NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' long-term Issuer Default Rating (IDR) and 'BBB' senior unsecured debt rating of Boardwalk Pipelines, LP (Boardwalk), and the 'BBB+' long-term IDR and 'BBB+' senior unsecured debt ratings for both Gulf South Pipeline Company, LP (Gulf South) and Texas Gas Transmission, LLC (Texas Gas). The Rating Outlook for all three entities is Stable. A full list of ratings actions is included at the end of this release.
These rating actions affect approximately $3.6 billion of outstanding debt.
KEY RATING DRIVERS
Boardwalk:
Boardwalk's rating is supported by cash flows at operating subsidiaries Gulf South, Texas Gas and Gulf Crossing. While contract renewals at the pipelines are expected to negatively impact 2013 results, Boardwalk's expansion into other services is expected to provide EBITDA growth this year and beyond. Over the last year and a half, Boardwalk has expanded its offerings with field services, storage and midstream operations. Other considerations include strong support from its ultimate majority owner, Loews Corporation ('A+', Stable Outlook) which has demonstrated its robust commitment to Boardwalk over the years with financial support (see below). Factors including the scale, quality and geographic diversity of Boardwalk's operations are also supportive of the credit profile.
Concerns include a consolidated financial profile which remains highly leveraged for a 'BBB' with the master limited partnership's (MLP) consolidated debt-to-MLP adjusted EBITDA ratio 4.9x for the 12 months ending with the first quarter of 2013, and distribution coverage of 1.1x despite flat quarterly distributions per unit. Other concerns include a less favorable recontracting environment for the pipelines, driven by flat gas basis differentials and the completion of several major infrastructure projects by competitors. It is important to note that given the company's weak stand-alone metrics, Boardwalk's rating would likely be lower absent support from Loews.
Other concerns include funding issues around the potential Bluegrass Pipeline project which is a 50/50 joint venture with The Williams Companies (WMB, IDR 'BBB-', Outlook Stable). While the details surrounding the potential project are to be determined, the size and scale of the project appear to be substantial. If the project moves forward, Fitch will evaluate how Boardwalk funds its share of the pipeline construction.
Gulf South:
The recommendation for the rating at Gulf South is supported by its stable cash flows which are supported by multi-year contracts (weighted average firm transportation contract life of approximately six years), support through its parent and ultimate majority owner, Loews and its good market position in the Gulf Coast area. Gulf South sources natural gas from some of the major production areas in that region, including the Haynesville, Barnett, and Eagle Ford shale plays and offshore Louisiana. Gulf South's system directly serves markets in the South and indirectly through unaffiliated pipelines serves markets in the Southeast, Midwest, and Northeast, some of the higher-demand regions of the U.S.
Concerns for Gulf South include weak credit metrics at Boardwalk and a less favorable recontracting environment for the pipeline due to increased competition and low basis differentials.
Texas Gas:
Texas Gas' recommendation is supported by its stable cash flows which have multi-year contracts with a weighted average firm transportation contract life of five years, support through its parent and its ultimate majority owner, Loews, and its favorable market position which includes access to natural gas supplies in offshore Louisiana, East Texas and the Fayetteville shale in Arkansas. The system directly serves markets in the Midwest and indirectly serves the markets in the Northeast. In addition, its storage facilities make Texas Gas a good candidate to serve the potential demand of Midwest electric utilities that are considering the conversion of their older coal-fired generation to natural gas in order to comply with increasingly stringent environmental regulations.
Concerns for Texas Gas include weak credit metrics at Boardwalk and a less favorable recontracting environment for the pipeline system due to increased competition and low basis differentials.
Predictable Cash Flows:
Robust cash flows at Gulf South and Texas Gas are supported by firm capacity reservation charges under contract that account for roughly 83% of Boardwalk's consolidated revenues. Utilization charges related to these firm contracts account for another 11% of consolidated revenues, resulting in a large portion of EBITDA that is minimally affected by changes in natural gas price fundamentals or broader economic conditions.
