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

DBRS Limited (DBRS) 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 rating at Pfd-3. All trends remain Stable. The confirmations incorporate Pembina’s solid financial performance in 2017 and the continued improvement of its business risk profile. All credit metrics for 2017 remained strong for the current ratings.

Following the acquisition of Veresen Inc. (the Veresen Acquisition) in October 2017 and with a number of sizable capital projects coming on line over the past two years, particularly in the Conventional Pipelines, Oil Sands and Heavy Oil, and Gas Services segments, the size, diversification and the quality of earnings and cash flow improved. In 2017, approximately 82% of EBITDA was generated from either cost of service (COS), take-or-pay (ToP) or fee-for-service (FFS) (2016: 77%). Throughput levels in all segments increased meaningfully, reflecting solid demand from the shippers and new projects that came on line in 2016 and 2017. These positive factors, combined with a large asset base and the improving natural gas liquids (NGL) pricing, resulted in strong performance in 2017. 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 2017, Pembina placed over $3.7 billion ($4.8 billion including those assumed from Veresen) of new capital projects into service, including the Phase III Expansion, third fractionator at Redwater, and additional pipeline expansions. The Company’s current and future capital projects are almost entirely supported by long-term FFS contracts with a significant ToP component, enhancing cash flow stability. This significantly improves Pembina’s cash flow stability going forward. In 2018, Pembina expects to bring approximately $1.0 billion of new projects into services, further strengthening its long-term cash flow stability.

Pembina is continuing a number of large capital projects in 2018. Most projects are supported by ToP or FFS commitments from the producers for a majority portion of the designed capacity. Capital expenditures (capex) in 2018 are estimated to be approximately $1.3 billion, focusing on the completion of the multi-year growth program. Based on Pembina’s projected cash flow in 2018, DBRS estimates a free cash flow deficit for the year in the $500 million to $700 million range. This potential deficit can be reasonably financed by Pembina. DBRS expects Pembina to continue to maintain its long-term financing plan with 50% debt/50% equity and internally generated cash flow. While Pembina’s current debt-to-capital ratio remains strong, providing it with some financing flexibility, should the cash flow-to-debt ratio decline materially below the 2017 level on a sustained basis, it could pressure the ratings.

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 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.

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