DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Commercial Paper rating of Inter Pipeline (Corridor) Inc. (Corridor or the Company) at A (low) and R-1 (low), respectively. All trends are Stable. Corridor is 100% owned by Inter Pipeline Ltd. (IPL; rated BBB (low), Stable by DBRS Morningstar). The rating confirmations reflect the Company's strong business risk profile and stable financial risk profile.
Corridor’s business risk profile is supported by a cost-of-service-based firm service agreement (FSA) with relatively strong investment-grade shippers that are also the Athabasca Oil Sands Project (AOSP) sponsors: Canadian Natural Resources Limited’s (CNRL; rated A (low) with a Stable trend by DBRS Morningstar) owns 70%, including 60% through its affiliate, Canadian Natural Upgrading Limited; Chevron Corporation (rated AA with a Stable trend by DBRS Morningstar) owns 20%; and Shell Canada Limited owns 10%. The FSA extends to 2049 and allows recovery of substantially all operating costs, including depreciation, taxes, and financing costs, plus a return on equity (ROE) on the rate base, which eliminates volume or commodity price risks and provides a steady stream of cash flows. Corridor's business risk profile is also supported by ample recoverable bitumen reserves at AOSP and Corridor's position as the sole pipeline with exclusive rights to transport diluted bitumen produced from AOSP. DBRS Morningstar believes that AOSP will remain a key focus asset for the shippers given its low decline rate and ability to generate positive netbacks at low crude oil prices, incentivizing them to use the pipeline.
The overall operating environment for Corridor continued to remain positive in 2023. While crude oil prices have declined in 2023 compared with 2022, they still remain comfortably above the break-even oil prices, as a result of which the shippers are expected to continue to report strong earnings and surplus free cash flow. The credit profile of the shippers remained strong with CNRL, the primary shipper on Corridor, confirmed at A (low) (see DBRS Morningstar press releases dated June 3, 2023). DBRS Morningstar also notes that rising interest rates have a positive impact on Corridor's earnings as financing costs are recoverable from shippers, while Corridor’s allowed ROE is linked to long-term interest rates.
DBRS Morningstar expects Corridor to maintain a stable financial profile with predictable cash flows supported by the long-term FSA. DBRS Morningstar notes that Corridor has maintained its debt-to-rate base ratio at or around the benchmark criteria of 75% (Q1 2023: 73.3%). The ratings incorporate DBRS Morningstar’s review of the Company’s financial and other relevant information, which will not be disclosed in this rating report for Corridor, as it is a private company. Corridor has maintained a stable financial profile. An upgrade to Corridor’s ratings is unlikely in the near term; however, the ratings could come under pressure should the credit quality of the shippers deteriorate materially.
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).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2022; https://www.dbrsmorningstar.com/research/404917)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)
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.
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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 did have 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.
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