Morningstar DBRS Confirms Credit Ratings on Keyera Corp. at BBB and BB (high) with Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the rating on the Senior Unsecured Notes of Keyera Corp. (Keyera or the Company) at BBB. Morningstar DBRS also confirmed the rating on the Company's Subordinated Notes at BB (high). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
Keyera's operating and financial performance was solid in 2023 and H1 2024. Despite weaker natural gas prices, throughput and earnings from the Gathering and Processing (G&P) segment remained strong because of the robust activity levels at the G&P North business. This business contributes more than 70% of the realized margins for the G&P segment and is largely driven by condensate pricing, which remained strong. Earnings at the G&P North business also benefitted from the incremental processing capacity placed in service at the Pipestone gas plant in 2023.

Morningstar DBRS expects activity levels at the G&P North to remain strong given the favourable condensate price. Earnings from the Liquids Infrastructure (LI) segment have also trended higher because of (1) higher condensate volumes, (2) benefits from the incremental stake acquired from the Keyera Fort Saskatchewan (KFS) complex in 2023, and (3) a ramp-up of volume at the KAPS pipeline system. Morningstar DBRS expects that the continued ramp-up of the KAPS Pipeline system; growth in the Company's G&P North business, which has a stronger contractual profile relative to its G&P South business; and growth capital expenditure (capex) focused on long-term contracts should increase the contribution of take-or-pay (ToP) contracts to overall margins from the G&P and LI segments. Morningstar DBRS also notes that the Company increased its guidance for earnings in the Marketing segment, given its strong year-to-date performance. Morningstar DBRS 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% (compared with 66% in 2023) of Keyera's EBITDA on a long-term basis. Keyera's credit metrics for the last 12 months (LTM) ended June 30, 2024, remained strong because of increased earnings in the G&P and LI business segments and continued strength in the Marketing segment.

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 ToP contracts to overall EBITDA increases while a lease-adjusted cash flow-to-debt ratio at or above 20% is maintained. While unlikely, a negative rating action would be possible if Keyera's lease-adjusted cash flow-to-debt ratio declines below 15%.

EARNINGS OUTLOOK
Morningstar DBRS expects EBITDA in 2024 to be higher relative to 2023 primarily based on higher earnings from the LI segment, which is benefitting from higher activity levels, incremental contribution from KFS, and ramp-up at the KAPS pipeline. Keyera's earnings in 2024 are also expected to benefit from the assumption of the absence of wildfire-related operational outages experienced in 2023. Longer-term, Morningstar DBRS expects EBITDA to grow in line with the Company's target range of 6% to 7%.

FINANCIAL OUTLOOK
The Company plans its 2024 capex to be between $80 million and $100 million. Taking into consideration Keyera's dividend policy and based on Morningstar DBRS' cash flow projections for the year, Keyera will likely incur a free cash flow surplus (before working capital) for 2024 that will potentially be used primarily to reduce debt and growth projects/shareholder distributions. Based on Morningstar DBRS' cash flow projections, cash flow-to-debt is expected to remain at or above 20% during the 2024-26 period, which Morningstar DBRS views as strong.

CREDIT RATING RATIONALE
The rating confirmations reflect the Company's solid business-risk profile underpinned by fee-for-service or ToP contracts at its G&P and LI segments and strong financial performance for the LTM ended June 30, 2024. The Stable trends reflect Morningstar DBRS' 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.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or 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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

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

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

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

(C) Weighting of the BRA and the FRA
In the analysis of Keyera, 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 Oil and Gas, Oilfield Services, Pipeline and Midstream Energy Industries (August 12, 2024) https://dbrs.morningstar.com/research/437739.

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 methodologies have also been applied:

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024),
https://dbrs.morningstar.com/research/431186

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 not initiated at the request of the rated entity. The credit rating was initiated at the request of a third party.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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