Fitch Downgrades Ratings on Boardwalk, Gulf South, and Texas Gas; Outlook Stable

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NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has downgraded the Issuer Default Rating (IDR) and the senior unsecured debt rating for Boardwalk Pipelines, LP (Boardwalk) one notch to 'BBB-' from 'BBB'. The IDR and senior unsecured debt ratings for both Gulf South Pipeline Company, LP (Gulf South) and Texas Gas Transmission, LLC (Texas Gas) have been downgraded two notches to 'BBB-' from 'BBB+'. 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 $3.4 billion of outstanding debt.

KEY RATING DRIVERS

Boardwalk:

Fitch's downgrade of Boardwalk's rating is prompted by the partnership's announcement to significantly cut its distribution to limited partner (LP) unit holders by 81%, as well as accompanying financial projections which failed to meet Fitch's previous expectations. Fitch expects the cut will significantly limit the partnership's ability to access capital markets for a prolonged period of time, particularly equity capital markets, and therefore increase its reliance on Loews Corp. (Loews; IDR 'A+' Stable Outlook), which has previously demonstrated its support, or absent that, higher debt funding. It is important to note that the company's weaker stand-alone metrics have effectively increased its reliance on parental support to maintain its investment grade ratings. That increased reliance on parental support is true for Gulf South and Texas Gas as well, and is the reason the ratings for all three have been equalized at the 'BBB-'level.

Other concerns include a consolidated financial profile which remains highly leveraged for a 'BBB-' rating with the master limited partnership's (MLP) consolidated debt-to-MLP adjusted EBITDA ratio of 5.0x as of year-end 2013. Fitch projects leverage to be in the range of 5.5x-6.0x over the next several quarters. Boardwalk's year-end leverage has been in the range of 4.8x-5.5x since 2010. The partnership's distribution coverage ratio was 1.1x as of year-end 2013; with the planned distribution cut, the partnership expects it to be around 4.0x by the end of 2014.

There are debt maturities in the near term for the two rated pipelines which have faced difficulties with new contract terms for transportation and storage. The nearest debt maturities are $275 million for Gulf South in 2015 and $250 million at Texas Gas also in 2015.

The ongoing unfavorable recontracting environment for the pipelines, driven by flat gas-basis differentials and the completion of several major infrastructure projects by competitors, remains a near- and long-term concern. Abundant natural gas supplies from the Marcellus and Utica have significantly changed the dynamics for Boardwalk's pipelines, hurting cash flows at Gulf South, Texas Gas, and Gulf Crossing.

Funding for the potential Bluegrass Pipeline project which is a 50/50 joint venture with The Williams Companies (WMB, IDR 'BBB-', Stable Outlook) is another concern. While the details surrounding the potential project are to be determined, the size and scale appear to be substantial. If the project moves forward, Fitch will evaluate how Boardwalk funds its share of the pipeline construction costs.

The 'BBB-' rating is driven by Loews' financial support of Boardwalk which it has demonstrated in the past and which we expect will continue. Without support from Loews, Fitch would not rate Boardwalk investment grade. Loews plans on offering Boardwalk with up to $300 million of subordinated notes for 2014 growth capex; these planned notes are excluded from the bank definition of leverage. Loews owns 51% of the outstanding LP units and the 2% GP interest.

Over the last two years, Boardwalk has expanded its offerings with field services, storage, and midstream operations. Factors including the scale and geographic diversity of Boardwalk's operations are also favorable for the credit profile.

Gulf South:

The 'BBB-' rating at Gulf South is supported by its multi-year contracts (weighted average contract life of approximately five years) which provides some stability of cash flows, and support through its parent and ultimate majority owner, Loews. 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:

Texas Gas's rating of 'BBB-' is supported by its multi-year contracts with a weighted average contract life of six years, which provides some stability of cash flows, 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 environmental regulations.

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.

Cash Flows:

Gulf South and Texas Gas have firm capacity reservation charges under contract that accounted for roughly 81% of Boardwalk's consolidated revenues in 2013. Utilization charges related to these firm contracts accounted for another 12% of consolidated revenues. Cash flow is dependent on a stable recontracting environment. While the recontracting environment has been challenging, Gulf South and Texas Gas have faced more challenges than Fitch had anticipated, which has had an impact on Boardwalk's cash flows.

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 2013, Boardwalk then raised equity and purchased the interest held by the 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 converted to common units in October 2013.

Less-Favorable Re-Contracting Environment for Pipelines:

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.

Liquidity:

Boardwalk has a $1 billion revolving credit facility which expires in 2017 and revolver borrowings as of Sept. 30, 2013 were $85 million. Cash on the balance sheet was $25 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. The leverage ratio also allows for the leverage calculation to exclude up to $300 million of subordinated debt (which Loews has offered to provide Boardwalk in the near term). When Boardwalk's bank-defined leverage is high, its availability to draw on the revolver is reduced. As of year-end 2013, the bank-defined leverage ratio was not to exceed 5.0x and Boardwalk was in compliance with this covenant.

Company Profile:

Boardwalk is a subsidiary of Boardwalk Pipeline Partners, LP (BWP), a publicly traded master limited partnership (MLP). Loews owns 51% 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 14,410 miles of interstate natural gas pipeline and 18 underground storage fields with 186 Bcf of aggregate working gas capacity. In addition, Boardwalk has 240 miles of NGL pipelines.

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 as of year-end 2012. 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 gathering capability 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 ten years.

RATING SENSITIVITIES

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

--Leverage reduction. Should leverage fall below 5.0x 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 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 the credit profile;

--Increased leverage beyond 6.5x for a sustained period of time.

Fitch has taken the following rating actions:

Boardwalk

--IDR downgraded to 'BBB-' from 'BBB';

--Senior unsecured debt downgraded to 'BBB-' from 'BBB'.

Gulf South

--IDR downgraded to 'BBB-' from 'BBB+';

--Senior unsecured debt downgraded to 'BBB-' from 'BBB+'.

Texas Gas

--IDR downgraded to 'BBB-' from 'BBB+';

--Senior unsecured debt downgraded to 'BBB-' from 'BBB+'.

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

Applicable Criteria and Related Research:

--'Pipelines, Midstream, and MLP Stats Quarterly - Third Quarter 2013', Dec. 17, 2013;

--'2014 Outlook: Natural Gas Pipelines', Dec. 10, 2013;

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

--'Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors' Aug. 5, 2013;

--'Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs', April 18, 2013;

--'The Top Ten Differences Between MLP and Corporate Issuers', Feb. 19, 2013;

--'Corporate Rating Methodology', Aug. 8, 2012;

--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012.

Applicable Criteria and Related Research:

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

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

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

The Top Ten Differences Between MLP and Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=701812

Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=705496

Credit Considerations for the GP/LP Relationship

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

2014 Outlook: Natural Gas Pipelines

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

Pipelines, Midstream, and MLP Stats Quarterly - Third-Quarter 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726243

Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715517

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820178

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Contact:
Fitch Ratings
Primary Analyst:
Kathleen Connelly, +1-212-908-0290
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Peter Molica, +1-212-908-0288
Director
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Committee Chairperson:
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Managing Director
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Media Relations:
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brian.bertsch@fitchratings.com

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