive regulatory outcomes in its jurisdictions, allowing it to sustain the ratio above 23% over the long-term.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to an upgradeA rating upgrade could result should Atmos' financial metrics including a ratio of CFO pre-WC to debt is sustained above 26% and if its regulatory construct improves and permits it to earn returns above industry averages.Factors that could lead to a downgradeA rating downgrade could occur if Atmos' regulatory construct becomes less credit supportive as evidenced by lower earned returns or a weaker equity capitalization, management deviates materially form its balanced fiscal policy, or the company's financial metrics including a ratio of CFO pre-WC to debt remains below 23% beyond 2024.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 Stable From NegativeHeadquartered 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 almost 70% of consolidated net income in 2021.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 accounts for 33% of net income in 2021.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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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.REFERENCES/CITATIONS[1] Railroad Commission of Texas, Docket No. OS-21-00007061, Financing Order, House Bill No. 1520 08-Feb-2022Please 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 Asst Vice President - Analyst Infra Finance Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Michael G. Haggarty Associate Managing Director Infra Finance JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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