DBRS Confirms Pembina Pipeline Corporation at BBB with Stable Trend

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Notes rating of Pembina Pipeline Corporation (Pembina or the Company) at BBB, both with Stable trends. Concurrently, DBRS has discontinued the rating of the 7.38% Senior Secured Notes, as Pembina has repaid these notes. The confirmation largely reflects DBRS’s view that the Company has managed its exposure to fractionation spreads as expected, following the completion of the Provident acquisition (the Acquisition). It also reflects its good liquidity and management focus on growing Pembina’s future earnings in low-risk businesses.

Pembina’s business risk increased notably following the Acquisition, as a material proportion of Provident’s EBIT came from operations with fractionation spread/commodity price risk exposure. This was evident in the second quarter in 2012, when earnings and cash flow were materially affected by weak propane prices, resulting in weaker cash flow and interest coverage metrics than expected at the time of the Acquisition. DBRS notes that the debt-to-capital ratio was 35.6% at June 2012, although, excluding goodwill, the debt ratio was 48.5%. Pembina’s current credit metrics remain within DBRS’s BBB rating category.

The confirmation also reflects DBRS’s expectation that Pembina’s exposure to product margins/fractionation spreads is expected to decline on a proportional basis over time, as incremental earnings from new projects are expected to be on fee-for-service terms or a long-term contract basis. In addition, the Company will have the option to move its portfolio of contracts to a higher fee-for-service mix as existing Provident contracts expire, although this is likely to be a gradual process.

Pembina is expected to generate large free cash flow deficits through 2013 due to large capital expenditures ($1.0 billion to $1.5 billion over 2012 and 2013, DBRS estimates). DBRS expects Pembina to finance its expansion with an appropriate mix of debt and equity to maintain credit metrics commensurate with the current rating. DBRS also expects Pembina’s credit metrics to improve gradually as the Company receives incremental cash flows from its new projects.

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 our website under Methodologies.