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17 Jun 2004
MOODY'S REVIEWS FOR POSSIBLE DOWNGRADE THE ATMOS ENERGY CORP.'S DEBT RATINGS (A3 SR. UNS.); CONFIRMS TXU GAS CO.'S RATINGS WITH A DEVELOPING OUTLOOK (Baa3 SR. UNS.)
Approximately $820 Million of Atmos's Rated Obligations Placed Under Review; About $900 Million of TXU Gas's Rated Debt and Shelf Registrations Confirmed
New York, June 17, 2004 -- Moody's Investors Service placed under review for possible downgrade the
ratings of Atmos Energy Corporation (Atmos, A3 senior unsecured).
TXU Gas Company's ratings are confirmed (TXU Gas, Baa3 senior
unsecured) and its current developing outlook maintained. These
rating actions were prompted by Atmos's announcement that it has
entered into an agreement to acquire the assets of TXU Gas from TXU Corporation
(Ba1 senior unsecured/stable outlook) for $1.925 billion
in cash. The acquired assets will be incorporated into Atmos Energy
Corporation, the utility parent company where the rated debt resides.
This acquisition, the largest that Atmos has ever undertaken,
will increase its assets by almost 70% from 3/31/04, but
its debt by more than 2.5 times.
The review of Atmos's ratings reflects our concern that the permanent
financing is expected to be substantially debt financed (as much $1.4
billion, three-quarters of the consideration), which
could constrain Atmos's financial flexibility and erode its profitability
for some time. A multi-notch downgrade is probable.
Moody's will assess whether the company will have an investment-grade
credit profile. There is execution risk in the permanent financing
plan, which calls for issuing $500 to $600 million
of common stock, almost half the company's current market
equity value. The transaction is fully valued, with the consideration
at about 11x TXU Gas's 2003 EBITDA, 10x when adjusted for
its recent rate increase. With the substantial increase in its
balance sheet and cost of capital, Atmos may be challenged in restoring
its coverages and returns for some time. Moody's also notes
the integration risk in Atmos's combining TXU Gas's operations
which, though adjacent to Atmos's existing operations in North
Texas, are roughly its size.
TXU Gas's ratings are confirmed, as Atmos will not assume
with the acquisition the $737 million of TXU Gas's outstanding
debt ($231 million of which are intercompany notes). The
consideration has been sized so as to accommodate the repayment of TXU
Gas's debt, which is required under the terms of their indentures
upon such an asset sale. A developing outlook is maintained,
pending TXU Corp.'s repayment of TXU Gas's debt which
is expected at around closing.
Moody's will soon meet with Atmos's management to discuss
more in detail its financing plans and pro forma forecasts. The
company expects to close the transaction in 4Q04. The conclusion
of Moody's rating review will depend on the consummation of the
transaction (contingent on approvals under the Harts-Scott-Rodino
Act and from the public utility commissions in Missouri, Iowa,
and Virginia) and the related financings (the company expects to pre-fund
a portion of the consideration with a $246 million of equity offering
Over the course of the review, Moody's will also assess: 1)
any shifts in near- and long-term strategic focus,
following this company-transforming transaction, including
possible asset sales; 2) potential for synergies that may arise from
combining neighboring distribution utilities in North Texas; 3) operational
integration and strategic fit of the intrastate pipeline that will come
with the acquisition (a new segment for Atmos); and 4) the role of
Atmos's marketing operations will play in light of the company's
greatly expanding its asset base, but also renewing its commitment
to its regulated business. The marketing segment (about 10%
of Atmos's segment assets currently) has been longstanding a rating
concern. Moody's will assess to what degree the reduction
in business risk from a higher proportion of regulated operations (regulated
operating income as a percentage of the whole will increase from the 80%
range to about 90% pro forma) will offset the additional financial
risk that will come with this transaction.
In summary, the following rating actions have been taken:
Atmos Energy Corporation's ratings placed under review: A3
senior unsecured notes; (P)A3 senior unsecured shelf; and Prime-2
TXU Gas Company ratings confirmed with a developing outlook: Baa3
senior unsecured notes; Ba1 junior subordinated; Ba2 preferred
stock; (P)Baa3 senior unsecured shelf; and (P)Ba1 junior subordinate
TXU Gas Capital II's ratings confirmed with a developing outlook:
TXU Gas Capital III's ratings confirmed with a developing
outlook: (P)Ba1 shelf;
TXU Gas Capital IV's ratings confirmed with a developing
outlook: (P)Ba1 shelf;
ENSERCH Capital I's ratings confirmed with a developing outlook:
Ba1 preferred stock; (P)Ba1 shelf.
Headquartered in Dallas, Texas, Atmos Energy Corporation is
a gas distribution company with operations in Colorado, Georgia,
Illinois, Iowa, Kansas, Kentucky, Louisiana,
Mississippi, Missouri, Tennessee, Texas, and Virginia.
Also based in Dallas, TXU Gas Company is a gas transmission and
distribution subsidiary of TXU Corp.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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