Fitch Affirms Boardwalk, Gulf South and Texas Gas Ratings; Outlook 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 in February 2014 has allowed Boardwalk to reduce its cash outflows while increasing capex. Distributions in 2015 and 2014 were approximately \\$100 million versus \\$534 million in 2013 allowing the partnership to utilize cash for spending over the last two years. At the end of 2015, the distribution coverage ratio was 4.1x against 4.5x in 2014 and 1.0x in 2013, the last year of higher distributions. 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: At year-end 2015, Boardwalk's leverage was 4.8x, well below 5.4x at the end of 2014. The lower leverage is attributed to lower debt and an increase in EBITDA. With expectations for increased capex in 2016, Fitch expects year-end leverage to increase to be in the range of 5.0x to 5.25x 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 2014, 78% of revenues were from capacity reservation charges, 13% 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, Gulf South and Texas Gas 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.
Texas Gas and Gulf South:
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Should favorable rating action occur at Boardwalk, Fitch would likely take positive rating action.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Should negative rating action occur at Boardwalk, Fitch would likely take negative rating action.
LIQUIDITY
Liquidity at Boardwalk appears to be sufficient to meet its needs in the near term. As of Dec. 31, 2015, Boardwalk had \\$1.125 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.
Boardwalk's liquidity benefits from the May 2015 upsizing and extension of its revolver. The prior revolver was for \\$1 billion and it matured in 2017. The new revolver has commitments for up to \\$1.5 billion and matures in 2020.
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 has affirmed the following ratings:
Boardwalk
--Long-term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
Gulf South
--Long-term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
Texas Gas
--Long-term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
The Rating Outlook for all three entities is Stable.
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