Fitch Rates Boardwalk's Senior Unsecured Notes 'BBB-'

NEW YORK--()--Fitch Ratings rates Boardwalk Pipelines LP's (Boardwalk) senior unsecured notes due 2024 'BBB-'. These senior notes are being offered as additional notes under an indenture pursuant to which Boardwalk issued $350 million of 4.95% notes due 2024 on Nov. 26, 2014. These additional senior unsecured notes due 2024 are identical to and will be treated as a single class of debt securities with the previously issued senior notes due 2024 under the indenture governing such notes.

Debt at Boardwalk is guaranteed by its parent, Boardwalk Pipeline Partners, LP. Proceeds from the offering are to be used to prefund Texas Gas Transmission, LLC's (Issuer Default Rating (IDR) 'BBB-'/Stable Outlook) $250 million senior unsecured notes due June 2015.

Fitch's current IDR for Boardwalk is 'BBB-'. The Rating Outlook is Stable.

KEY RATING DRIVERS

Boardwalk's 'BBB-' rating is supported by Loews Corporation's (Loews; IDR 'A+'; Outlook Stable by Fitch) 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 2015. Loews also owns the 2% general partner interest and approximately 52% of the limited partnership units of the MLP.

The significant distribution cut paid to unit holders beginning in February 2014 has allowed Boardwalk to reduce its cash outflows while increasing capex. Distributions in 2014 were cut to $99 million versus $534 million in 2013, allowing the partnership to utilize cash for spending. At the end of 2014, the distribution coverage ratio was 4.5x versus 1.0x in 2013. Fitch expects the coverage ratio at the end of 2015 will remain above 4.0x.

Concerns for Boardwalk include EBITDA deterioration and expectations for high leverage over the next couple of years due to plans for increased spending. Fitch is also concerned that the leverage covenant in the bank agreement may restrict availability to draw on the revolver after the second quarter of 2015 when the maximum bank defined leverage reverts to 5.0x from 5.5x. Spending at Boardwalk's two significant pipelines, Gulf South and Texas Gas) have multi-year contracts with a weighted average life of approximately five years. These contracts provide some stability of cash flows. However, basis differentials have narrowed over the past few years which have hurt contract renewals. Contracts which have been renewed were done at lower rates and generally under shorter terms. 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.

Projects to Drive Growth: Gulf South's Southeast Market Expansion was placed in service in October 2014 and should ramp up volumes as 2015 progresses. The expansion project involved building a 70 mile pipeline with capacity of up to 0.5 Bcf/d which connects Gulf South to Petal Gas Storage. The pipeline is fully contracted with a weighted average contract life of 10 years. The cost of this project was approximately $300 million.

A significant project for Gulf South is the Coastal Bend Header which will ship approximately 1.4 bcf/d of natural gas to the planned Freeport LNG terminal. There is a planned 65 mile supply header and the Gulf South pipeline system will be expanded and modified. The project is subject to FERC approval. If the project proceeds as currently anticipated, 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. It continues to talk with shippers and if interest increases, the header system capacity may increase from 1.4 bcf/d up to 2.2 bcf/d. Management has indicated that capital requirements for this project will not be significant until 2016.

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 from north to south. This is its Ohio to Louisiana access project. Thus far, it has filed with the FERC for approval.

Leverage: At year-end 2014, Boardwalk's adjusted leverage was 5.4x, above adjusted leverage of 5.0x at the end of 2013. Debt increased while EBITDA was nearly unchanged. Fitch expects 2015 year-end leverage to be in the range of 5.0x to 5.25x. Leverage is likely to remain above 5.0x for the next couple of years until new projects begin to generate earnings.

Liquidity: Liquidity at Boardwalk appears to be sufficient to meet its spending needs in the near term. As of Dec. 31, 2014, Boardwalk had $880 million undrawn on its $1 billion revolver which extends until April 2017. In addition, the partnership also had full availability on the $300 million subordinated loan from Loews. Boardwalk can draw on this until year-end 2015. Texas Gas has $250 million of notes due in June 2015.

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 from 5.0x for three consecutive quarters. Given the October 2014 acquisition of assets for $295 million, Boardwalk will have additional covenant cushion until June 2015. Following that quarter, availability to draw on the revolver is likely to be reduced. The bank defined leverage ratio allows for up to $300 million of subordinated notes (e.g. Loews undrawn $300 million subordinated loan) to be excluded from the calculation of debt. Like other MLPs, Boardwalk receives pro forma EBITDA credit for material projects.

Spending: During 2014, total spending was $404 million, up from $295 million in 2013. The significant increase is attributed to spending at Gulf South which has had higher capex for the Southeast Market Expansion project which was completed early in the fourth quarter of 2014. Management expects growth capex in 2015 to be approximately $400 million and maintenance capex to be $170 million. Spending for growth should significantly increase in 2016 when spending begins to ramp up for the Coastal Bend Header at Gulf South. In 2014, the partnership also spent approximately $294.7 million for the acquisition of an ethylene pipeline.

Fee Based Revenues: For the year end 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

--Revenue growth in the low single digits over the next two years;

--EBITDA margins which average 57.4%, slightly below the 58.4% average over the past five years;

--Capex slightly above management's guidance of $1.5 billion over the next three years;

--Distributions remain flat given the partnership's strategy to improve the balance sheet.

RATING SENSITIVITIES

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

--Adjusted leverage reduction. Should adjusted 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 adjusted leverage at Boardwalk beyond 6.5x for a sustained period of time.

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

Applicable Criteria and Related Research:

--'2015 Outlook: Natural Gas Pipelines (Stability Despite Price Uncertainty)' (December 2014);

--'Pipelines, Midstream and MLP Stats Quarterly - Third Quarter 2014' (December 2014);

--'MLP End Game (Common Goals - Divergent Strategies) (November 2014);

--'Bakken Shale Report (Prolific Production Prompts New Pipelines) (October 2014);

--'What Investors Want to Know: Pipelines, Midstream and MLPs' (October 2014);

--'Midstream Spending Significantly Rising for MLPs and C-Corps' (August 2014);

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014)';

--'Rating Pipelines, Midstream and MLPs - Sector Credit Factors' (January 2014).

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Contacts

Fitch Ratings
Primary Analyst
Kathleen Connelly
Director
+1-212-908-0290
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Peter Molica
Senior Director
+1-212-908-0288
or
Committee Chairperson
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kathleen Connelly
Director
+1-212-908-0290
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Peter Molica
Senior Director
+1-212-908-0288
or
Committee Chairperson
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com