Morningstar DBRS Confirms Ratings on Inter Pipeline (Corridor) Inc. at A (low) and R-1 (low) With Stable Trends

DBRS Limited (Morningstar DBRS) 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. Both trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The overall operating environment for Corridor remained positive in 2024. Crude oil prices have remained in line with 2023 average prices, which are well above the breakeven oil prices for Corridor's shippers, and thus the Company is expected to continue to report strong earnings and surplus cash flow. The credit profile of the shippers remained strong, with Morningstar DBRS’ rating on Canadian Natural Resources Limited (CNRL), the primary shipper on Corridor, confirmed at A (low) (see the Morningstar DBRS press release dated May 31, 2024). Morningstar DBRS also notes that the increase in interest rates had a positive impact on Corridor's earnings as financing costs are recoverable from shippers, while the Company’s allowed return on equity (ROE) is linked to long-term interest rates.

Morningstar DBRS expects Corridor to maintain a stable financial profile with predictable cash flows supported by the long-term firm service agreement (FSA). Morningstar DBRS notes that Corridor has maintained its debt-to-rate base ratio at or around the benchmark criteria of 75% (Q1 2024: 73%). The ratings incorporate Morningstar DBRS’ review of the Company’s financial and other relevant information, which will not be disclosed in the rating report as Corridor is a private company. Corridor has maintained a stable financial profile.

CREDIT RATING DRIVERS
A positive credit rating action is unlikely given the Company's relatively stable business and financial risk profiles. The ratings could come under pressure if the credit quality of the shippers deteriorates materially.

EARNINGS OUTLOOK
The ratings incorporate Morningstar DBRS' review of the Company’s financial and other relevant information. Earnings are stable and predictable, underpinned by the FSA, as three shippers cover 100% of pipeline capacity and tolls are based on a cost-of-service (COS) methodology with no throughput or commodity risk. All shipper obligations are on a several basis, that is, each entity is responsible only for its own share of costs. The FSA provides for long-term, ship-or-pay contracts, resulting in recovery of all operating costs, including depreciation, taxes, and financing costs, plus ROE over the term of the contracts. Revenue and toll rates are tied to changes in allowed ROE.

FINANCIAL OUTLOOK
The financial outlook of Corridor is stable, provided the stable and predictable earning profile of the Company is supported by the long-term FSA

CREDIT RATING RATIONALE
Corridor’s business risk profile is supported by COS-based FSA with relatively strong investment-grade shippers that are also the Athabasca Oil Sands Project (AOSP) sponsors: CNRL owns 70%, including 60% through its affiliate, Canadian Natural Upgrading Limited; Chevron Corporation (rated AA with a Stable trend by Morningstar DBRS) 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 an ROE on the rate base, which eliminates volume or commodity price risks and provides a steady stream of cash flows. The Company’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 (dilbit) produced from AOSP. Morningstar DBRS 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.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant 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) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Corridor, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Corridor, the following FRA factors listed in the Pipeline and Midstream Energy Industry methodology are considered more important: cash flow-to-debt and EBIT interest coverage.

(C) Weighting of the BRA and the FRA
In the analysis of Corridor, 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

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, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030

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.

Morningstar DBRS will publish a full report shortly that will provide additional analytical detail on this credit rating action. If you are interested in receiving this report, contact us at info-DBRS@morningstar.com.

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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