DBRS Confirms Inter Pipeline Ltd. at BBB (high), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Medium Term Notes rating of Inter Pipeline Ltd. (IPL or the Company) at BBB (high) with Stable trends. IPL’s ratings reflect the Company’s strong business risk profile supported by medium- to long-term cost-of-service (COS) and fee-based contracts accounting for approximately 85% of EBITDA. The Company’s financial risk profile has remained reasonable with growing and predictable cash flows from its oil sands pipeline expansions and diversified operations.

The Company’s business risk profile continues to strengthen with the substantial completion and placing into service of the $2.7 billion integrated oil sands expansion program for Cold Lake and Polaris pipeline systems in January 2015. These major expansion projects are expected to contribute approximately $255 million in incremental EBITDA annually and are commercially secured by a 20-year ship-or-pay contract with Foster Creek, Christina Lake and Narrows Lake developments (a partnership of Cenovus Energy Inc. and ConocoPhillips Co. rated A (low) and “A,” respectively, by DBRS) to transport 850,000 barrels/day (b/d) of bitumen blend and diluent. These pipeline expansions further diversify and strengthen the Company’s competitive position in the Western Canadian Sedimentary Basin and add approximately 1.3 million b/d of additional capacity in addition to current contractual arrangements, providing opportunity for incremental growth. The Company is, however, exposed to earnings volatility because of commodity and volume risk in its Natural Gas Liquids Extraction business as well as volume risk in the Bulk Liquid Storage business. In 2014, 15% of IPL’s EBITDA was exposed to both commodity and volume risk. DBRS expects this exposure to reduce to approximately 10% of EBITDA as full-year benefit of the new oil sands pipeline expansions underpinned by COS contracts are placed in service and, combined with existing contracts, are expected to contribute approximately 60% of IPL’s EBITDA in 2015.

IPL’s financial profile is supported by a contracted stream of cash flow generated from its growing portfolio of diversified energy infrastructure assets. The Company’s cash flow to total debt (non-consolidated) improved to 20.9% at Q1 2015 compared with 18.6% at Q1 2014. IPL’s $400 million capital expenditure (capex) program (growth: $340 million; sustaining: $60 million) for 2015 is primarily focused on the expansion of its oil sands and conventional oil pipeline systems ($142 million spent at Q1 2015). IPL’s capex is expected to moderate going forward as major projects are completed, reducing the Company’s need to access the debt markets. Going forward, DBRS expects Company’s total debt-to-capital on a non-consolidated basis (53.6% at Q1 2015) to remain in the lower end of the Company’s 50% to 55% target range.

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 (January 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.