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

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. All trends remain Stable. The confirmations incorporate Pembina’s solid financial performance in 2016 and the continued improvement of its business risk profile. All credit metrics for 2016 remained strong for current ratings.

With a number of sizable capital projects that came online over the past two years, particularly in the Conventional Pipeline segment and the Gas Service segment, the quality of earnings and cash flow improved as approximately 80% of EBITDA generated from either cost of services, take-or-pay or fee-for-service (2015: 77%). Throughput levels in all segments increased meaningfully, reflecting solid demand from the shippers and new projects that came online in 2015 and 2016. These positive factors, combined with a large asset base and the improving natural gas liquids pricing, resulted in strong performance in 2016. The Company’s credit metrics remained strong for the year despite higher debt levels and the lagging of cash flow from projects that are still under construction.

In 2016, Pembina placed approximately $1.3 billion new assets into service, including the Musreau III Facility, Resthaven Expansion, Vantage Expansion, Terminal and Hub Services, RFS II Fractionator, Horizon expansion and Cheecham Terminal Expansion. In 2017, there are approximately $4.0 billion of projects to be completed. These assets, along with those placed into service in 2016, are expected to contribute between $600 million to $950 million of incremental EBITDA by 2018. Additionally, all of the Company’s current and future capital projects are supported by long-term fee-for-service contracts with a significant take-or-pay component.

Pembina is continuing a number of large capital projects in 2017. Most projects are supported by take-or-pay or fee-for-service commitments from the producers for a majority portion of the designed capacity. Capital expenditures in 2017 is estimated to be approximately $1.9 billion, focusing on the completion of the multi-year growth program. As a result, substantial free cash flow deficits are expected in 2017. During this period, Pembina faces several challenges, such as (1) project execution risk relating to potential cost overruns and delays and (2) financing free cash flow deficits in a prudent manner as to maintain credit metrics at or close to current levels. DBRS recognizes that during this period, the Company’s credit metrics are expected to deteriorate modestly but should improve starting in 2018, once the major projects are in service. Given the improvement of its business risk profile over the past few years, DBRS expects Pembina to maintain the debt-to-capital ratio at under 50% and the cash flow-to-debt ratio close to 20% on a sustained basis

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.

The principal 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 www.dbrs.com under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.