DBRS Confirms Inter Pipeline Ltd. at BBB with a Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and the Unsecured Medium Term Notes rating of Inter Pipeline Ltd. (IPL or the Company) at BBB. DBRS also confirmed the rating of IPL’s Fixed-to-Floating Rate Subordinated Notes at BB (high). All trends are Stable.

IPL’s ratings reflect the Company’s earnings from a diversified portfolio of energy infrastructure assets supported by medium- to long-term cost-of-service (COS) and fee-based contracts. The ratings are, however, constrained by earnings volatility from exposure to commodity and volume risks in the Company’s natural gas liquids processing and volume risk in its conventional oil pipelines and bulk liquid storage businesses. For 2018, 56% of IPL’s EBITDA was generated from COS contracts, 13% from fee-based contracts, 29% from commodity-based contracts and 2% from the product margin business.

IPL’s Heartland Petrochemical Complex (HPC or the Project), which is set to produce 525,000 tonnes of polypropylene, remains on schedule and budget. IPL completed installation of two major components of the Project, including the 820-tonne propane-propylene splitter and 800-tonne polypropylene reactor. The $3.5 billion Project is expected to come into service in late 2021, and $1.3 billion has been spent as at Q1 2019. DBRS considers the petrochemical and processing business to be riskier relative to IPL’s contractually secured pipelines business because of the higher volatility in the income stream and high level of competition. IPL aims to mitigate the volatility by securing take-or-pay contracts for 70% to 85% of HPC’s capacity. IPL has maintained its previously announced funding plan and completed its inaugural issuance of $750 million of long-term subordinated hybrid notes in March 2019 (rated BB (high) with a Stable trend and assigned an equity weight of 50% by DBRS) to fund its capital program.

In November 2018, IPL acquired NuStar Energy L.P.’s European bulk liquids storage business for USD 270 million, adding 9.1 million barrels of capacity to IPL’s existing suite of storage assets. In July 2019, IPL placed into service its diluent and bitumen blend pipeline connection to the Kirby North Oil Sands Project under a long-term COS contract, which increased contracted capacity for IPL’s Cold Lake and Polaris pipeline systems.

The Company’s consolidated debt of $5.8 billion as at Q1 2019 includes approximately $1.4 billion of non-recourse debt at Inter Pipeline (Corridor) Inc. (rated A (low) with a Stable trend by DBRS). DBRS expects IPL’s non-consolidated debt-to-capital to remain in the 50% to 55% range during the construction of HPC. Project delays and cost overruns could pressure the ratings. DBRS also notes that when HPC is placed into service, should the Company successfully secure the target level of plant capacity under long-duration take-or-pay contracts with strong investment-grade counterparties, DBRS will reassess the ratings. However, the ratings could be negatively affected should the Company’s contract profile reflect shorter-duration contracts with weak counterparties for over 50% of plant capacity or if a significant portion of plant capacity remains uncontracted.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 2018), Rating Companies in the Oil and Gas and Oilfield Services Industries (August 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

This rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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.

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

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