DBRS Morningstar Upgrades Ratings on Pembina Pipeline Corporation

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and Senior Unsecured Notes rating of Pembina Pipeline Corporation (Pembina or the Company) to BBB (high) from BBB, the Company’s Preferred Shares rating to Pfd-3 (high) from Pfd-3, and its Subordinated Notes rating to BBB (low) from BB (high). All trends are Stable.

The upgrades reflect (1) Pembina’s operational resiliency and financial flexibility during both the low oil price environment and the Coronavirus Disease (COVID-19) pandemic in 2020 as well as its strong credit metrics and liquidity during this period; and (2) a material reduction in Pembina’s potential exposure to commodity price risk as the Company indefinitely suspended the propane dehydrogenation (PDH) plant and polypropylene (PP) upgrading facility (PDH/PP Facility). Pembina also paused the development of the liquefied natural gas Jordan Cove project, which was part of the 2017 Veresen Inc. acquisition, as a result of regulatory and political uncertainties. The suspension of the PDH/PP Facility (or CKPC) was because of significant risk resulting from the coronavirus pandemic, mostly with respect to costs. Pembina assumed net-tax impairments of $258 million for Jordan Cove and $252 million for CKPC, which are sunk costs and have no impact on Pembina’s future cash flow. The indefinite suspension of the CKPC and the pause of the Jordan Cove development significantly improve Pembina’s business risk profile in the following ways: (1) elimination of potential exposure to commodity price risk associated with the operations of these projects; (2) reduction of project execution risk, including delays and cost overruns; (3) mitigation of regulatory and political uncertainties; and (4) allowing Pembina to focus on areas where it has expertise and leverage.

In line with DBRS Morningstar’s expectations, Pembina’s credit metrics in 2020 were very resilient through the low oil price environment and remained strong, at much higher than the level required for the BBB rating, given Pembina’s currently strong business profile. DBRS Morningstar expects that the Company’s financial performance will likely continue to remain strong in the medium term. Pembina also demonstrated its resiliency in managing the low crude oil price environment in the early part of 2020. In March 2020, Pembina, like all other pipelines and midstream asset operators and owners in Western Canada, faced a challenging situation during which the coronavirus pandemic and the collapse of crude oil prices had a profound impact on the energy sector, particularly on oil and gas producers. The upgrades also incorporate risks faced by Pembina, including operational disruptions, potentially lower volume throughput in the low price environment, rising counterparty credit risk, cost overruns, and delays for its capital projects. However, these risks can be mitigated (1) because more than 90% of Pembina’s EBITDA in 2021 is expected to be generated from long-term fee-based contracts, with a substantial portion from cost of service (COS) or take-or-pay (TORP); and (2) by the integration and strategic locations of Pembina’s infrastructure networks in Western Canada and in the United States. Further, Pembina implemented a number of measures, one of which was to defer its 2020 and 2021 capital expenditures (capex) to later years. The capex reduction, by almost 50% from what was previously planned, would have no material impact on Pembina’s existing cash flow level. This materially reduced free cash flow deficits in 2020 to approximately $200 million from more than $600 million in 2019 ($1.2 billion in 2017 and $1.5 billion in 2016).

While DBRS Morningstar believes that a prolonged coronavirus pandemic and/or another collapse of oil prices could materially affect Pembina’s credit profile; with the project suspensions, Pembina should be in a much stronger position to cope with these circumstances over the near to medium term. Based on the Company’s current capex program and its projected cash flow, DBRS Morningstar expects Pembina to generate free cash flow surplus after dividends and capex in 2021 and 2022. DBRS Morningstar expects Pembina to maintain strong cash flow and credit metrics over the near to medium term, which will be supported by the following: (1) long-term fee-based contracts account for more than 90% of estimated EBITDA in 2021 (including nearly 70% from COS or TORP contracts, which are not subject to volume risk); (2) approximately 75% of Pembina’s counterparties remain investment-grade credits or have split ratings, even with weakening credit counterparties resulting from the collapse of oil prices; (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 Kinder Morgan Canada (KMC) acquisition, Pembina significantly increased its size and diversification. Pembina’s well diversified infrastructure operations include 40% crude oil and condensate, 30% natural gas liquids, and 30% natural gas.

DBRS Morningstar believes that Pembina’s current credit profile is strong, providing it with good financial flexibility to cope with market volatility in the near to medium term; however, DBRS Morningstar could take a negative rating action if the Company’s credit metrics weaken materially from the current level on a sustained basis and/or if its business risk profile deteriorates significantly, particularly its future exposure to commodity price risk rising to 20% of EBITDA on a long-term basis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 19, 2020, https://www.dbrsmorningstar.com/research/370267) and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020, https://www.dbrsmorningstar.com/research/369165), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

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.

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

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