CASE SUMMARY: Ruby Pipeline Enters Chapter 11 Without Negotiated Agreement Facing April 1 Maturity Date on $475M Unsecured Notes, Discussions With Ad Hoc Noteholder Group Ongoing

Relevant Documents:
Voluntary Petition
Press Release
First Day Declaration
First Day Hearing Agenda

Houston-based Ruby Pipeline, a 680-mile natural gas system from the Rockies hub of Opal, Wyo., to interconnections near Malin, Ore., filed for chapter 11 on Thursday, March 31, in the Bankruptcy Court for the District of Delaware. The petition reports $500 million to $1 billion in both assets and liabilities. The debtor entered bankruptcy without an agreement with bondholders of its $475 million of 6% senior unsecured notes, facing an imminent maturity on April 1. However, over 70% of the noteholders signed confidentiality agreements, and negotiations, which had ceased, have since resumed.

The debtor is represented by Richards, Layton & Finger as counsel and PJT Partners as investment banker. Kroll (Prime Clerk) is the claims agent. The case has been assigned to Judge Craig Goldblatt (case No. 22-10278).

The debtor operates a natural gas pipeline and generates revenue for transportation services and ancillary sale of natural gas. The sale of capacity on the pipeline is subject to the regulatory authority of the Federal Energy Regulatory Commission, or FERC, with the majority of revenue generated under long-term, take-or-pay firm commitment contracts.

The company attributes the bankruptcy filing to a “challenging re-contracting environment.” A majority of the company’s firm contracts expired in July 2021, and the debtor has encountered difficulties in reaching substitute agreements and faces reduced prospective contract rates. The resulting decrease in revenue, combined with the April 1 maturity date of the 2022 unsecured notes, necessitated the filing.

The company had announced that it had executed confidentiality agreements to facilitate restructuring negotiations on March 25 with members of an ad hoc group of holders of more than 70% of the 2022 notes. Earlier, on March 15, the company indicated that previous restructuring discussions had failed. As of the time of the bankruptcy filing, a press release states that negotiations between the equity owners and the noteholders were ongoing “in an effort to work out a mutually satisfactory resolution.”

Although the debtor “does not yet have a firm exit path for this Chapter 11 Case yet set,” the first day declaration of Will W. Brown, vice president for a division of Kinder Morgan Inc., or KMI and an officer of the debtor, states that the case will be funded with cash on hand without the need for additional financing. The first day declaration points to “recent global turbulence” resulting in “a renewed interest in energy independence for the United States” and increases in European demand for U.S.-sourced natural gas as reasons for optimism about “various value enhancing” restructuring measures.

Despite this improvement in the market outlook, the debtor says it will use the bankruptcy process to continue discussions with the ad hoc noteholder group and to explore “all possible restructuring alternatives,” including either an asset sale or the consummation of a plan of reorganization.

The first day hearing is scheduled for Monday, April 4, at 1 p.m. ET.

The company’s prepetition capital structure includes $475 million of 6% unsecured notes due 2022 and approximately $234.4 million of 10% subordinated notes due 2026. The unsecured notes had an original principal amount of $825 million and have been paid down at a rate of $43.75 million semiannually beginning on Oct. 1, 2017, as required by the notes. The company says that as of April 1, it owed $475 million of principal as well as $19 million of interest on the 2022 notes. At the time of issuance, the notes bore interest at 6% per year, but according to the first day declaration, the interest rate on the notes increased from 6% to the current 8% per year, as a result of rating downgrades.

The subordinated notes were issued under a 2017 note purchase agreement between the debtor, EP Ruby LLC and Veresen U.S. Infrastructure Inc (nka Pembina U.S. Corp.). EP Ruby is the entity through which KMI owns its equity interest in Ruby Pipeline, while Pembina U.S. Corp. is either the owner of Pembina Pipeline Corp.’s interest in the pipeline or an affiliate thereof.

The company sold the subordinated notes from time to time from 2017 to 2020 and used the proceeds to pay down a term loan. In 2017, the company entered into a $250 million term loan and was repaid in full in April 2020, when the company entered into a new $62.5 million term loan and used the proceeds to pay off the 2017 term loan. The 2020 term loan was paid off in March 2021 using cash on hand.
 
