Fitch Ratings, New York, 21 January 2016: Fitch Ratings has affirmed the
Long-term Issuer Default Rating (IDR) and senior unsecured rating for
Ruby Pipeline, LLC (Ruby) at 'BBB-'. The Rating Outlook is Stable.
Approximately $1 billion in debt is affected by today's rating decision.
Ruby is a Federal Energy Regulatory Commission (FERC) regulated
interstate natural gas pipeline providing 1.5 billion cubic feet per day
(Bcf/d) of natural gas delivery capacity from the Opal Hub in Wyoming to
the Malin Hub in Oregon, on the California border. The 673-mile pipeline
was completed in July 2011. Ruby's operations are supported by
take-or-pay capacity reservation contracts with mostly investment grade
counterparties. The company's ratings reflect the cash flow stability
and relatively low business risk associated with an interstate natural
gas pipeline. Re-contracting risk is a longer term concern given
depressed gas differentials. However, the long-term nature of existing
contracts, Ruby's first-mover advantage in what should be a low to
moderate gas-demand-growth geographic region, and its access to growing
gas supply basins helps to mitigate some of the risk surrounding its
ability to re-contract its capacity.
Ruby is an indirect operating subsidiary of a joint venture holding
company that is owned 50/50 by Kinder Morgan Inc. (KMI; IDR
'BBB-'/Stable Outlook by Fitch) and Veresen, Inc. (Veresen) a Canadian
owner and operator of North American infrastructure assets.
KEY RATINGS DRIVERS
Cash Flow and Earnings Stability: Ruby has roughly 72% of its capacity
subscribed under long-term reservation contracts. These contracts are
ship-or-pay type contracts providing a high amount of revenue and cash
flow certainty. Assuming Ruby generates revenue from capacity
reservations only, Fitch estimates that the pipeline's debt/EBITDA
leverage will be approximately 3.8x-to-4.0x in 2015, and improving
slightly to 3.8x in 2016 and beyond as Ruby's term loan is amortized.
Supply/Demand Outlook Trends: Ruby currently provides the most direct
and economic access to Rocky Mountain supply to the northern West Coast.
Northern California, the Pacific Northwest and Northern Nevada are on a
combined basis expected to show moderate natural gas demand growth over
the next five to seven years, stemming mostly from increased gas power
generation. Ruby, as a new direct pipe with excess capacity, should
enjoy significant advantage over other transportation methods for
Rockies gas to get to markets in Northern CA, NV and PNW.
Re-contracting Risk: Ruby has long-term contracts with 11 counterparties
for 72% of its capacity. Roughly 66% of these contracts (by capacity)
roll off in 2021, with the most of the remaining contracted capacity
rolling off by 2026. Pacific Gas & Electric (PG&E; rated 'BBB+'/Stable
Outlook) is the anchor shipper accounting for 34% of the pipeline's
contracted capacity with a 15-year contract. Ruby is exposed to the
possibility that current capacity cannot be re-contracted at current
rates or current volumes at contract expiry (generally 2021 and beyond).
The supply demand dynamic within the markets that Ruby's serves are
trending in Ruby's favor long-term. Should this dynamic materially
change Fitch would likely take a negative ratings action.
Fitch's key assumptions within our rating case for Ruby Pipeline, LLC
--Revenue in the base case is consistent with historical revenue
generated from contracted volumes through initial contract expiry in
--O&M expenses are forecasted at current YTD run rate with annual
inflation of 2%.
--All free cash is paid out as dividends.
Considerations for a Negative Rating action include, but are not limited
--Significant increase in leverage above projections, which is not
expected under the normal course of business. If Ruby's leverage were
forecasted to be above 4.5x on a sustained basis Fitch would consider a
negative ratings action.
--A significant and unfavourable change in the natural gas supply/demand
dynamics in Ruby's service territories leading to contract renewal or
debt refinancing difficulties.
Considerations for a Positive Rating Action include, but are not limited
--Fitch does not expect a positive credit action under the course of
normal business in the near term. Ruby contracting 100% of its capacity
under long term contracts at favorable rates could likely result in an
upgrade but this is not expected given current basis spreads.
Liquidity Adequate: Ruby is not expected to need significant available
liquidity given the expected low maintenance and operating costs. Fitch
estimates -- based on contracted revenue -- that Ruby should generate
more than adequate liquidity for its operating needs, in addition to,
nearly full availability under its $25 million revolver for any working
capital needs. Ruby is expected to distribute all excess cash flow after
interest payments, maintenance capex and term loan amortization to its
owners in the form of dividends. Ruby is required to comply with a
leverage ratio of no more than 5.0x. Ruby is currently in compliance
with all of its financial covenants. Ruby's leverage ratio as of Sept.
30, 2015 was 3.8x.
FULL LIST OF RATING ACTIONS
Fitch has affirmed Ruby Pipeline, LLC as follows:
--Long-term IDR at 'BBB-';
--Senior unsecured rating at 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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