DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating on the Senior Unsecured Notes of Keyera Corp. (Keyera or the Company) at BBB. DBRS Morningstar also confirmed the rating on the Company’s Subordinated Notes at BB (high). All trends are Stable. The rating confirmations reflect the Company’s solid business risk profile underpinned by fee for service (FFS) or take-or-pay (ToP) contracts at its gathering and processing (G&P) and Liquids Infrastructure (LI) segments and strong financial performance for the last 12 months (LTM) ended June 30, 2023. The Stable trends reflect DBRS Morningstar's expectations that Keyera's credit metrics will remain strong and that the Company will continue to manage its exposure to commodity risk within an appropriate target.
Keyera's operating and financial performance was solid in 2022 and H1 2023. The Company placed the KAPS pipeline system in service in 2023, ending a period of elevated capital expenditure (capex) and project execution risk. DBRS Morningstar expects that the ramp up of the KAPS Pipeline system, growth in the Company's G&P North business, which has a stronger contractual profile relative its G&P South business and growth capex focused on long-term contracts, should increase the contribution of ToP contracts to overall margins from the G&P and LI segments. While total debt has increased in H1 2023 relative to year end 2022 primarily because of the acquisition of the additional 21% interest in the Keyera Fort Saskatchewan complex, Keyera's credit metrics for the LTM ended June 30, 2023, have remained strong because of increased earnings in the G&P and LI business segments and continued strength in the marketing segment. DBRS Morningstar expects that, over the longer term, earnings from the marketing segment will normalize and the relatively stable G&P and LI businesses will account for approximately 75% (2022: 66%) of Keyera’s EBITDA on a long-term basis.
Keyera’s estimated capex of between $295 million and $345 million for 2023 (including maintenance capex), is materially lower than 2022 because of the completion of the KAPS pipeline system. While shareholder distributions are likely to increase over the medium term, Keyera remains committed to funding its capex program within its target net debt-to-EBITDA ratio of 2.5 times(x) to 3.0x. DBRS Morningstar expects the Company's key credit metrics, which are currently strong, to be modestly weaker over the forecast period because of normalization of earnings in the marketing segment. Nevertheless, they are expected to remain strong for the current rating with the cash flow-to-debt ratio around 20%.
A positive rating action would require an improvement in the Keyera's business risk profile, which could occur if the contribution of ToP contracts to realized margins in the G&P and LI segments increases materially and the Company maintains its cash flow-to-debt ratio at or above 20%. While unlikely over the medium term, Keyera’s ratings could be negatively affected should its cash flow-to-debt ratio decline below 15% over a sustained period or its business risk profile deteriorate significantly from the current level.
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 (July 4, 2023; https://www.dbrsmorningstar.com/research/416784).
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 Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 19, 2023; https://www.dbrsmorningstar.com/research/422134
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 credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit 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 credit ratings are under regular surveillance.
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