Fitch Downgrades NGPL PipeCo's IDR to 'B-'; Outlook Negative

NEW YORK--()--Fitch Ratings has downgraded the Issuer Default Rating (IDR) for NGPL PipeCo LLC (NGPL) to 'B-' from 'B'. Also downgraded, to 'B-/RR4' from 'B/RR4', are NGPL's senior notes and Term Loan B. The Rating Outlook is revised to Negative from Stable.

A total of $2.95 billion of outstanding senior debt is affected by the rating downgrade.

KEY RATING DRIVERS

The downgrade reflects NGPL's weakening credit metrics, primarily the result of 2010 Federal Energy Regulatory Commission (FERC) mandated phased-in decreases in operating subsidiary Natural Gas Pipeline Company of America's (NGPCA) base recourse rates and fuel retention factors, and unfavorable market conditions. Current gas market conditions characterized by low commodity prices, reduced basis spreads, and low volatility will likely have a further negative impact on near- to intermediate-term operating results. Furthermore, growing natural gas production from the Marcellus basin is displacing historical supplies shipped on certain west-to-east transport paths, particularly on the company's Louisiana Line.

Fitch expects NGPL's calendar 2013 debt/EBITDA to be approximately 9.64x based on Fitch estimated EBITDA of $306 million. NGPL's ability to maintain the current level of EBITDA could result in a modest improvement in leverage metrics to 9.5x or below in 2014-2015 as the Term Loan balance is reduced through the credit facilities' debt amortization and excess cash flow sweep provisions. However, a breach of the credit facilities' leverage covenant could occur in the future, especially since the maximum leverage test drops from 9.75x to 9.50x in 2015 and drops again to 9.25x in 2016. Management has indicated that $50 million of cash now held at NGPL's holding company could be available for use to cure a financial covenant breach.

Other credit concerns include: the relatively short average term of NGPCA's transportation and storage contracts of approximately three years and the related re-contracting risk; the limiting effect of reduced cash flows on the company's operating flexibility and strategies; and the refinancing of maturing $1.25 billion senior notes and the Term Loan B (currently $650 million) in 2017.

Favorable considerations include NGPL's strong Chicago/Midwest market franchise which accounts for a significant portion of total EBITDA, its high-quality and reliable utility customer base, a strong demand for storage services, limited liquidity needs, and the near-term financial benefits of a cold 2014 winter heating season. Also the interconnection between NGPL's Louisiana Line with the Sabine Pass liquid natural gas (LNG) facility could result in increased throughput in 2016-2017, when the facility is expected to begin exporting LNG.

Liquidity Adequate: NGPL's $75 million secured revolver matures in September 2017. In March 2013, NGPL and its lenders entered into a First Amendment to the credit agreement by which two financial covenants were loosened. As amended, interest coverage must not be less than 1.35x through March 31, 2013; 1.20x thereafter through Sept. 30, 2015; and 1.30x thereafter. Leverage must not exceed 9.75x through Sept. 30, 2015; 9.50x thereafter through Sept. 30, 2016; 9.25x thereafter through March 31, 2017; and 9.00x thereafter. At Sept 30, 2013, the interest coverage ratio was 1.33x and the leverage ratio was 9.61x. In addition, the excess cash flow sweep was increased from 60% of excess cash flow to 100% of excess cash flow if the leverage ratio is over 7.0x. NGPL had $60 million of cash on its balance sheet at Sept. 30, 2013.

NGPL's senior notes together with its Term Loan B and $75 million revolving credit facility (the credit facilities) are secured equally and ratably by a first priority lien on the capital stock of NGPL's two direct operating subsidiaries, NGPCA and Kinder Morgan Illinois Pipeline LLC (the shared collateral). The subsidiaries had no indebtedness at Sept. 30, 2013. The lenders under the credit facilities also have a lien on all current and future assets of NGPL not constituting shared collateral. Currently there is no material non-shared collateral.

