The looming bankruptcy of California's largest utility is putting financial pressure on a key supply line of gas to the West Coast, with Ruby Pipeline LLC's credit downgraded to junk status by one rating agency and facing similar downgrades by the other two.
Pacific Gas and Electric Co., Ruby's biggest shipper, and parent company, PG&E Corp., on Jan. 14 announced plans to seek bankruptcy protection before the end of the month, citing billions of dollars in liability costs for wildfires in California. "This has the potential for an earnings shortfall at Ruby which ... will modestly pressure leverage, with the extent depending on the final status of the contracted capacity, Ruby's ability to re-contract capacity or renegotiate its contracts with PG&E and ultimate rates," midstream energy analysts at Fitch Ratings wrote in a Jan. 15 note.
Interstate natural gas pipelines like Ruby, which carries gas from the Rockies to Oregon and northern California, transport volumes under fixed reservation charges that are paid monthly regardless of the actual gas volumes moved or stored. Should PG&E Corp. and the utility company Pacific Gas and Electric move the Chapter 11 process forward, a bankruptcy court could reject the gas utility's shipper agreements with Ruby, which total 375,000 Dth/d and account for 27.2% of the pipeline's contracted capacity, according to S&P Global Market Intelligence's Index of Customers and tariff data.
Both Fitch and S&P Global Ratings decided to keep Ruby's BBB- credit rating, the lowest investment-grade rating, while Moody's downgraded the pipeline to two notches below investment grade at Ba2. S&P Ratings placed Ruby on CreditWatch with negative implications.
All three major U.S. agencies have issued multi-notch downgrades for the parent company and the utility subsidiary, pushing it deep into speculative-grade territory.
A formal bankruptcy filing alone, however, will not automatically trigger a downgrade for Ruby, according to S&P Global Ratings midstream analyst Michael Grande.
"I think PG&E had a request from different counterparties for over $1 billion in collateral postings, which they haven't done yet, but under the contract, they're required to [pay it out]," he said in an interview. "We would want to understand all of that first."
Moody's also cited "uncertainty about ... the ability of Ruby to realize in full its right to collateral against the PG&E contracts" in its Jan. 15 note, but Kinder Morgan Inc., which jointly owns the 1.5-Bcf/d pipeline with Canada's Pembina Pipeline Corp., is not at risk given the fraction of corporate EBITDA that revenues from Ruby represent.
"I can say with confidence that [a Kinder Morgan downgrade] is highly unlikely," Grande said.
Other shippers on Ruby, he added, should also be protected from knock-on downgrades because the pipeline should continue operating.
TransCanada Corp.'s Gas Transmission Northwest LLC pipeline and Energy Transfer LP's Transwestern Pipeline Co. LLC are also exposed to PG&E, but the utility accounts for only 1.1% of contracted capacity on Transwestern, while Gas Transmission Northwest's credit quality is insulated from a PG&E bankruptcy because of lower leverage and a "favorable supply situation," midstream analysts at CreditSights wrote in a Jan. 13 note to clients.