DBRS Limited (DBRS Morningstar) confirmed the ratings on Inter Pipeline Ltd. (IPL or the Company) at BBB (low) and BB. All trends are Stable. The rating confirmations reflect the Company’s strong business risk profile underpinned by contracted cost of service- (COS) and fee-based contracts and a diversified asset base. The key challenge to the ratings remains the commissioning and start-up risk at the Heartland Petrochemical Complex (HPC). The Stable trend reflects DBRS Morningstar’s expectation that once the HPC is fully operational, the Company’s credit metrics will improve and that Brookfield Infrastructure Partners L.P. and its institutional partners (together, Brookfield Infrastructure) will maintain IPL’s credit metrics at a level commensurate with the current ratings.
The HPC achieved two major milestones in 2022 with the commissioning of the polypropylene plant in June 2022 and the propane dehydrogenation plant in October 2022. Production from the HPC is expected to ramp up in Q4 2022 and in 2023. Nevertheless, ramping up production at a new and large petrochemical plant is a complicated process and a material delay or under-performance could have a negative impact on the Company's credit risk profile.
Earnings as of the nine months ended September 30, 2022, (9M 2022) were higher relative to 9M 2021 across IPL's business segments. The Long-Haul Pipeline business (51% of 9M 2022 EBITDA) benefitted from higher interest rates. The business operates under COS contracts where returns are directly linked to long-term Government of Canada bond rates. The COS contracts also mitigate the impact of inflation by passing on increases in costs to primarily investment-grade counterparties. In addition, higher commodity prices had a material impact on earnings, especially at the Marketing segment. Higher earnings combined with lower capital expenditure (capex) at the HPC, and the absence of dividend payments allowed IPL to generate a modest free cash flow (FCF; i.e., cash flow after capex) in 9M 2022 and a modest increase in debt. Consequently, the Company's modified consolidated (treating Inter Pipeline (Corridor) Inc., rated A (low) with a Stable trend by DBRS Morningstar, as an equity investment) cash flow-to-debt ratio improved in 9M 2022 compared with YE 2021.
While earnings from the Marketing segment in 2023 is expected to be tempered by lower commodity prices, DBRS Morningstar expects overall earnings and cash flow to be materially higher in 2023 because of the ramp-up in production at the HPC. DBRS Morningstar expects the credit metrics to continue to improve in 2023 and expects IPL to maintain its modified consolidated cash flow-to-debt ratio in excess of 15% once the HPC is fully operational. DBRS Morningstar notes post completion of the HPC, IPL's sustaining/growth capex requirements are modest relative to its cash flow, and expects IPL to generate a material FCF surplus. DBRS Morningstar expects Brookfield Infrastructure to manage its distribution policy in a manner consistent with maintaining IPL's key credit metrics at a level commensurate with the ratings.
DBRS Morningstar may consider a negative rating action if credit metrics weaken materially below DBRS Morningstar's expectation and/or IPL's business risk profile deteriorates materially. A positive rating action is unlikely until the HPC is fully operational and the credit metrics improve materially.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
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/396929 (May 17, 2022).
The principal methodologies are Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2022; https://www.dbrsmorningstar.com/research/404917), Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 31, 2022; https://www.dbrsmorningstar.com/research/402196), and DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404248), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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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.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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