News Column

Fitch Upgrades Tennessee Gas Pipeline Company; Affirms El Paso Natural Gas Company; Outlook Stable

May 16, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded the Issuer Default Rating (IDR) and senior unsecured rating of Tennessee Gas Pipeline Company, LLC (TGP) to 'BBB+' from 'BBB' and affirmed the IDR and senior unsecured ratings of El Paso Natural Gas Company, LLC (EPNG) at 'BBB'. The Ratings Outlook for both issuers is Stable. Approximately $2.9 billion of debt is affected by today's rating actions.

A full list of ratings action follows at the end of this release.

The upgrade of TGP reflects the operating strength of the pipeline, as a premier system which serves and accesses growing demand and supply areas, and the structural superiority that TGP debt has to that of Kinder Morgan Partners, LP (TGP; rated 'BBB'; Stable Outlook) its parent company. As part of the Kinder Morgan family, TGP is part of the largest natural gas network in the country, making it a more integrated, core piece of national infrastructure. Additionally, TGP sits directly over the emerging Marcellus and Utica shales, providing significant growth opportunities and an ability to expand its system to offer increased optionality for shippers. The upgrade also reflects TGP's better than expected credit metrics and expectations that TGP's leverage remains between 2.5x to 3.0x on a sustained basis.

The affirmation of EPNG reflects the low-risk nature and cash flow stability of the system's interstate FERC regulated pipeline operations. In contrast to TGP, EPNG serves a geographic region where Fitch expects to see muted natural gas demand growth over the next several years, although EPNG will benefit from expected demand growth in Mexico.

KEY RATINGS DRIVERS

Cash Flow/Earnings Stability: TGP and EPNG are FERC regulated interstate natural gas pipelines with the majority of their capacity contracted for with long-term take-or-pay reservation contracts providing predictable, stable earnings and cash flows. The majority of TGP's capacity is contracted with long term take or pay reservation contracts with a weighted average life of over 6 years, which provides significant earnings and cash flow stability. The majority of EPNG's capacity is contracted with long term take or pay reservation contracts with a weighted average life of 4.8 years.

Geographic/Strategic Benefits: As part of the Kinder Morgan family, TGP and EPNG are part of one of the largest energy companies in North America, as well as, the largest natural gas network in the country making it a more integrated, core piece of national infrastructure. The KMI network provides access to every demand region in the country. TGP delivers gas to one of the strongest demand regions of the country (the North-eastern U.S.) Additionally, TGP sits directly over the emerging Marcellus and Utica shales providing significant growth opportunities and an ability to expand its system to offer increased optionality for shippers.

Recontracting Risk: As with any long haul interstate pipelines both TGP and EPNG are exposed to the possibility that current capacity cannot be recontracted at current rates or current volumes. Natural gas demand is expected to grow in the demand regions that TGP serves as well as in the regions EPNG serves though more slowly, with some increased upside from Mexican gas demand. Recent expansions have served to increase the weighted average contract length for capacity for both TGP and EPNG.

Stronger than Expected Metrics: TGP's and EPNG's metrics were stronger than expected for 2013, driven by completed growth projects and increased operating efficiencies driving better than expected EBITDA. TGP's leverage, as measured by debt/EBITDA for 2013 was 2.4x versus 3.9x for 2012 and Fitch's previous expectations of 3.0x to 3.5x. Fitch had cited leverage better than 3.0x as a positive ratings trigger. Going forward Fitch expects TGPs debt to EBITDA to be between 2.5x and 3.0x on a sustained basis. EPNG's leverage was roughly 3.7x as of the end of 2013, versus 4.2x for 2012 and Fitch's expectation for leverage above 4.0x. Going forward Fitch expects leverage to be between 3.0x - 3.5x on a sustained basis.

Parental Relationship: The ratings reflect the credit profiles of TGP and EPNG are largely linked to its 100% owner KMP. The ratings consider that legal, strategic and operational ties are moderate to strong and include KMP's control of TGP's and EPNG's operational and financial decisions, including financing decisions and dividend policy. The debt at both TGP and EPNG is structurally superior to KMP's obligations. Fitch believes that the strong legal, operational and strategic ties between entities justify the linkage of EPNG and TGP's ratings to that of KMP. The upgrade of TGP reflects this structural superiority as well as its beneficial geographic reach and stronger stand-alone credit profile which likely would be higher rated on a stand-alone basis. Due to the strong linkage with its parent company KMP Fitch believes a one notch separation of the ratings is appropriate given TGP's relative strength.

RATINGS SENSITIVITIES

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

--A positive rating action at KMP;

--Leverage below 3.0x at EPNG on a sustained basis could be a catalyst for a one notch upgrade.

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

--Significant increases in leverage to support organic growth and acquisitions;

--Inability to successfully recontract expiring contracts at beneficial rates and/or tenor;

--Weakening operating performance. Fitch expects TGP debt/EBITDA to be between 2.5x to 3.0x and EPNG to be between 3.0x to 4.0x for 2014 - 2015 --leverage higher than these ranges on a sustained basis could lead to a negative ratings action.

--A negative rating action at KMP.

Fitch has upgraded the following ratings with a Stable Outlook:

Tennessee Gas Pipeline Company, LLC

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

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

Fitch has affirmed the following ratings with a Stable Outlook:

El Paso Natural Gas Company, LLC

--IDR at 'BBB';

--Senior unsecured debt at 'BBB'.

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

Applicable Criteria and Related Research:

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

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

--'Rating Pipelines, Midstream, and MLPs - Sector Credit Factors' (Jan. 13, 2014);

--'Credit Considerations for the GP/LP Relationship' (December 2013).

Applicable Criteria and Related Research:

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

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

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

Rating Pipelines, Midstream and MLPs - Sector Credit Factors

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

Credit Considerations for the GP/LP Relationship

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830552

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.



Fitch Ratings

Primary Analyst

Peter Molica

Director

+1 212-908-0288

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Kathleen Connelly

Director

+1 212-908-0290

or

Committee Chairperson

Mark C. Sadeghian, CFA

Senior Director

+1 312-368-2090

or

Media Relations, New York

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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