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 rating of Pembina Pipeline Corporation (Pembina or the Company) at BBB, and the Company’s Preferred Shares at Pfd-3. The trends remain Stable. The confirmations largely reflect DBRS’s view that Pembina continues to maintain solid credit metrics and liquidity in the current significantly lower energy price environment, and has executed most of its major capital projects within budget and on schedule.

Pembina’s credit metrics in 2015 remained consistent with DBRS’s expectation and supportive of the current rating. Despite being in the midst of high capex (until 2017) and a significantly weaker energy price environment, the Company maintained its solid financial profile. Throughput levels in the Oil Sands segment also remained stable, while throughputs in the Conventional Pipelines and Gas Services segments increased meaningfully, reflecting solid demand from the shippers and new projects that came online in 2014 and 2015.

In 2015, Pembina placed $1.3 billion of new assets into service, including the Peace and Northern Phase II pipeline expansion, Saturn II, the Saskatchewan Ethane Extraction plant (SEEP) and the Resthaven Gathering pipeline. These assets are expected to contribute between $100 million and $150 million of EBITDA. Additionally, all of the Company’s current and future capital projects are supported by long-term fee-for-service (FFS) contracts with significant take-or-pay (ToP) portions. DBRS expects that over the near to medium term, Pembina’s cash flow should continue to be protected by ToP and FFS contracts. In 2015, approximately 80% of EBITDA was generated by cost of service, ToP and FFS contracts (66% in 2014), with exposure to frac spreads limited to merely 1%, from 14% in 2014.

However, DBRS recognizes that, over a longer term, should the weak energy price environment persist, there could be a negative impact on Pembina’s throughput volumes and the ability of the Company to generate cash flow. Should throughputs drop materially in the coming years, DBRS could take a negative rating action. In addition, it is DBRS’s view that Pembina’s exposure to credit risk would increase should the energy price drop further from the current levels, as a considerable portion of Pembina’s net credit exposure is with counterparties that are below investment grade and non-collateralized. DBRS notes that Pembina manages its non-investment grade counterparties by requiring parental guarantee, letter of credit, pre-payments or cash deposits.

Pembina is currently pursuing a number of large capital projects in 2016 and 2017, mainly on its conventional pipelines, and natural gas and natural gas liquids (NGL) processing plants. Most projects are supported by ToP or FFS commitments from the producers for a significant portion of the designed capacity. Capex in 2016 and 2017 is estimated to be approximately $2.1 and $1.0 billion, respectively. As a result, substantial 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, and (2) financing free cash flow deficits in a prudent manner as to maintain credit metrics at or close to current levels to be consistent with the current rating. DBRS expects Pembina to maintain the debt-to-capital ratio at around 40% and the cash flow-to-debt ratio at 25% on a sustainable basis. 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 Pembina’s credit metrics deteriorate significantly from current levels, 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 methodologies are Rating Companies in the Pipeline and Diversified Energy Industry and Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on our website under Methodologies.