DBRS Limited (DBRS Morningstar) confirmed Inter Pipeline Ltd.’s (IPL or the Company) Issuer Rating and Senior Unsecured Notes rating at BBB (low) and its Fixed-to-Floating Rate Subordinated Notes at BB. All trends are Stable. The credit rating confirmations reflect the Company’s strong business risk profile underpinned by contracted cost-of-service and fee-based contracts and a diversified asset base. The key challenge to the credit ratings remains the start-up risk at the Heartland Petrochemical Complex (HPC or the Project). The Stable trends reflect DBRS Morningstar’s expectation that, once the HPC is fully operational, the Company’s credit metrics will improve and 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 credit ratings.
The HPC underwent repairs at its propane dehydrogenation (PDH) facility in Q2 2023, leading the Project to be shut down for most of the quarter. However, the PDH plant was restarted in Q3 2023 and is currently operating at close to full capacity. As a result of the remedial measures carried out at the PDH plant, the major turnaround in 2025 has been rescheduled to 2026. The polypropylene plant has been operating without any issues and all the take-or-pay contracts have commenced. Ramping up production at a new, large petrochemical plant is a complicated process, and DBRS Morningstar recognizes the possibility of modest delays. Nevertheless, material delays at the HPC, which could disrupt the assumption of 2024 being a full year of operation and in turn put the improvement in credit metrics at risk, could have a negative impact on the credit ratings.
Earnings as of the nine months ended September 30, 2023 (9M 2023), were comparable with 9M 2022 as weakness in the Marketing segment was mostly offset by higher earnings in the Transportation segment and the HPC. However, cash flow from operations was lower in the same period because of lower capitalized interest, as the HPC was placed in service in 2022. Nevertheless, lower capital expenditure (capex) at the HPC and the absence of material dividend payments allowed IPL to generate a free cash flow (FCF; i.e., cash flow after capex) in 9M 2023 and a modest reduction in debt. However, given the lack of meaningful cash flow from the HPC during 9M 2023, 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 weakened in 9M 2023 (8.8%) compared with YE2022 (11.2%).
DBRS Morningstar expects overall earnings and cash flow to be higher in 2024 because of the ramp-up in production at the HPC and modestly improved outlook for the Marketing segment. DBRS Morningstar also expects growth in earnings and cash flow at the Company's Transportation segment to grow over the medium term based on secured projects and optimization initiatives. Consequently, DBRS Morningstar expects credit metrics to continue to improve in 2024 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 that IPL's sustaining/growth capex requirements are modest relative to its cash flow and expects IPL to generate a material FCF surplus once the HPC is operational. 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 credit ratings.
DBRS Morningstar may consider a negative credit rating action if credit metrics don’t improve in line with DBRS Morningstar's expectations noted above and/or IPL's business risk profile deteriorates materially. A positive credit rating action is unlikely until the HPC is fully operational and the Company’s credit metrics improve 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/416784 (July 4, 2023).
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)
-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 16, 2023; https://www.dbrsmorningstar.com/research/419228)
-- 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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