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

DBRS Limited (DBRS Morningstar) 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 are Stable. The confirmations incorporate Pembina’s solid financial performance in 2019 and DBRS Morningstar’s expectation that Pembina’s credit profile will remain solid and resilient to the Coronavirus Disease (COVID-19) pandemic and the currently low crude oil price environment over the medium term. The confirmation also reflects Pembina’s improved business risk profile following the acquisition of Kinder Morgan Canada Limited (KMC) and the U.S. portion of the Cochin pipeline system, which closed in December 2019 (2019 Acquisition).

Since March 2020, Pembina, like all other pipelines and mid-stream asset operators and owners in Western Canada, has faced a challenging situation in which the coronavirus pandemic and the collapse of crude oil prices have had a profound impact on the energy sector, particularly on the oil and gas producers. The current and potential risks for Pembina include the safety and health of its staff, operational disruptions, potentially lower volume throughput, rising counterparty credit risk, and delays or deferrals of its capital projects. Pembina announced a number of measures to cope with this difficult situation as follows: (1) deferring a portion of its 2020 capital expenditures (capex), between $900 million and $1,100 million (approximately a 50% cut), to later years, with most of the capex reduction being associated with Peace Pipeline Expansion Phases VII, VIII, and IX as well as the propane dehydrogenation (PDH) plant and polypropylene (PP) upgrading facility (PDH/PP Facility); (2) obtaining an additional $800 million unsecured revolving credit facility, making the total liquidity over $2.3 billion in cash and available credit facilities in early April 2020; and (3) implementing a plan to maintain the safety and health of staff and its operational continuity because Pembina’s assets are designated as critical infrastructure. DBRS Morningstar believes these measures have materially muted the negative macro environment, at least in the near term.

While DBRS Morningstar believes that a prolonged coronavirus pandemic and low oil prices could materially impact Pembina’s credit profile, Pembina is in a good position to cope with the current situation over the near to medium term. Pembina’s resiliency and ability to cope with heightened market volatility reflect its very strong 2019 credit metrics (despite the impact of debt issuance for the KMC acquisition in December 2019) and its expected solid 2020 metrics, even if there is a 25% volume throughput reduction on its Conventional Pipeline system and Facilities. In early 2020, Pembina issued $1.0 billion in medium-term notes with proceeds used to reduce credit facilities. As a result, the impact of the debt issuance on Pembina’s credit metrics is modest. DBRS Morningstar expects Pembina to generate sufficient cash flow to fund its reduced capex and dividends in 2020 without requiring additional external funds. Cash flow generation and credit metrics over the near to medium term are supported by (1) long-term fee-based contracts that account for between 85% and 90% of estimated EBITDA in 2020 (including 62% from take or pay or cost of service contracts, which are not subject to volume risk); (2) even with weakening credit counterparties due to the collapse of oil prices, approximately 86% of Pembina’s counterparties remain investment-grade credits or have split ratings; (3) approximately 66% of Pembina’s top 20 counterparties are non-oil and gas producers and integrated oil and gas producers, significantly mitigating the impact of low oil prices; and (4) following the 2019 Acquisition, Pembina significantly increased its operational and geographical diversification. Pembina’s well diversified infrastructure operations include 40% crude oil and condensate, 30% natural gas liquids (NGL), and 30% natural gas.

While DBRS Morningstar believes that Pembina’s current credit profile is solid and its ability to cope with the market volatility is strong in the near to medium term, DBRS Morningstar could take a negative rating action if its adjusted debt/EBITDA increases significantly over 4.0 times and cash flow/adjusted debt declines to below 17.5% on a sustained basis. On the other hand, DBRS Morningstar could consider a positive rating action if Pembina maintains its current business risk profile and reasonable credit metrics through this challenging period and the macro environment stabilizes.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are the Rating Companies in the Pipeline and Diversified Energy Industry (November 26, 2019); DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019); and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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