Morningstar DBRS Confirms Inter Pipeline Ltd.'s Issuer Rating at BBB (low) and Fixed-to-Floating Rate Subordinated Notes at BB, Maintains Negative Trends

DBRS Limited (Morningstar DBRS) 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 maintained at Negative.

KEY CREDIT RATING CONSIDERATIONS
Morningstar DBRS notes that the Company completed the maintenance activities at the propane dehydrogenation (PDH) facility in Q2 2024. The PDH facility operated at planned production rates of approximately 80% for Q3 2024. The Company generated EBITDA of approximately $59.5 million in Q3 2024, including contribution from the Alberta Petrochemicals Incentive Program grant. The Company expects margins and earnings to improve over the next 12 months because of higher production and direct polypropylene sales. While the resumption of production at the PDH plant is a step in the right direction, the Negative trend reflects the risk associated with ramp-up and stabilization of production at the PDH facility. Morningstar DBRS expects production at the Heartland Petrochemical Complex (HPC) to ramp up through 2025 with operating rates reaching design capacity in the latter half of 2025. Morningstar DBRS recognizes the possibility of modest delays during the commissioning of a large petrochemical plant and does not expect scheduled turnarounds to have a negative impact on ratings.

At the Company's current level of debt, a successful ramp-up to design capacity and annualized EBITDA at HPC in line with Morningstar DBRS forecast are essential for the Company to achieve the modified consolidated cash flow-to-debt ratio of around 15% (Target Credit Metric; treating Inter Pipeline (Corridor) Inc. (rated A (low) with a Stable trend) as an equity investment). Morningstar DBRS notes that earnings and cash flow at the Company's Transportation and Facilities segment, which are backed by contracts, are expected to grow materially in 2025-26 (approximately $125 million to $150 million) based on secured projects and optimization initiatives. Consequently, Morningstar DBRS estimates that with modest deleveraging from the current levels, the Company can achieve the Target Credit Metric with annualized EBITDA contribution of approximately $200 million from the Heartland Petrochemical Complex and around $225 million from the Marketing Segment.

CREDIT RATING DRIVERS
Morningstar DBRS could downgrade the rating by a notch if there is no progress toward Morningstar DBRS' Target Credit Metric over the next 12 months. Morningstar DBRS could change the trend back to Stable over the next 12 months if IPL makes meaningful progress towards achieving the Target Credit Metric. Morningstar DBRS could also change the trend back to Stable if IPL reduces gross debt such that there is a clear line of sight to achieving the Target Credit Metric even if performance at HPC is below Morningstar DBRS' expectations.

EARNINGS OUTLOOK
Morningstar DBRS expects IPL's earnings in 2025 to be higher than in 2024 because of the ramp-up in production at HPC and higher earnings from the Company's Transportation and Facilities segments. IPL's sustaining/growth capital expenditure (capex) requirements in 2025 is expected to be modestly higher relative to 2024 because of scheduled spend on secured projects. Nevertheless, Morningstar DBRS expects IPL to generate a material free cash flow (FCF; i.e., cash flow after capex) surplus in 2025.

FINANCIAL OUTLOOK
Morningstar DBRS expects IPL's credit metrics to improve in 2025 with modified consolidated cash flow-to-debt ratio (Q3 2024: 10.4%) improving towards the Target Credit Metric. Morningstar DBRS expects IPL to maintain its Target Credit Metric once HPC is fully operational. Morningstar DBRS expects Brookfield Infrastructure Partners L.P. and its institutional partners (together, Brookfield Infrastructure) to be prudent with distributions until HPC is fully operational. Morningstar DBRS acknowledges that Brookfield Infrastructure is committed to maintaining IPL's BBB (low) rating, and the expected FCF surplus in 2025 and beyond will provide it with an opportunity to deleverage. However, the quantum of deleveraging required at IPL to achieve the Target Credit Metric in the event of consistent, delays or underperformance at HPC is material and will require Brookfield Infrastructure to forego distributions.

CREDIT RATING RATIONALE
The credit rating confirmations reflect the Company's strong business-risk profile underpinned by contracted cash flows and a diversified asset base with a competitive position. The challenges to the ratings include the start-up risk at the HPC, commodity price and volume risk, and weaker credit metrics through the ramp-up at HPC. IPL has sufficient liquidity available under its credit facilities, and refinancing risk remains manageable. At September 30, 2024, IPL had $1.1. billion under its $1.3 billion revolving credit facility and a cash balance of $24.8 million.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 IPL, the BRA factors listed in the Pipeline and Midstream Energy Industry are considered in the order of importance contemplated in the methodology.

In the analysis of IPL, the BRA factors listed in the Oil & Gas Industry are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of IPL, the FRA factors listed in the Pipeline and Midstream Energy Industry are considered in the order of importance contemplated in the methodology.

In the analysis of IPL, the FRA factors listed in the Oil & Gas Industry are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of IPL, the BRA listed in the Pipeline and Midstream Energy Industry carries greater weight than the FRA.

In the analysis of IPL, the BRA and the FRAs listed in the Oil & Gas Industry carry approximately equal weight.

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 Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance 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.

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

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