TEXT - Fitch affirms Ruby Pipeline LLC issuer default rating
Jan 28 - 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. 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. Ruby'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 Ruby's 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. (KMI; IDR 'BB+'/Stable Outlook by Fitch) and Global Infrastructure Partners (GIP), a large independent infrastructure fund formed in 2006. Ruby's ratings reflect Fitch's assessment of Ruby on a stand-alone basis. SENSITIVITY/RATING DRIVERS: Cash Flow and Earnings Stability: Ruby has roughly 72% of its capacity subscribed under long-term reservation contracts with a weighted average contract life of roughly 10 years. 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 4.5 times (x) in 2013, moving to below 4.0x in 2015 as Ruby's term loan is amortized. Under a capacity-payment-only scenario, leverage is high in the initial stages of the forecast. However, the forced deleveraging that Ruby's amortizing term loan provides results in more appropriate leverage metrics relative to Ruby's single-asset pipeline peers, without any consideration provided to any potential incremental capacity sales for uncontracted capacity. Long-Term Contracts: As mentioned, Ruby has a significant amount of its capacity contracted with long-term capacity reservation contracts with investment grade counterparties - a mix of utilities and gas producers. Pacific Gas & Electric (PG&E; rated 'A-') is the anchor shipper accounting for 34% of the pipeline's contracted capacity with a 15-year contract. There is moderate counterparty risk associated with Ruby's producer contract portfolio; however, to the extent that Ruby has a capacity contract with a sub-investment or unrated-grade entity it has gotten letters of credit in support of a portion of the counterparty's contractual obligation. Favorable Supply Demand Dynamics: Ruby provides the most direct and most economic access for Northern California, Nevada and the Pacific Northwest (PNW) to Rocky Mountain area gas supply. CA, the PNW and NV on a combined basis are expected to experience moderate gas demand growth in the longer term stemming mostly from power generation. With Western Canadian gas imports expected to decline, Rocky Mountain gas as a supply source to the region offers the potential for significant growth which will benefit Ruby. Ruby, as the first new direct pipe with excess capacity, should enjoy significant advantage over other transportation methods for Rockies gas to get to markets in CA, NV and PNW. 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 should 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. Recontracting Risk: Ruby currently has long-term contracts with 11 counterparties for 72% of its capacity. The majority of these roll off in 2021, with the rest of the capacity mostly rolling off by 2026. As such, Ruby is exposed to the possibility that current capacity cannot be recontracted at current rates or current volumes. Fitch notes that the supply demand dynamic within the markets that Ruby serves are trending in Ruby's favor. Should this dynamic materially change Fitch would likely take a negative rating action. Liquidity Adequate: Ruby is not expected to need significant available liquidity given the expected low maintenance and operating costs. Fitch estimates, based on contract revenue, that Ruby should generate more than adequate liquidity, with between $272 million and $287 million in annual contracted EBITDA through 2019, and its $25 million revolver for any working capital needs. Ruby is expected to distribute all excess cash flow after maintenance capex and term loan amortization to its owners in the form of dividends. RATING TRIGGERS 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 remain above 4.5x Fitch would consider a negative ratings action. --A significant 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 or near max rates could likely result in an upgrade but this is not expected. Fitch affirms the following ratings: --Long-term IDR at 'BBB-'; --Senior unsecured rating at 'BBB-'.