Fitch Downgrades NGPL PipeCo Issuer Default Rating to 'CCC'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has downgraded the Issuer Default Rating (IDR) for NGPL PipeCo LLC (NGPL) to 'CCC' from 'B-.' Also, downgraded to 'CCC+/RR3' from 'B-/RR4' are NGPL's senior secured notes and secured Term Loan B. A total of $2.95 billion of outstanding senior debt is affected by the rating downgrade. A full list of rating actions follows at the end of this release.

The downgrade reflects continued deterioration in NGPL's credit metrics as of the yearend 2014, with leverage remaining well above prior expectations. Fitch had previously listed a breach of covenants as a trigger for downgrades and NGPL had to receive a waiver for its financial covenants to remain in compliance for 4Q 2014. Fitch does believe that NGPL's owners will take steps necessary to avoid defaulting on its obligations at least in the near term. In association with the covenant waivers through 3Q 2015, NGPL's owners have committed an equity contribution of up to $50 million (contingent on a variety of factors) that can be used to pay principal on secured borrowings, for interest payments, equity cures or capital spending subject to some limitations.

NGPL expects cash outflows to exceed inflows in 2015. This is obviously unsustainable, and NGPL is pursuing strategic alternatives to address the situation. Leverage is expected to remain extremely elevated with EBITDA for 2015 expected to be roughly $285 million, and expected Debt/EBITDA of over 10x. Fitch believes that NGPL HoldCo, (NGPL's parent company) will have to contribute the $50 million in equity being held there for the purpose of providing NGPL with liquidity that will help in 2015, but is not likely enough to help in 2016 absent increased profitability on the pipeline system.

KEY RATING DRIVERS

EBITDA Weakness: The downgrade reflects EBITDA weakness at the pipeline due to supply and demand fundamentals that began to unfavorably change for NGPL years ago, its prior FERC rate reduction and a slight rise in costs for 2014. NGPL's EBITDA for the yearend 2014 was $284 million, a decline of roughly 6% versus 2013 results, due in part to non-recurring expenses including a $13 million loss on operational gas as a result of higher than expected fuel usage to run the pipe during last winter's (2013/2014) cold weather. The other non-recurring expense was a $14 million non-cash charge for a lower cost or market adjustment to gas inventory due to gas prices falling below inventory basis. For yearend 2014, NGPL's leverage increased to over 10x, prompting the need for covenant waivers.

Generally, NGPL's earnings weakness stems from the combination of FERC mandated phase-in decreases in operating subsidiary Natural Gas Pipeline of America's base recourse rate, fuel retention factors, and unfavorable market conditions. Marcellus shale area production growth has displaced historical supplies shipped on the pipelines historical west-to-east transport path, particularly its Louisiana line, as well as impacting historical north to south flows.

Exploring Strategic Alternatives: NGPL is exploring strategic alternatives, including a sale of the company, recapitalizations, restructuring, or a sale of assets. There is significant uncertainty around what ultimately gets completed, while the recent waivers of covenants gives the company until roughly early December to get a feasible plan in place to address its cash flow needs before it would need another covenant amendment or would violate covenant. In the event that NGPL is unable to cure any covenant violation, NGPL's outstanding debt could be accelerated by lenders. A credit facility default can trigger cross payment default and cross acceleration provisions in NGPL's existing senior notes. Management has committed to an equity injection of up to $50 million subject to certain specific conditions. Fitch currently believes that this equity injection should prevent a default in 2015.

Recontracting Stabilizing: There are some signs that the financial impact of gas displacement on NGPL is finally waning. During 2014, NGPL saw its existing transportation revenue stabilize and contract rollover stayed steady for the first time in several years. All of NGPL's higher rate contracts have rolled over at this point and management does not expect much more downside to revenue going forward. Additionally, NGPL was able to secure binding commitments for a northbound expansion project into Chicago that will provide roughly $17 million in incremental EBITDA. Construction of this project, at a cost of roughly $80 million, is expected to start in 2016 with the expansion in service towards the end of 2016. Financing of the project is uncertain at this time.

Other credit concerns include the limiting effect of the reduced cash flows on the company's operating flexibility and strategies; the refinancing of $1.25 billion senior notes and the Term Loan B (currently $598 million) in 2017. Favorable considerations include NGPL's Chicago/Midwest market franchise, which accounts for a significant portion of total EBITDA, and its associated high-quality, reliable utility customer base and demand for storage services.

KEY ASSUMPTIONS

- Revenue consistent with existing contract profile;

- $50 million equity injection from HoldCo in 2015; revolver fully maxed out at $75 million in 2015.

- For the recovery rating, Fitch projects a going concern enterprise valuation of $2.1 billion, using an 8x multiple and EBITDA of approximately $285. After deducting Fitch's standard of 10% for administrative claims, Fitch estimates recovery of the senior notes and Term Loan B at their current outstanding amount of roughly 70%, towards the high end of 'RR3' (51%-70%).

RATINGS SENSITIVITIES

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

-- Lack of viable strategic alternative plan by end of 3Q 2015 would likely lead to further downgrade.

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

-- Ability to achieve sustainable liquidity;

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

-- Successfully refinancing 2017 debt maturities.

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

Fitch downgrades the following ratings:

NGPL PipeCo LLC

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

--Senior secured notes to 'CCC+/RR3' from 'B-/RR4';

--Term Loan B to 'CCC+/RR3' from 'B-/RR4'.

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

Applicable Criteria and Related Research

--'2015 Outlook: Natural Gas Pipelines' (December 2014);

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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984717

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Fitch Ratings
Primary Analyst
Peter Molica
Senior Director
+1 212-908-0288
Fitch Inc.
33 Whitehall,
New York, NY 10004
or
Secondary Analyst
Kathleen Connelly
Director
+1 212-908-0290
or
Committee Chairperson
Sharon Bonelli
Senior Director
+1 212-908-0581
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Media Relations:
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[email protected]
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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