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12 Jun 2000
MOODY'S CONFIRMS ATMOS ENERGY'S CP RATING AT PRIME-2; GIVES PRELIMINARY ASSESSMENT OF ATMOS ENERGY'S LONG-TERM RATINGS (A3 SR. UNS.), WHICH REMAIN UNDER REVIEW FOR POSSIBLE DOWNGRADE
Moody's Investors Service confirmed Atmos Energy Corporation's commercial paper rating at Prime-2 and continues to review Atmos Energy Corporation's long-term ratings for possible downgrade. Although a downgrade is highly possible, it is unlikely that Atmos's long-term debt rating would be downgraded by more than one notch. Consequently, it is unlikely that its short-term rating would be affected. Ratings still under review include:
Atmos Energy Corporation - A3 senior unsecured notes, (P)A3 shelf registration.
These ratings have been under review since April 14, 2000, when Atmos announced its agreement to acquire the Louisiana gas distribution properties from Citizens Utility Company (rated A2 senior unsecured) for $375 million in cash. The company will finance the consideration initially with a 364-day bridge loan. It has not yet determined how to permanently finance it in calendar year 2001; it could issue long-term debt, hybrid securities, or common stock, or a combination of these securities. The acquisition will likely close by spring of next year, contingent upon receipt of regulatory approvals from the Louisiana Public Service Commission and the U.S. Department of Justice.
Moody's made its preliminary assessment after discussions with Atmos's senior management and analysis of pro forma financial projections. In the assessment, we assumed that the permanent financing would comprise substantially of debt or debt-like instruments. At current weak stock prices, we believe Atmos is not likely to issue a significant amount of common stock, although its intention is to issue stock eventually to balance its capital structure.
Under these assumptions, Atmos' projected credit measures will be weaker than what we would expect for A3-rated LDCs. The debt the company will incur in this acquisition will roughly double its long-term debt. Its debt-to-capital, including hybrids, will increase from just under 60% to the mid- to high-60% range. Atmos will also incur about $150 million of goodwill, which will not affect cash flows but will depress earnings and returns. We expect its coverages (EBIT-to-interest in the 2 times range) to be compressed from higher fixed charges and lower earnings from increased amortization and interest expenses.
Nevertheless, Moody's believes that Atmos's senior unsecured debt rating is unlikely to fall below Baa1. The acquisition will improve its business position by increasing its base of customers by a quarter of its current size, which will make Atmos the fifth-largest pure LDC in the U.S. With heavy investments in a central calling center and technology now complete, we expect the company to begin realizing the operating efficiencies envisioned three years ago, when it began making those investments to manage the expansion of its operations from its last major acquisition, United Cities Gas. Atmos's capital expenditures should now fall to maintenance levels, which should be comfortably financed through its internal cash flow. This leaves Atmos with enough financial flexibility to use any excess cash to pay down debt or for other uses.
Excluding the effects of the Louisiana acquisition, the financial performance for Atmos's existing operations should improve from what the company has experienced in the last few years. It has pursued rate case filings to cure regulatory lag. We expect its uneven single-digit returns to strengthen to levels more in line with its peers', bolstered by the rate increases it has already received over the last several months in three jurisdictions. Three more rate cases are pending. The company is seeking to make its earnings less sensitive to weather, mostly through regulatory mechanisms. About half its customers have weather-mitigated rates, either through weather normalization adjustments or rates that are based more on recovery of fixed costs and less on volume.
Although Atmos has long had an acquisition strategy, the management is conservative, and we do not expect another major one until it reduces its leverage closer to its 50% long-term goal. Atmos's strategy is focused on expanding its gas distribution operations, which are regulated and which have low business risk.
Moody's will take a rating action that ends the review once the requisite approvals are obtained and the consummation of this transaction is assured, and Atmos determines its permanent financing plan.
Headquartered in Dallas, Texas, Atmos Energy Corporation is a gas distribution company with operations in Colorado, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana, Missouri, North Carolina, South Carolina, Tennessee, Texas, and Virginia.
No Related Data.
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