Strong Support from Loews:
The ratings on Boardwalk, Gulf South, and Texas Gas reflect the strong support of Loews. This support was evident most recently with the $620 million acquisition of Louisiana Midstream, which included the purchase of 65% of assets on an interim basis by a joint venture between a wholly-owned subsidiary of Loews and Boardwalk. In late October, Boardwalk then raised equity and purchased the interest held by Loews subsidiary. This follows Boardwalk's $550 million acquisition of storage assets in late 2011. A wholly-owned Loews subsidiary purchased 80% of the assets through a joint venture and in early 2012, Boardwalk acquired that interest which was largely funded with equity proceeds.
Loews showed significant support to Boardwalk during the nearly $5 billion pipeline expansion projects that reached their peak financing needs in 2008 and 2009. Loews provided $200 million of subordinated debt and $1.35 billion in equity, $700 million of which was in the form of low-distribution-paying Class B units that convert to common units after June 30, 2013. It is expected that these Class B units will convert on that date resulting in approximately $5 million of additional distributions per quarter.
Fitch views Loews' prior support as being indicative of its desire to keep Boardwalk and its subsidiaries on a sound financial footing.
Good Market Position:
Gulf South benefits from its good market position in the Gulf Coast, sourcing natural gas from some of the major production areas in that region, including the Haynesville, Barnett, and Eagle Ford shale plays and offshore Louisiana. Gulf South's system directly serves markets in the South and indirectly through unaffiliated pipelines serves markets in the Southeast, Midwest, and Northeast, some of the higher-demand regions of the U.S.
Texas Gas' favorable market position includes access to natural gas supplies in offshore Louisiana, East Texas, and the Fayetteville Shale in Arkansas. The system directly serves markets in the Midwest and indirectly serves markets in the Northeast. In addition, its storage facilities make Texas Gas a good candidate to serve the potential demand of Midwest electric utilities that are considering the conversion of their older coal-fired generation to natural gas in order to comply with increasingly stringent environmental regulations.
Less-Favorable Re-Contracting Environment:
The completion of several major infrastructure projects by competitors over the past few years and the development of new high-growth shale plays has resulted in increased competition and a reduction in gas basis differentials. The combination of these factors along with a sustained weak economy has resulted in pricing pressure on some contract renewals, which has decreased revenues at both Gulf South and Texas Gas. Fitch expects these tougher market conditions to continue in the near term.
Weaker Leverage Metrics at Boardwalk:
Boardwalk's consolidated financial profile remains highly leveraged. For the 12 months ending March 31, 2013, Boardwalk's consolidated debt to MLP adjusted EBITDA ratio was 4.9x, in line with the end of 2012 but lower than 5.5x seen at the end of 2011. Over the next 12-18 months, Fitch expects leverage metrics to be approximately 5.0x or slightly below.
Liquidity:
Boardwalk has a $1 billion revolving credit facility which expires in 2017 and revolver borrowings as of March 31, 2013 were $370 million. Cash on the balance sheet was $4 million. The revolver has a financial covenant which restricts leverage (as defined in the bank agreement) from exceeding 5.0x. If qualified acquisitions are made, leverage can increase to 5.5x for three consecutive quarters. Following the acquisition of Louisiana Midstream, the maximum leverage can be is 5.5x until 3Q'13 when it steps down to 5.0x.
There are no near term debt maturities. The nearest debt maturities are $275 million for Gulf South in 2015 and $250 million at Texas Gas also in 2015.
Parent/Subsidiary Notching:
The one-notch difference in ratings between Boardwalk and its subsidiary pipeline companies reflects the structural subordination of Boardwalk's debt obligations to the outstanding debt of Gulf South and Texas Gas.
Company Profile:
Boardwalk is a subsidiary of Boardwalk Pipeline Partners, LP (BWP), a publicly traded MLP. Loews owns 55% of BWP (excluding the incentive distribution rights) and the 2% general partner interest. Boardwalk's operations are: Texas Gas, Gulf South, Gulf Crossing Pipeline Company LLC (Gulf Crossing), Field Services, Petal Gas Storage, LLC (formerly named Boardwalk HP Storage, LLC), and Boardwalk Louisiana Midstream, LLC. These operating subsidiaries combine for 14,170 miles of interstate natural gas pipeline and 14 underground natural gas storage fields with 201 Bcf of aggregate working gas capacity. In addition, Boardwalk has 240 miles of NGL pipelines and four underground storage fields.
Texas Gas is an interstate natural gas transmission company that has 6,110 miles of pipeline, extending from Louisiana, East Texas, and Arkansas to the South and Midwest markets, with indirect access to the Northeast markets through interconnections with unaffiliated pipelines. Peak-day delivery capacity is 4.4 Bcf/d, and average daily throughput at year-end 2012 was 2.5 Bcf/d. Texas Gas also has nine natural gas storage facilities located in Indiana and Kentucky that have an aggregate 84 Bcf of working gas capacity.
Gulf South is a web-like system consisting of 7,240 miles of interstate pipeline that delivers natural gas from the Gulf Coast area to on-system markets in the South and off-system markets in the Southeast and Northeast. Peak-day delivery capacity is 6.8 Bcf/d, and average daily throughput at year-end 2012 was 3.0 Bcf/d. Gulf South also has two natural gas storage facilities located in Louisiana and Mississippi that have an aggregate 83 Bcf of working gas capacity.
Gulf Crossing consists of 360 miles of 42-inch pipe originating near Sherman, TX and proceeding to the Perryville, LA area. Peak-day delivery capacity is 1.7 Bcf/d, and average daily throughput at year-end 2012 was 1.3 Bcf/d.
Petal Storage was formed in 2011 and its assets were acquired through an acquisition. It has seven salt dome natural gas storage caverns with 23 Bcf of working gas capacity. The storage is connected to Gulf South's pipelines and there are plans to also connect to Gulf South's Southeast expansion.
Field Services was also formed in 2011 and offers gathering and processing in East Texas, the Marcellus Shale, and in the Eagle Ford. The recently completed South Texas Eagle Ford Expansion project has 300 mmcf/d of storage capacity and 150 mmcf/d of processing capacity.
Boardwalk Louisiana Midstream was acquired in late 2012. It transports and stores NGLs in the Gulf Coast and has fee-based contracts with an average weighted life of 10 years.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Positive rating action is not anticipated.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Leverage (defined by Fitch as debt to adjusted EBITDA) in excess of 6.0x on a sustained basis.
--Reduction in current robust support offered by ultimate parent, Loews to its subsidiaries.
Fitch has affirmed the following ratings with a Stable Outlook:
Boardwalk
--Long-term IDR at 'BBB';
--Senior unsecured debt at 'BBB'.
Gulf South
--Long-term IDR 'BBB+';
--Senior unsecured debt 'BBB+'.
Texas Gas
--Long-term IDR at 'BBB+';
--Senior unsecured debt at 'BBB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage' Aug. 8, 2012;
--'Pipelines, Midstream, and MLP Stats Quarterly - Fourth- Quarter 2012' May 29, 2013;
--'Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs', April 18, 2013;
--'Top 10 Comparisons of REITS and MLPs', April 16, 2013'
--'Top 10 Differences Between MLP and Corporate Issuers', Feb. 19, 2013;
--'2013 Outlook: Natural Gas Pipelines and MLPs' Nov. 29, 2012;
--'Natural Gas Pipelines: Hot Topics' Oct. 13, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Pipelines, Midstream and MLP Stats Quarterly -- Fourth-Quarter 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708748
Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=705496
Top 10 Comparisons of REITs and MLPs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=705475
The Top Ten Differences Between MLP and Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=701812
2013 Outlook: Natural Gas Pipelines & MLPs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695939
Natural Gas Pipelines: Hot Topics -- Long-Term Trends Affecting Pipeline Risk
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=652851
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794026
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