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 the Company’s (1) exceptionally strong credit metrics in 2022, which are expected to remain strong in 2023 and over the medium term; (2) good liquidity and sufficient operating cash flow to finance growth capital expenditures (capex) and dividends; and (3) reasonable debt leverage target. The fee-based contribution to adjusted EBITDA was approximately 82% in 2022, above the minimum 80% threshold. Pembina's debt/adjusted EBITDA ratio was below Pembina’s 3.50 times (x)–4.25x target range, which DBRS Morningstar views as strong in the context of the current ratings.

Pembina's credit metrics were supported by its exceptionally strong EBITDA and cash flow in 2022 and reasonable debt leverage. Most of the increases in EBITDA and cash flow were contributed by the Marketing & New Ventures (M&NV) and Pipeline divisions, as well as from Pembina Gas Infrastructure Inc. (PGI), of which Pembina owns 60% following the transaction in August 2022. (Kohlberg Kravis Roberts (KKR) owns 40%.) The financial performance of the M&NV division is not expected to repeat in 2023, but Pembina's fee-based operations should remain solid, supported mainly by Pembina's stable contractual risk profile and its focus on enhancing utilization of existing assets, as well as newly completed projects. As such, DBRS Morningstar expects Pembina's credit metrics to remain strong in 2023 and solid in the medium term, providing the Company with good financial flexibility to fund its growth capital needs.

Pembina's current capex program is modest, with plans to spend most capex on growth projects across the integrated value chain. Capex for 2023 is estimated to be approximately $800 million and is expected to be fully funded with cash flow from operations (net of dividends). Any net free cash flow surplus (net of capex and dividends) will likely be used to reduce debt and to buy back shares. DBRS Morningstar notes that if the investment in the proposed Cedar LNG project in partnership with the Haisla First Nation is finalized this year, capex beyond 2023 would increase notably from 2023 but would remain manageable, given the currently projected cash flow and financing plan.

Given the challenges in the sector, as well as Pembina's exposure to commodity price risk, DBRS Morningstar does not expect a positive rating action in the near 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 deteriorates significantly; or (3) Pembina's future exposure to commodity price risk increases to over 20% of adjusted EBITDA on a sustained basis.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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).

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

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2022; https://www.dbrsmorningstar.com/research/404917)

-- DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404252/)

The credit rating methodologies used in the analysis of this transaction can be found at:
https://www.dbrsmorningstar.com/about/methodologies.

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.

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 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 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. This is a solicited credit rating.

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.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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