DBRS Places Pembina Pipeline Corporation Under Review with Negative Implications Following Provident Acquisition Announcement

DBRS has today placed the BBB (high) ratings of the Senior Unsecured Notes and the 7.38% Senior Secured Notes of Pembina Pipeline Corporation (Pembina or the Company) Under Review with Negative Implications. This rating action follows the announcement that the Company has agreed to acquire all of the outstanding shares of Provident Energy Ltd. (Provident). The acquisition will be through an exchange of shares, with the exchange ratio representing a premium of 26.2% to Provident’s 20-day weighted-average share price of $9.80. Pembina will assume all of Provident’s outstanding debt (approximately $550 million), including its convertible unsecured subordinate debentures. After the closing of the transaction, Pembina intends to offer 100% of the principal value plus accrued interest for Provident’s debentures. The acquisition is expected to close in late March or early April 2012.

BUSINESS RISK PROFILE – NEGATIVE
Provident’s cash flow is considered more volatile than that of Pembina because Provident has significant exposure to fractionation spreads and, to a lesser extent, to its product margin business. Currently, only 30% of Provident’s operating margins are tied to more stable fee-for-service agreements.

If the proposed acquisition completes as expected, Pembina’s EBIT, having been relatively stable for a conventional pipelines and oil sands producer, would decline to the 35% to 40% range (from 64% as of September 2011). In addition, DBRS also expects some integration risk following the acquisition.

As a result, Pembina’s ratings could be downgraded by more than one notch following the completion of the acquisition.

FINANCIAL RISK PROFILE – NEUTRAL
Financially, the proposed acquisition would not have a significant impact on Pembina’s credit metrics. The assumption of $550 million in debt from Provident would not increase the debt leverage as Pembina will issue approximately $3.0 billion in new shares for the acquisition. In addition, the proposed acquisition is earnings and cash flow accretive immediately, which should provide some support to interest coverage and cash flow ratios.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies, which can be found on the DBRS website under Methodologies.