Fitch Affirms Ratings on Boardwalk, Gulf South and Texas Gas; Outlook Stable
NEW YORK -- June 19, 2013
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'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.
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' 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
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.
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.
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.
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
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.
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
Fitch has affirmed the following ratings with a Stable Outlook:
--Long-term IDR at 'BBB';
--Senior unsecured debt at 'BBB'.
--Long-term IDR 'BBB+';
--Senior unsecured debt 'BBB+'.
--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
--'Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs', April
--'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
Parent and Subsidiary Rating Linkage
Pipelines, Midstream and MLP Stats Quarterly -- Fourth-Quarter 2012
Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs
Top 10 Comparisons of REITs and MLPs
The Top Ten Differences Between MLP and Corporate Issuers
2013 Outlook: Natural Gas Pipelines & MLPs
Natural Gas Pipelines: Hot Topics -- Long-Term Trends Affecting Pipeline Risk
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Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Sean T Sexton, CFA
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