Fitch Ratings has affirmed its long-term Issuer default rating (IDR) and senior unsecured rating on Ruby Pipeline, LLC (Ruby) at 'BBB-'. The rating outlook is stable. Approximately US$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 ft3/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. Recontracting 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 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 recontract its capacity.
Ruby is an indirect operating subsidiary of a joint venture holding company that is owned 50/50 by Kinder Morgan Inc. and Veresen, Inc.
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 4 times in 2015, and improves as Ruby's term loan is amortised. The planned deleveraging that Ruby's amortising term loan provides leverage metric results more in line with Ruby's single-asset pipeline peers, without any consideration provided to any potential incremental capacity sales for uncontracted capacity.
Low maintenance/operating costs: Ruby is a new pipeline with very low maintenance and operating costs, particularly for the initial years of the pipeline's life when heavy safety testing will not be needed or required. As a new pipe, Ruby should largely be free from federal scrutiny or mandates from the Pipeline Hazardous Materials Safety Administration and the Federal Transportation Safety Board with regard to hydrostatically testing existing pipeline infrastructure. As a resultm maintenance and operating cost should generally be low, helping keep cash flow available for debt service (and distribution) strong.
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. With Western Canadian gas production imports to the US expected to decline due to the construction of LNG exports facilities currently planned in Western Canada and increased use of gas for Canadian oil sands production, these regions should look to Rocky Mountain production regions as the major gas supply source. 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.
New ownership offers strategic benefits: Global Infrastructure Partners sold its 50% interest in Ruby to Veresen for US$1.43 billion with the deal closing in 14 November, 2014. Fitch believes Veresen should provide operational benefits for the pipeline longer term. Veresen believes Ruby can provide a strategic link for Rockies Gas to its proposed LNG export facility planned for Jordan Cove in Oregon. Ruby has the potential to provide Jordan Cove with direct access to Rocky Mountain gas supply for export through the Jordan Cove terminal. The construction of the Jordan Cove LNG export terminal would represent a significant source for natural gas demand on the West Coast and could represent significant source of demand for existing and potentially new capacity on Ruby.
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 favour long-term. Should this dynamic materially change Fitch would likely take a negative ratings action.
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, full availability under its US$25 million revolver for any working capital needs. Ruby is expected to distribute all excess cash flow after maintenance capex and term loan amortisation 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 30 September 2014 was 4.2x.
Adapted from press release by Hannah Priestley-Eaton