Morningstar DBRS Assigns Issuer Rating of BBB With a Stable Trend to Husky Midstream Limited Partnership

DBRS Limited (Morningstar DBRS) assigned an Issuer Rating of BBB with a Stable trend to Husky Midstream Limited Partnership (HMLP or the Company). Morningstar DBRS also assigned a provisional credit rating of (P) BBB with a Stable trend to the Senior Unsecured Notes to be issued by HMLP.

KEY CREDIT RATING CONSIDERATIONS
The Company's long-term contracted cash flows anchor its business risk profile. Approximately 86% of its revenue in 2023 was attributable to the minimum commitment amounts under take-or-pay (TOP) contracts, which were primarily with investment-grade counterparties, have minimal volume risk, and most of which include provisions to accommodate cost escalations such as energy prices. Morningstar DBRS expects TOP contracts to contribute more than 85% of the Company's EBITDA over the next five years. The weighted-average tenor of HMLP's contracts is 12.6 years, longer than the tenors of most of its Morningstar DBRS-rated peers, and the Company is well diversified for its current credit rating with multiple pipeline and storage assets. In addition, HMLP's pipelines are the only transportation solution outside of trucking available to producers in the Lloydminster region, and its storage assets in Hardisty, Alberta, give shippers critical access to export markets and would be difficult to replicate. HMLP's assets are also a major source of supply to Cenovus Energy Inc.'s (Cenovus) Lloydminster operations, a profitable segment for Cenovus.

Cenovus is the single largest contract counterparty at HMLP, resulting in a customer concentration risk. While Cenovus has strong ties with HMLP through its ownership stake and its role as an operator of HMLP's assets, a shift in Cenovus' focus away from current operating areas could have an impact on contracts and revenue after the current contracts expire. HMLP's pipeline assets service a smaller area of the Western Canadian Sedimentary Basin (WCSB) compared with some of its Morningstar DBRS-rated peers that service the WCSB as a whole, exposing the Company to region-specific risks. HMLP also depends on Cenovus' Lloydminster operations to drive volume through the pipeline system.

HMLP's earnings and cashflow have increased materially over the last four years because of renegotiated agreements with customers and terminal expansion projects. The Company also spent a significant amount of capital between 2019 and 2022 to improve reliability and add demand-backed pipeline and storage capacity. HMLP funded most of that capital spend through operating cash flow with only a modest increase in debt. Consequently, HMLP's financial risk profile is strong, with relatively lower leverage compared with its Morningstar DBRS-rated peers, and the Company's key credit metrics are in the AA credit rating range. Morningstar DBRS expects the Company to maintain its strong financial risk profile over the medium term.

CREDIT RATING DRIVERS
Morningstar DBRS could take a positive credit rating action if HMLP diversified its contracted customer base and added additional long-term contracts with investment-grade counterparties while maintaining its financial risk profile. Morningstar DBRS could downgrade the credit rating if HMLP's contractual profile weakened or if its cash flow-to-debt ratio deteriorated below 15%.

EARNINGS OUTLOOK
Contracted cash flows ensure a floor for the Company's earnings irrespective of the prevailing commodity prices. Morningstar DBRS expects revenue to grow modestly over the next five years and the TOP contracts to contribute 85% of the average forecast revenue over the same period. Morningstar DBRS expects EBITDA to grow in line with revenue and the Company to maintain strong EBITDA margins as most of its TOP contracts have provisions to accommodate cost escalations such as energy prices.

FINANCIAL OUTLOOK
Morningstar DBRS expects cash flow from operations to grow modestly over the next five years. HMLP assets have minimal maintenance capital expenditure requirements ($25 million as estimated by Morningstar DBRS), and the Company should generate a material free cash flow surplus over the medium term. In the absence of new capital projects, Morningstar DBRS expects overall debt to remain at around the current level and the Company to maintain its cash flow-to-debt ratio well in excess of 20% (Q3 2024: 30.1%).

CREDIT RATING RATIONALE
HMLP's credit rating is supported by relatively stable cash flows generated from long-term TOP contracts, primarily with investment-grade counterparties; a reasonably diversified asset base; the strategic importance of its assets to Cenovus and other shippers in the region; and its strong financial risk profile. Supply and demand considerations constrain the credit rating given HMLP's limited presence and customer concentration risk as it relies on Cenovus for approximately 60% of its revenues.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

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

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

(C) Weighting of the BRA and the FRA
In the analysis of HMLP, 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 & 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 Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of the final credit ratings on the above-mentioned securities are subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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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