OREANDA-NEWS. Fitch rates Boardwalk Pipelines, LP's (Boardwalk) senior unsecured note offering 'BBB-'. The notes are fully and unconditionally guaranteed by its parent, Boardwalk Pipeline Partners, LP. Proceeds from the offering are to be used for general partnership purposes such as growth spending, the repayment of debt and for working capital requirements.

Fitch rates Boardwalk's Long-Term Issuer Default Rating (IDR) 'BBB-'. The Rating Outlook is Stable.

KEY RATING DRIVERS

Boardwalk's 'BBB-' rating is supported by Loews Corporation's (Loews; IDR 'A', Stable Outlook) financial support of the partnership which it has demonstrated in the past and which Fitch expects will continue. Without past and expected future support from Loews, Fitch would not rate Boardwalk investment grade. Loews has extended Boardwalk a $300 million subordinated loan for growth capex which can be drawn through the end of 2016. Loews also owns the 2% general partner interest and 50% of the limited partnership units of the master limited partnership (MLP).

The significant distribution cut done over two years ago has allowed Boardwalk to reduce its cash outflows while increasing capex. Distributions are now approximately $100 million per year versus $534 million in 2013 allowing the partnership to utilize cash for spending over the last two years. For the latest 12 months (LTM) ending March 31, 2016, the distribution coverage ratio was 4.4x, up from 4.1x at the end of 2015. Fitch expects the coverage ratio at the end of 2016 to remain above 4.0x.

Rating concerns include the challenging capital market environment and the partnership's plan for significant spending. Fitch estimates that Boardwalk had cash and committed liquidity of approximately $1.4 billion as of year-end 2015. Management expects growth capex in 2016 to be approximately $720 million. In addition, Boardwalk has $250 million of notes due in November 2016. In 2017, $575 million of notes mature. While Boardwalk would be able to fund its spending and financing needs in 2016 with its existing liquidity, its ability for financing beyond then is uncertain.

Like other MLPs, Boardwalk's access to the capital markets is more restricted than in the past when commodity prices were stronger. With Boardwalk's low equity price, Fitch does not anticipate that Boardwalk will access the equity markets until there is significant improvement in pricing.

Should Boardwalk's liquidity significantly deteriorate and access to capital markets remain unavailable when the partnership needs it, Boardwalk would need to take steps to maintain adequate liquidity through capital spending reductions, further distribution cuts or additional sponsor support from Loews in order to maintain the rating and Stable Outlook. Failure to do so would likely result in Fitch taking a negative ratings action.

Concerns for Boardwalk also include expectations for leverage to remain high over the next couple of years due to plans for increased spending. Recontracting risk remains a concern particularly for 2018 and 2019 when a material amount of contracts expire for all three pipelines.

Boardwalk's two significant pipelines, Gulf South and Texas Gas have multi-year contracts with a weighted average life of under five years. These contracts provide some stability of cash flows. Both pipelines have been actively pursuing strategies to participate in the changing supply and demand environment and have projects underway which could drive future growth.

A significant project for Gulf South is the Coastal Bend Header which will ship approximately 1.4 bcf/d of natural gas to the Freeport LNG terminal. Construction involves a 65-mile supply header and additionally, the Gulf South pipeline system will be expanded and modified. Boardwalk expects capex to be $720 million and the header should be in service in 2018. Boardwalk has 20-year agreements with shippers for the header system.

Boardwalk also has plans underway for Texas Gas, its long haul pipeline, to flow natural gas bi-directionally. The first part of the project involves flowing gas south from Ohio to Louisiana. This $115 million project should be in service in the second quarter of 2016 (2Q16). The other significant project to move gas south on Texas Gas is the Northern Supply Access Project which is expected cost $310 million and be in service in 2017.

Leverage: For the LTM ending March 31, 2016, Boardwalk's adjusted leverage was 4.7x, a slight improvement from year-end 2015 when it was 4.8x and well below 5.4x at the end of 2014. The lower leverage over the past few quarters is attributed to lower debt and an increase in EBITDA. With expectations for increased capex in 2016, Fitch expects yearend leverage to increase to be in the range of 5.0x to 5.3x in 2016. Beyond then, leverage is likely to remain above 5.0x for the next couple of years given expectations for significant capex.

Spending: During 2015, total spending was $375 million, a slight decrease from $404 million seen in 2014. Management forecasts total capex to be approximately $850 million in 2016. During the current year, spending will ramp up due to a number of growth projects including the Coastal Bend Header. Spending for that project will ramp up in 2017. Overall, Boardwalk has $1.6 billion of growth projects underway which are to be placed into service through 2018. The weighted average contract life of these projects is 18 years.

Fee Based Revenues: In 2015, 79% of revenues were from capacity reservation charges, 12% were from fee based utilization under firm contracts, and the remaining 9% were from interruptible transportation, interruptible storage, parking and lending of natural gas, and other services.

Strong Support from Loews: The ratings for Boardwalk reflect the strong support from Loews. In addition to the $300 million subordinated debt Loews has extended to Boardwalk, the most recent support was evident with the October 2012 $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. Shortly after the acquisition closed, Boardwalk 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 for 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 which converted to common units in October 2013.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Boardwalk include:

--Revenue growth in the low single digits over the next two years;
--Total capex for 2016 largely in line with management's guidance of $850 million;
--Spending needs met with cash flows and debt in 2016 (no equity raises);
--Distributions remain flat given the partnership's strategy to improve the balance sheet.

RATING SENSITIVITIES

Boardwalk:

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Leverage reduction. Should leverage fall below 4.5x on a sustained period of time, Fitch may take positive rating action.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Reduced liquidity or changes in financial support from Loews;
--Deterioration of EBITDA from Fitch's current expectations;
--Significant increases in capital spending beyond Fitch's expectations which have negative consequences for its credit profile;
--Increased leverage at Boardwalk beyond 6.5x for a sustained period of time.

LIQUIDITY

Liquidity at Boardwalk appears to be sufficient to meet its needs in the near term. As of March 31, 2016, Boardwalk had $9 million of cash on the balance sheet. It also had approximately $1.1 billion undrawn on its $1.5 billion revolver which extends until 2020. In addition, the partnership also had full availability on the $300 million subordinated loan from Loews through year-end 2016. On Nov. 15, 2016, Boardwalk Pipelines LP has $250 million of notes due. In February 2017, it has $300 million of notes maturing and in August 2017, Gulf South has $275 million due.

The bank agreement has one financial covenant. Leverage as defined by the bank agreement is to be no greater than 5.0x for covenant compliance. However, if Boardwalk makes an acquisition (defined as acquisitions which total $100 million or more even if within a 12 month period), the bank-defined leverage ratio increases to 5.5x for three consecutive quarters following the quarter of the acquisition for a total of four quarters. The bank defined leverage ratio allows for up to $500 million of subordinated notes to be excluded from the calculation of debt (the Loews subordinated loan is for up $300 million). Like other MLPs, Boardwalk receives pro forma EBITDA credit for material projects and acquisitions.

Fitch currently rates Boardwalk as follows:

Boardwalk Pipelines, LP
--Long-Term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.

The Rating Outlook is Stable.