Morningstar DBRS Confirms Issuer Rating of Pembina Pipeline Corporation at BBB (high), Stable

DBRS Limited (Morningstar DBRS) 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.

KEY CREDIT RATING CONSIDERATIONS
Pembina exceeded its EBITDA guidance in 2023 as contractual cashflows along with higher activity levels at the Company's assets and higher earnings from the Marketing division offset the negative impact from wildfires and the system outage at Northern Pipeline. All of the Company's projects that are currently underway continue to be on time and are on or under budget. Pembina operated within cashflow and generated a free cash flow (cash flow after capital expenditure (capex), common and preferred dividends) surplus in 2023, a part of which was used to reduce debt modestly. As a result, the Company's key credit metrics strengthened modestly at year-end 2023. Morningstar DBRS believes that the Company's business risk profile remains strong and has improved modestly with closing of the previously announced purchase of the stake in Alliance, Aux Sable, and NRGreen joint ventures in April 2024 (the Acquisition).

Given supportive liquid prices, availability of additional pipeline egress options, and improving access to export markets, the outlook for activity levels at Pembina's assets in the Western Canadian Sedimentary Basin remains constructive. Morningstar DBRS expects the Company to stay within its financial guardrails and maintain its lease-adjusted cash flow-to-debt ratio in excess of 20% over the medium term.

Morningstar DBRS notes that the Company has achieved significant milestones on the Cedar LNG Project (Cedar) and continues to progress towards a final investment decision (FID) in the middle of 2024. If approved, approximately 60% of the estimated project cost of USD 4.0 billion is proposed to be funded through nonrecourse asset-level debt with the balance to be funded through equity contributions from the partners. Morningstar DBRS expects the Company to fund its share of the equity contribution (approximately USD 800 million spread over several years) to be funded from internal cashflows and the Company's key credit metrics to remain supportive of the rating through the construction period. Morningstar DBRS also expects that the offtake agreement signed by Pembina in advance of the FID will be assigned to a third party after FID.

CREDIT RATING DRIVERS
A rating upgrade is not likely in the medium term absent a material improvement in the Company's business risk profile. Such an upgrade would likely occur if the contribution of take-or-pay (ToP) contracts to overall EBITDA increases to 80% while maintaining lease-adjusted cash flow-to-debt ratio at around 20%. While unlikely, a negative rating action would be possible if Pembina's future exposure to commodity price risk increases to over 20% of adjusted EBITDA on a sustained basis or if the lease-adjusted cash flow-to-debt ratio declines below 15%.

EARNINGS OUTLOOK
While Morningstar DBRS expects earnings from the Marketing division to be modestly lower in 2024 based on its base-case commodity price assumptions, overall EBITDA in 2024 is expected to be higher because of the Acquisition and full-year contribution from Nipsi Pipeline.

FINANCIAL OUTLOOK
Morningstar expects cashflow from operations in 2024 to be higher relative to 2023 because of higher earnings. Pembina's current capex program is modest, with plans to spend most capex on growth projects across the integrated value chain. Capex for 2024 is estimated to be approximately $880 million and along with the pre-FID investment of approximately $300 million on Cedar 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.

CREDIT RATING RATIONALE
The credit ratings are supported by Pembina's stable cashflows underpinned by ToP and fee-for-service contracts, large well-diversified operations, and a conservative and strong financial risk profile. Pembina's ratings are constrained by its exposure to commodity price risk at its marketing division. The Stable trends reflect Morningstar DBRS' expectation that the Company's financial risk profile will continue to remain strong over the forecast period.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of BRA Factors
In the analysis of Pembina, the BRA factors are considered in the order of importance contemplated in the methodology.

B) Weighting of FRA Factors
In the analysis of Pembina, the BRA factors are considered in the order of importance contemplated in the methodology.

C) Weighting of the BRA and the FRA
In the analysis of Pembina, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (April 15, 2024)
https://dbrs.morningstar.com/research/431181/global-methodology-for-rating-companies-in-the-pipeline-and-midstream-energy-industry

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186/morningstar-dbrs-global-corporate-criteria), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186/morningstar-dbrs-global-corporate-criteria

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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