Dec 10 -
Summary analysis -- Florida Gas Transmission Co. LLC -------------- 10-Dec-2012
CREDIT RATING: BBB/Stable/-- Country: United States
Primary SIC: Pipelines, nec
Mult. CUSIP6: 340711
Credit Rating History:
Local currency Foreign currency
09-Jan-2009 BBB/-- BBB/--
20-Oct-2004 BBB+/-- BBB+/--
The rating on natural gas pipeline company Florida Gas Transmission Co. Ltd. (FGT) reflects its consolidated credit profile with parent Citrus, which issues debt, but does not receive revenues outside of FGT. The pipeline’s “excellent” business risk profile reflects its strong competitive position and stable cash flows, tempered by an “aggressive” financial risk profile characterized by high consolidated financial leverage.
FGT operates a 5,500-mile interstate gas pipeline that moves gas from southern Texas through Louisiana, Mississippi, and Alabama along the Gulf Coast, to utility and industrial customers in Florida. The company’s Phase VIII expansion, which increased FGT’s pipeline capacity by more than 0.8 billion cubic feet of gas per day (bcf/d) to 3.1 bcf/d, went into service on April 1, 2011 at a cost of $2.48 billion. Citrus, a 50/50 joint venture owned by subsidiaries of Kinder Morgan Inc. (BB/Stable/--) and Energy Transfer Partners L.P. (BBB-/Stable/--), fully owns FGT. Energy Transfer Partners manages Citrus’ and FGT’s operations.
The ‘BBB’ rating reflects the following strengths:
-- The pipeline’s capacity is almost fully contracted, with reservation charges constituting 98% of revenues; utilities hold about 95% of the contracted capacity, which provides stable revenues.
-- Florida’s demand for gas has averaged growth of about 10% annually, and electric generation consumes 90% of gas demand in the state. Gulfstream Natural Gas System LLC (BBB/Stable/--) is the only significant competitor.
-- The Federal Energy Regulatory Commission (FERC) regulates FGT, allowing the pipeline to charge a straight-fixed-variable rate that stabilizes cash flows and allows the company to pass through variable costs to shippers on significant portions of the pipeline.
-- The weighted average rating of shippers on FGT is ‘BBB+', and the average life of contracts is about 13 years.
The following risks offset the strengths:
-- Citrus’s consolidated financial leverage will remain somewhat elevated in 2013 due to the debt financing of a significant portion of the $2.48 billion Phase VIII expansion.
-- Gulfstream provides some limited competition.
FGT’s excellent business profile reflects a dominant position as a demand-pull pipeline in a growing market with ample access to natural gas supplies from the Gulf of Mexico, large interstate pipelines, and market centers in Texas and Louisiana. The pipeline’s capacity almost entirely consists of reservation charges, which is independent of throughput levels, priced at negotiated rates as well as the maximum tariff that the FERC will allow it to charge customers. Electricity generation is the primary driver for gas demand in Florida, which peaks in the summer. FGT has contracted about 78% of its Phase VIII expansion under long-term (more than 20 years) firm commitments. FGT’s largest customers include electric utilities NextEra Energy Inc. (A-/Stable/--; about 46% of revenues), utilities owned by TECO Energy Inc. (BBB+/Stable/--; about 13%), including Peoples Gas System and Tampa Electric Co. (BBB+/Stable/A-2), Florida Gas Utility (not rated), and Progress Energy Inc. (BBB+/Negative/A-2). Gulfstream is currently the only competitor for gas supply into Florida, with 1.26 bcf/d capacity.
FGT’s aggressive financial profile reflects high consolidated financial leverage at parent Citrus that we believe will continue through 2013 due to the mostly debt-financed Phase VIII expansion project. Under our 2013 base-case forecast, we assume 2% growth in volumes and that a portion of Phase VIII capacity that is not under long-term firm agreements will be contracted under short-term firm arrangements. We expect Citrus’ consolidated debt to EBITDA ratio to be in the 4.3x to 4.4x area in 2013, which is slightly better than the 4.5x as of Sept. 30, 2012. We project consolidated funds from operations (FFO) to debt at Citrus of about 16% and EBITDA interest coverage of 3.25x. FGT’s stand-alone financial measures are stronger than the consolidated ratios. We forecast total debt to EBITDA to be about 3.2x and FFO to debt in the low-20% area by year-end 2013.
We assess FGT’s consolidated liquidity as “strong” under our criteria, since we expect sources of liquidity to exceed uses by about 1.7x during the next 12 months and more than 1x in 2014.
Our assumptions for cash sources consist of FFO of about $425 million and revolving credit facility availability of about $176 million under FGT’s and Citrus’ credit facilities.
In June 2012, Citrus and FGT renewed their revolving credit facilities at the $200 million level, and extended the maturity date to November 2015. Cash uses consist of about $150 million of growth and maintenance capital, $21.5 million of long-term debt maturities, and about $200 million of distributions to its owners.
A key assumption underlying our assessment of FGT’s liquidity is the company’s ability to curtail discretionary capital spending if it can’t obtain external funding or capital from its sponsors for its cash needs.
As of Sept. 30, 2012, FGT and Citrus were in compliance with their maximum debt to capitalization ratios of 65%. We estimate Citrus has about a 12% cushion and FGT has a 30% cushion in its debt to capitalization covenant as of the same date. We expect Citrus and FGT to remain in compliance in 2013.
The stable outlook on FGT reflects our belief that Citrus’ consolidated credit measures will continue to improve due to the incremental cash flows resulting from the Phase VIII expansion. We could raise the rating on FGT if Citrus sustains its consolidated debt to EBITDA ratio at or below 4x. We could lower the rating on FGT if consolidated debt to EBITDA at Citrus is above 5.5x due to a change in the financial policies of its sponsors over time.
Related Criteria And Research
Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012
Additional telephone contact number: Michael Grande (1) 917-509-7492