The debtor also lists a liability of $9.5 million to the Klamath tribes, described as the total undiscounted future annual payments of $500,000 through and including 2041. The underlying agreement was for the debtor to support a “living cultural center” for the Klamath tribes.

Background

Brown’s first day declaration details the initial planning in 2007 to construct the pipeline by El Paso, which was later acquired by KMI. The pipeline received FERC approval in 2010 and was constructed for a cost of approximately $3.7 billion, funded by a combination of a $1.5 billion secured credit facility and a $2 billion combined equity investment from El Paso and Global Infrastructure Partners, or GIP. GIP provided a $700 million preferred equity investment, obtaining a 50% ownership interest. In 2014, Veresen Inc. acquired GIP’s interest in the business. In 2017, Pembina Pipeline Corp. acquired Veresen and with it the 50% ownership interest in Ruby Pipeline. Today, KMI and Pembina are the co-owners of the company.

The company entered into the $1.5 billion senior secured credit facility to provide for construction financing in 2010, according to the Brown declaration. The company had $1.474 billion outstanding under this credit facility in January 2012, at which time the company refinanced its debt. In February 2012, the company issued $250 million of unsecured notes due 2017 and $825 million of unsecured notes due 2022. The 2017 notes were paid at maturity using proceeds from a term loan, which has also since been paid off, as is described further above.

The debtor owns and facilitates the operation of Ruby Pipeline, with a transport capacity of 1.5 million Dths of natural gas per day, between the Opal Hub in Wyoming to the Malin Hub in Oregon, near the California border. Brown states that the company has historically been profitable as the result of favorable long-term, FERC-regulated firm contracts whereby third-party shippers of natural gas reserve capacity to transport natural gas on the pipeline in exchange for a fixed fee, regardless of whether the reserved capacity is used, and a variable fee for amounts actually transported.

As the debtor has no employees, it contracts with EP Ruby, an affiliate of KMI, to manage and operate the pipeline under an operation and maintenance, or O&M, agreement. EP Ruby is responsible for the day-to-day management of the pipeline and is compensated for direct and indirect costs incurred. In the 12 months prior to the petition date, the debtor paid EP Ruby approximately $8.6 million for O&M services.

PG&E served as an initial investing partner (though it later exited its investment) and an anchor shipper, entering into a firm contract for 25% of the pipeline’s capacity in 2011. At the time of construction, the company had in place 12 firm contracts for an aggregate capacity of 1.103 million Dth/d. The majority of these firm contracts were for a term of ten years and expired in July 2021. Prior to July, the debtor had approximately 84% of the pipeline’s capacity under contract, but approximately 54% of that capacity under those firm contracts expired. Currently, only 40% of capacity is subject to firm contracts, and 38% of this contracted capacity will expire in 2022.

Many of the firm-contract counterparties have opted not to re-contract or are offering reduced contract rates, states the first day declaration. The debtor is in ongoing discussions with its firm contract counterparties; Brown noted in particular negotiations with PG&E, which has annual 20% “step-down” rights in its capacity obligations until its current contract expires in 2026. Brown states that it is “imperative” for the debtors to reach terms on new firm contracts or find suitable replacement shippers, as less than 0.1% of the company’s revenue historically comes from interruptible contracts.

These reductions in revenue have made repayment of the approximately $475 million 2022 unsecured notes at the April 1 maturity date “impractical at this time,” states the first day declaration, given the debtor’s current $113 million of cash and cash equivalents. However, the first day declaration states that this cash will be sufficient to fund the case without the need for additional financing.

The “breathing space afforded by chapter 11” will be used to: “(i) continuing its discussions with the Ad Hoc Group, (ii) exploring all possible restructuring alternatives, including a potential sale pursuant to section 363 of the Bankruptcy Code and/or a chapter 11 plan or the consummation of a plan of reorganization, (iii) continuing to re-contract its Firm Contracts that have either rolled, or that will roll, off in the near future, and (iv) continuing to finalize an extension of PG&E’s Firm Contract, which will continue to serve as a foundation for the Debtor’s business.”

The debtors' largest unsecured creditors are listed below: