News Column

Fitch Affirms Buckeye at 'BBB-' Following $860MM Acquisition Announcement; Outlook Stable

September 3, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Issuer Default Rating (IDR) and senior unsecured rating for Buckeye Partners, L.P. (Buckeye) at 'BBB-'. This follows the partnership's announcement to acquire an 80% interest in a company to be jointly owned with Trafigura AG for $860 million.

The new entity will be Buckeye Texas Partners LLC (BTP). Trafigura will retain a 20% interest in BTP and remain the customer for all volumes on the existing assets and assets under construction.

The Outlook is Stable.

KEY RATINGS DRIVERS

The 'BBB-' rating is supported by the company's size, geographic diversity, and ability to invest in growth opportunities that should drive increases in EBITDA and distributable cash flows. Past acquisitions and strategic capex initiatives have already proven to create growth. Fitch believes that the partnership will increase its geographic diversity with the pending acquisition of assets in the Gulf Coast. Importantly, the new assets are supported by seven to ten year minimum volume throughput, storage and tolling agreements with Trafigura.

Currently, Buckeye has a significant presence in the New York Harbor, Chicago and the Caribbean. With the pending transaction, the partnership will establish the Gulf Coast as its fourth region.

Assets to be acquired in Corpus Christi include a deep water marine terminal, a condensate splitter to be completed in mid-2015 and total petroleum product storage of 5.6 million barrels once construction is complete. In the Eagle Ford, there are three crude and condensate gathering facilities. BTP will invest between $240 million and $270 million on capex through the first quarter of 2016. Buckeye is to fund 80% of spending at BTP.

Concerns include integration risk of the pending large acquisition, leverage, increases in capex for strategic growth projects, and distribution coverage which may fall slightly below 1.0x over the next few quarters.

Leverage: Buckeye's leverage remains high and for the LTM ending June 30, 2014 it was 5.6x. Since the end of the recent quarter, the partnership issued $229 million of equity in August 2014. In addition, it announced it will issue 5.5 million units (plus a greenshoe for 825,000 units) to partially fund its interest in BTP. Buckeye is also waiting to close on the sale of natural gas storage assets for $105 million. That is expected to occur in the fourth quarter of 2014 or the first quarter of next year.

Fitch forecasts 2014 yearend leverage to be in the range of 5 -5.5x. As assets in the Gulf Coast complete construction and begin to generate EBITDA, Fitch expects leverage to be below 5x at the end of 2015.

Liquidity: As of June 30, 2104, Buckeye had $22 million of cash on the balance sheet. In addition, it had $605 million of borrowing capacity on the $1.25 billion credit facility. Buckeye's indirect wholly owned subsidiary, Buckeye Energy Services LLC (BES) has a sublimit of $500 million for working capital needs.

The credit agreement states that BES shall not be held jointly and severally liable for any obligations of Buckeye for the credit agreement or other debt. At the end of any fiscal quarter, leverage (as defined by the bank agreement) cannot exceed 5.0x. If an acquisition is $50 million or more in one quarter or if acquisitions are $100 million or more over a twelve month period, then leverage cannot exceed 5.5x for that quarter and the two following quarters.

For the bank defined leverage ratio, 'consolidated funded debt' allows for exclusion of BES's letters of credit and revolver borrowings. Like other MLP's, the bank definition of EBITDA allows for a pro forma adjustment for 'material projects'.

Fitch projects that Buckeye will continue to generate credit ratios which provide it with sufficient covenant cushion for the bank agreement. Buckeye has $275 million of notes due in October 2014. Fitch expects the partnership to refinance the debt in the near term. With access to capital markets and availability on the revolver, Fitch expects Buckeye to have adequate liquidity to meet its spending needs.

Diverse operations: Buckeye's assets are reasonably diverse although the domestic pipelines and terminals segment dominates contributions to earnings. For the LTM ending 2Q'14, that segment contributed 73% of adjusted EBITDA while international pipelines and terminals contributed to 28%. Buckeye Services contributed negative EBITDA for the LTM.

RATING SENSITIVITIES

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

--Significant leverage reduction. Should leverage fall below 4.0x over 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;

--Lack of improvement at the energy services segment without substantial growth in other segments;

--Inability to meet growth expectations associated with the pending acquisition or with expansion projects given the substantial investments in prior acquisitions;

--Significant increases in capex or acquisitions not funded in a balanced way;

--Increased adjusted leverage beyond 5.5x for a sustained period of time and distribution coverage below 1.0x.

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

Applicable Criteria and Related Research:

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

--'Liquidity Review: Pipelines, Midstream and MLPs' (July 2014);

--'Crude Oil and Refined Products Pipelines Dashboard' (June 2014);

--'Pipelines, Midstream and MLP Stats Quarterly - First-Quarter 2014' (June 2014);

--'Non-Traditional MLP Assets (Changing Mix, Changing Risk)' (May 2014);

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

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

Applicable Criteria and Related Research:

Midstream Spending Significantly Rising for MLPs and C-Corps

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=759467

Liquidity Review: Pipelines, Midstream and MLPs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752807

Crude Oil and Refined Products Pipelines Dashboard

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750405

Pipelines, Midstream and MLP Stats Quarterly - First-Quarter 2014 (First-Quarter Review)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750842

Non-Traditional MLP Assets (Changing Mix, Changing Risk)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747370

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Rating Pipelines, Midstream and MLPs - Sector Credit Factors

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=863974

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:

Kathleen Connelly, +1-212-908-0290

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst:

Peter Molica, +1-212-908-0288

Director

or

Committee Chairperson:

Ralph Pellecchia, +1-212-908-0586

Senior Director

or

Brian Bertsch, +1-212-908-0549

Media Relations, New York

brian.bertsch@fitchratings.com


Source: Fitch Ratings


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