Under the terms of the indenture for the senior notes, at such time the credit facilities are repaid in full, or the liens for the shared collateral cease to secure the credit facilities, the liens in the shared collateral granted for the benefit of the senior notes will terminate. The senior note indenture has restrictions on asset sales, restricted payments, and debt incurrence. Should the notes be rated investment grade, indenture covenants restricting certain NGPL activities would no longer apply. Covenants that would be affected include restricted payments, incurrence of debt, and transactions with affiliates.

Recovery Rating Analysis: Fitch projects a going-concern enterprise valuation of $1.54 billion, using a 5.5x multiple and an EBITDA of approximately $280 million, which is 8.5% lower than 2013 Fitch estimated EBITDA of $306 million. After deducting Fitch's standard 10% administrative claim, Fitch estimates recovery of the senior notes and Term Loan B at their current outstanding amount of $2.95 billion of 47%, which is near the high end of the 31%-50% 'RR4' range. Debt reduction through the credit facilities' debt amortization and excess cash flow sweep provisions could result in improving recovery.

RATING SENSITIVITIES

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

--Improving credit metrics through some combination of revenue growth and or debt reduction with sustained leverage below 7.0x;

--Successfully refinancing of debt which is maturing in 2017.

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

--Operating results that are weaker than current expectations;

--A breach of the credit facilities' financial covenants;

--The inability to refinance debt maturing in 2017.

NGPL is 80% owned by Myria Acquisition Inc. (Myria), a consortium of investors including Brookfield Infrastructure Partners, SteelRiver Infrastructure Fund North America, a Canadian pension fund and a Netherlands pension fund 20% owned by Kinder Morgan, Inc. (IDR rated 'BB+' Outlook Stable by Fitch).

Fitch downgrades the following ratings and revises the Outlook to Negative from Stable:

NGPL PipeCo LLC

--IDR to 'B-' from 'B';

--Senior secured notes to 'B-/RR4' from 'B/RR4';

--Term Loan B to 'B-/RR4' from 'B/RR4'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology, Including Parent and Subsidiary Linkage' Aug. 5, 2013;

--'Scenario Analysis: Lifting the Crude Export Ban' Jan. 23, 2014;

--'Rating Pipeline, Midstream and MLPs-Sector Credit Factors' Jan. 13, 2014;

--'NGL Pipelines: Northeast Supply Drives New Projects' Dec. 20, 2013;

--'2014 Outlook: Midstream Services' Dec. 10, 2013;

--'2014 Outlook: Crude Oil and Refined Products Pipelines' Dec. 9, 2014;

--'2014 Outlook: Natural Gas Pipelines' Dec. 5, 2013;

--'Crossover Credits in Natural Resources' Oct. 31, 2013;

--'Credit Considerations for the GP/LP Relationship' Nov. 6, 2013;

--'Funding U.S. LNG Export Facilities' Aug. 20, 2013.

Applicable Criteria and Related Research:

Funding U.S. LNG Export Facilities (Credit Issues for MLP and Corporate Sponsors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716427

Credit Considerations for the GP/LP Relationship

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721999

Crossover Credits in Natural Resources -- Migration Catalysts 2003-2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721741

2014 Outlook: Natural Gas Pipelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724977

2014 Outlook: Crude Oil and Refined Products Pipelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726461

2014 Outlook: Midstream Services

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726064

NGL Pipelines: Northeast Surplus Drives New Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=727520

Rating Pipelines, Midstream and MLPs -- Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722082

Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited but Varies by Industry)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732055

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826727

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Ralph Pellecchia, +1 212-908-0586
Senior Director
Fitch Ratings, Inc.
One State Street Plaza, New York, NY 10004
or
Secondary Analyst
Peter Molica, +1 212-908-0288
Director
or
Committee Chairperson
Mark C. Sadeghian, CFA, +1 312-368-2090
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Ralph Pellecchia, +1 212-908-0586
Senior Director
Fitch Ratings, Inc.
One State Street Plaza, New York, NY 10004
or
Secondary Analyst
Peter Molica, +1 212-908-0288
Director
or
Committee Chairperson
Mark C. Sadeghian, CFA, +1 312-368-2090
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com