DBRS Morningstar Confirms Ratings on Pembina Pipeline Corporation

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes rating of Pembina Pipeline Corporation (Pembina or the Company) at BBB (high), its Subordinated Notes rating at BBB (low), and its Preferred Shares rating at Pfd-3 (high). All trends are Stable. The confirmations reflect (1) Pembina’s operational resiliency and financial flexibility during the ongoing Coronavirus Disease (COVID-19) pandemic; (2) strong credit metrics in 2021, which are expected to remain solid over the medium term, as well as good liquidity; (3) a stable and contractual business risk profile as Pembina continued to bring new projects into service within a planned schedule and mostly within budget; and (4) a modest 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 has decided not to move forward with the development of the liquefied natural gas (LNG) Jordan Cove project, which was part of the 2017 Veresen Inc. acquisition, as a result of regulatory and political uncertainties.

In March 2022, Pembina announced that it entered into definitive agreements with Kohlberg Kravis Roberts & Co. (KKR) to combine their respective Western Canadian natural gas processing assets into a single new entity (NewCo) (the Transaction). Pembina will own 60% and KKR will own 40%. Pembina will be reporting its investment in the NewCo under the equity accounting method, under which Pembina will not consolidate the debt to be issued by the NewCo into its consolidated balance sheet. DBRS Morningstar reviewed the Transaction and issued its no-rating-impact opinion in the press release "DBRS Morningstar Comments on Agreement Between Pembina Pipeline Corporation and Kohlberg Kravis Roberts to Create New Joint Venture," dated March 1, 2022.

In line with DBRS Morningstar’s expectations, Pembina’s credit metrics in 2021 remained strong, providing the Company with good financial flexibility. Pembina also demonstrated its resiliency in managing through the impact of the ongoing coronavirus pandemic, as well as the low crude oil price environment in the early part of 2020, which had a profound impact on the energy sector, particularly on oil and gas producers. DBRS Morningstar expects that the Company’s financial performance will likely continue to remain strong in the medium term, given Pembina's reasonable leverage strategy, cash flow stability, and the positive impact of current crude oil prices.

The confirmations also incorporate risks faced by Pembina, including the negative impact of (1) contract expiries associated with the Ruby, Nipisi, and Mitsue pipelines; (2) unplanned operational disruptions from curtailments or third-party issues; and (3) potentially lower volume throughput in a volatile crude oil and natural gas price environment, including rising counterparty credit risk, and cost overruns and delays for its capital projects. While DBRS Morningstar believes that a prolonged coronavirus pandemic and/or another collapse in oil prices could materially affect Pembina’s credit profile, DBRS Morningstar expects Pembina to maintain strong cash flow and credit metrics over the near-to-medium term, which will be supported by the fact that long-term fee-based contracts account for approximately 90% of estimated EBITDA in 2022 (including nearly 70% from COS or TORP contracts, which are not subject to volume risk) and approximately 83% of Pembina’s counterparties remain investment-grade credits or have split ratings.

Pembina's credit profile in 2021 was further supported by a free cash flow surplus of over $450 million (after funding capex and paying dividends). DBRS Morningstar estimates that Pembina will spend approximately $600 million to $700 million in capex each year over the next few years. Based on the Company's cash flow projection, DBRS Morningstar expects Pembina to generate sufficient cash flow to fund its capex and pay dividends in the next two years. Should any external funding be required, DBRS Morningstar expects Pembina to continue to finance with 50% debt and 50% equity, maintaining its debt-to-EBITDA ratio at or below 4.0 times (x).

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 (1) the Company’s credit metrics weaken materially from current levels on a sustained basis; (2) its business risk profile following the completion of the Transaction deteriorates significantly; or (3) Pembina's future exposure to commodity price risk increases to 20% of EBITDA on a long-term basis.

ESG CONSIDERATIONS
There was no environmental, social, or governance factor or consideration with a significant or relevant impact on the credit ratings.

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 Midstream Energy Industry (November 3, 2021; https://www.dbrsmorningstar.com/research/387443) and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), 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).

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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