DBRS Confirms Pembina Pipeline Corporation at BBB and Pfd-3, Trends Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes of Pembina Pipeline Corporation (Pembina or the Company) at BBB, and the Preferred Shares at Pfd-3. The trends remain Stable. The confirmation largely reflects DBRS’s view that the Company’s exposure to fractionation (frac) spreads and seasonal pricing differentials has lowered since the closing of the Provident acquisition (the Acquisition) in 2012 and has been maintained at a manageable level. The confirmation also reflects DBRS’s expectation that Pembina will continue to prudently manage its project expansion risk and to finance its expansion with appropriate debt and equity to maintain its debt-to-capital ratio at around 40% and cash flow-to-debt ratio at or above 25%. However, the rating trends could be changed to Positive if the Company successfully and substantially completes its current major expansion projects (backed by long-term take-or-pay or fee for service (FFS) contracts) while maintaining its credit metrics at or near the current level.

Pembina’s business risk profile continued to improve in 2014 reflecting the following main factors: (1) All new capital projects that have come into service in 2013–2014 were either take-or-pay contracts or FFS contracts. (2) The Conventional Pipeline segment has replaced a portion of market-based contracts with take-or-pay contracts. In 2014, approximately 10% of EBITDA was from the operations that were exposed to frac spread risk (35% in 2012). All these factors improve Pembina’s ability to cope with price volatility and seasonal price differentials, as evident by weak earnings in its propane business in Q4 2014 due to low propane prices. DBRS recognizes that Pembina is exposed to volume risk in some of its contracts; however, the 2014 volume throughput remained strong. As a result, the impact of the current weak energy price environment is not a major concern in the short term.

Pembina’s financial profile strengthened significantly in 2013 and remained stable in 2014, reflecting strong incremental cash flow from new investments and the conservative financing strategy to date. Over the past two years, total debt-to-capital declined to approximately 30% (2012: 37%) and cash flow-to-debt has strengthened to near 30% (2012: 19%). In 2014, the capital structure was supported by a substantial amount of equity issuance, including the dividend reinvestment program, despite a modest increase in debt levels.

Pembina is currently pursuing a number of large capital projects in 2015 and 2016, mainly on its conventional pipelines, and natural gas and natural gas liquids processing plants. Most projects have received take-or-pay (or FFS) commitments from the producers for a significant portion of designed capacity. Capital expenditures in 2015are estimated to be $1.9 billion. As a result, large free cash flow deficits are expected to be incurred over the next two years. During this period, Pembina faces several challenges, such as (1) significant project execution risk relating to potential cost overruns and project delays, (2) financing free cash flow deficits so as to maintain credit metrics at or close to current levels and consistent with the current rating and (3) continuing to manage its exposure to frac spread risk at around 10% of overall assets and EBITDA.

DBRS recognizes that during this period of large capital projects, Pembina’s credit metrics are expected to decline modestly but should improve once the major projects are completed. However, should the financial profile deteriorate significantly from the current level, a negative rating action could occur.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Pipeline and Diversified Energy Industry, which can be found on our website under Methodologies.