DBRS Comments on Pembina’s Closing of the Veresen Inc. Acquisition

DBRS Limited (DBRS) noted that Pembina Pipeline Corporation (Pembina or the Company; rated BBB with a Stable trend by DBRS) announced today that it has closed the acquisition of Veresen Inc. (Veresen; rated BBB, Under Review with Negative Implications, by DBRS) for approximately $9.4 billion, including the assumption of Veresen’s debt (including non-recourse debt at Veresen’s subsidiaries) and preferred shares (the Acquisition). Consistent with DBRS’s press release “DBRS Comments on Veresen’s Proposed Combination with Pembina,” dated May 1, 2017, DBRS’s view remains that the Acquisition will not have a material impact on the Company’s credit profile.

Pursuant to the Acquisition agreement, (1) Pembina acquired all of the issued and outstanding common shares of Veresen, (2) Veresen has amalgamated with Pembina and (3) the outstanding Veresen preferred shares have been exchanged for Pembina preferred shares with the same terms and conditions. The debt issued under Veresen (excluding Veresen’s non-recourse subsidiary debt) will be Pembina’s obligations.

In accordance with the Acquisition agreement, each Veresen common shareholder (Shareholder) who elected cash will receive, on a pro-rated basis, an aggregate amount that equals (1) cash of approximately $6.4314 and (2) approximately 0.2809 of a Pembina common share multiplied by the number of Veresen common shares held by each Shareholder. Shareholders who elected Pembina common shares or did not make an election will receive 0.4287 of a Pembina common share for each Veresen share held.

Based on Pembina’s press release dated today, all regulatory conditions have been satisfied prior to closing. DBRS also notes that Pembina will continue working with the Commissioner of Competition regarding the Alberta Ethane Gathering System (AEGS) post-closing and the fact that the matter may be referred to the Competition Tribunal for resolution for a period of up to one year from closing. However, DBRS believes that it will not have a material impact on Pembina’s business risk profile, since the AEGS is estimated to account for only approximately 1% of Pembina’s forecast 2018 adjusted EBITDA.

In terms of Pembina’s financing of the Acquisition, DBRS notes that the financing is consistent with Pembina’s financing plan at the time of the announcement of the Acquisition in May 2017. The cash portion of the Acquisition is estimated to be approximately $1.5 billion. This will temporarily be financed with Pembina’s credit facilities and then refinanced with a mix of long-term debt, common equity and preferred shares. DBRS continues to hold the view that the Acquisition will modestly weaken Pembina’s financial metrics in the near term. Please see DBRS’s above-referenced press release dated May 1, 2017, for more details.

Post-Acquisition, Pembina will benefit from the following:

(1) Larger size and scale.
(2) Stronger access to the capital market.
(3) Enhanced ability to carry on larger-scale capital projects.
(4) Improved diversification.

DBRS believes that these positive factors will offset the modestly weaker financial profile post-Acquisition for Pembina.

In the medium term, Pembina is expected to benefit from approximately $2.8 billion of capital projects that have been recently brought into service. All of these newly completed projects are under fee-for-service or take-or-pay long-term contracts. Pembina expects to have another $2.0 billion of projects brought into service in early 2018.

DBRS will continue to assess any new developments post-closing. DBRS does not expect any material changes in Pembina’s business and financing strategies. However, should Pembina take aggressive actions that may negatively affect its current credit profile, particularly if its credit metrics are to weaken materially from June 30, 2017, levels (which were strong for the current ratings) with no plan to reverse these metrics within a reasonable time period, a negative rating action is possible.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies.

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