January 21, 2016 - 4:25 PM EST
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Fitch Affirms Ruby Pipeline, LLC at 'BBB-'; Outlook Stable

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.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for Ruby Pipeline, LLC include:

--Revenue in the base case is consistent with historical revenue generated from contracted volumes through initial contract expiry in 2021.

--O&M expenses are forecasted at current YTD run rate with annual inflation of 2%.

--All free cash is paid out as dividends.

RATING SENSITIVITIES

Considerations for a Negative Rating action include, but are not limited to:

--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 to:

--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

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'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998198

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998198

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Peter Molica, +1-212-908-0288
Senior Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Kathleen Connelly, +1-212-908-0290
Director
or
Committee Chairperson
Shalini Mahajan, CFA, +1-212-908-0351
Managing Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
[email protected]


Source: Business Wire (January 21, 2016 - 4:25 PM EST)

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