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Ruby Pipeline, LLC -- Moody's downgrades Ruby Pipeline's notes to B1; outlook negative

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Rating Action: Moody's downgrades Ruby Pipeline's notes to B1; outlook negative

Global Credit Research - 03 Aug 2020

New York, August 03, 2020 -- Moody's Investors Service (Moody's) downgraded Ruby Pipeline, LLC's (Ruby) Corporate Family Rating (CFR) to B1 from Ba2, Probability of Default Rating (PDR) to B1-PD from Ba2-PD and senior unsecured notes rating to B1 from Ba2. The rating outlook remains negative.

"The downgrade and negative rating outlook reflect Ruby's increasing re-contracting risk in 2021 when its non-PG&E contracts mature, and the weak pricing and volume environment for such re-contracting," said Amol Joshi, Moody's Vice President and Senior Credit Officer. "The company also faces rising refinancing risk amid cash flow uncertainty and weak liquidity as its senior notes mature in 2022."

Downgrades:

..Issuer: Ruby Pipeline, LLC

.... Corporate Family Rating, Downgraded to B1 from Ba2

.... Probability of Default Rating, Downgraded to B1-PD from Ba2-PD

....Senior Unsecured Regular Bond/Debenture, Downgraded to B1 (LGD3) from Ba2 (LGD3)

Outlook Actions:

..Issuer: Ruby Pipeline, LLC

....Outlook, Remains Negative

RATINGS RATIONALE

Ruby's B1 CFR is challenged by the weak credit quality of its principal shipper Pacific Gas & Electric Company (PG&E), which comprises about 30% of Ruby's revenue and whose parent PG&E Corporation is rated Ba2 stable, high and increasing re-contracting risk in 2021 when its non-PG&E contracts mature, and the weak pricing and volume environment for such re-contracting. Ruby is supported by natural gas pipeline transportation contracts with non-PG&E shippers having good weighted-average credit quality for about 70% of its revenue through mid-2021. As Ruby manages its maturing contracts, it will be imperative that committed contract cash flow and debt are managed to ensure continued leverage and coverage metrics consistent with the credit profile. As existing contracts mature, if Ruby executes firm transportation contracts from the larger producers in the Rocky Mountains, it will likely be at reduced rates as Canadian natural gas remains competitive. Ruby's owners, Kinder Morgan, Inc. (KMI, Baa2 stable) and Pembina Pipeline Corporation (unrated), have the ability to provide support, but Pembina has a preferred ownership interest relative to KMI's ownership interest. At this point, the partners do not have any commitment to provide future financial support to Ruby, beyond the existing term loan committed payments.

Ruby has weak liquidity. The company's cash flow from operations will fall in 2021 as non-PG&E contracts expire in mid-2021, while a material portion of its cash flow will be used for required debt payments in 2021. The remaining cash flow will likely be distributed, but it should still be insufficient to fully cover Pembina's preferred distribution. Because it's a relatively new pipeline, maintenance capital expenditures are minimal at less than $1 million per year.

Ruby does not have a revolving credit facility. The company has a $62.5 million term loan maturing in March 2021 which is scheduled to be repaid in equal quarterly payments over one year, using a committed subordinated debt facility provided by subsidiaries of the partners that should grow to $250 million and mature in 2026. The company also had $606 million of senior unsecured notes at March 31, 2020, with scheduled payments of about $88 million in 2020, $44 million in 2021 and final maturity of $475 million in April 2022. Ruby is expected to remain in compliance with its financial covenant of debt to EBITDA less than 5x under the term loan and 5.5x under the senior unsecured notes, but covenant cushion will fall after mid-2021 as the non-PG&E contracts expire.

Ruby's senior unsecured notes are rated B1, consistent with the B1 CFR, despite its senior claim to the subordinated debt (unrated) from the partners in the capital structure. The B1 rating for the senior unsecured notes is more appropriate than the rating suggested by Moody's Loss Given Default for Speculative-Grade Companies methodology because the support provided by the subordinated debt is reflected in the CFR. The term loan (unrated) is pari passu with the notes.

The negative rating outlook reflects Ruby's significant cash flow uncertainty and weak liquidity while its senior notes mature in 2022.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ruby's ratings could be downgraded if there is a significant change to its contract terms with PG&E, contracting with non-PG&E shippers fails to sufficiently materialize, the company is unable to refinance its debt in a timely manner, or if liquidity weakens further.

Ruby's ratings could be upgraded if contract counterparty risk and tenor improve, the company achieves adequate liquidity while mitigating refinancing risk and maintains leverage below 5x.

The principal methodology used in these ratings was Natural Gas Pipelines published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113727. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Ruby Pipeline, LLC (Ruby) is owned equally by Kinder Morgan, Inc. (Baa2 stable), one of the largest midstream energy companies in North America, and Pembina Pipeline Corporation (unrated), a diversified energy infrastructure company based in Calgary, Alberta. A subsidiary of Kinder Morgan, Inc. operates the company's sole asset, the Ruby Pipeline, a 1,500 MMBtu per day natural gas pipeline that entered service in July 2011 and runs 680 miles from Opal, Wyoming to Malin, Oregon.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Amol Joshi, CFA VP - Sr Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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