Morningstar DBRS Confirms Credit Ratings on 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 the top end of its EBITDA guidance in 2024 driven primarily by contributions from Alliance, Aux Sable, and NRGreen assets acquired in 2024 and higher earnings from the Marketing segment because of an increase in realized natural gas liquids (NGL) margins. All the Company's projects that are currently underway are proceeding on time and on budget. Excluding acquisitions, Pembina operated within cash flow and generated a free cash flow (cash flow after capital expenditure (capex), common and preferred dividends) surplus in 2024.

The outlook for activity levels at Pembina's assets in the Western Canada Sedimentary Basin remains stable. Infrastructure constraints have loosened with the availability of additional pipeline egress options and upcoming liquified natural gas (LNG) projects improving access to export markets. Pembina is also expected to benefit from growth in the petrochemical industry in Alberta. Despite recent commodity price volatility linked to broad tariffs and reciprocal tariffs imposed by the Trump administration, Morningstar DBRS expects the long-term commodity pricing environment to be supportive of stable activity levels. Additionally, the presence of take-or-pay (ToP) and fee-for-service (FFS) contracts largely insulates Pembina's earnings and cash flow from short-term volatility in commodity prices. However, Morningstar DBRS expects lower commodity prices to have a negative impact on earnings from the Marketing segment in 2025 because of lower realized NGL margins. Nevertheless, 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.

Pembina announced a positive final investment decision on the Cedar LNG Project (Cedar) in June 2024. Approximately 60% of the estimated project cost of USD 4.0 billion is expected to be funded through nonrecourse asset-level debt, which has already been secured with the balance funded through 20% equity contributions from both Pembina and the Haisla Nation. For the 2024 fiscal year Pembina made an equity contribution of $241 million toward Cedar. Morningstar DBRS expects the Company's remaining equity contribution to be funded from internal cash flows with Pembina's key credit metrics expected to remain supportive of the rating through the construction period. Cedar has secured a 20-year take-or-pay, fixed toll contract with ARC Resources Ltd. (rated BBB with a Stable trend by Morningstar DBRS) for half of Cedar's capacity with Pembina accounting for the other half. Pembina is actively pursuing remarketing of its contracted capacity at Cedar and has received nonbinding proposals from several counterparties. Morningstar DBRS expects the Company to make progress in 2025 toward finalizing its preferred counterparties and signing definitive agreements with buyers.

CREDIT RATING DRIVERS
A rating upgrade would require 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 increased to greater than 80% while maintaining the lease-adjusted cash flow-to-debt ratio at or above 20%. While unlikely, a negative rating action would be possible if Pembina's future exposure to commodity price risk increased to greater than 20% of adjusted EBITDA on a sustained basis or if lease-adjusted cash flow-to-debt ratio declined below 15%.

EARNINGS OUTLOOK
Morningstar DBRS expects earnings from the Marketing division to be lower in 2025 based on its base-case commodity price assumptions, while overall EBITDA in 2025 is expected to be modestly lower as growth in the Pipelines and Facilities divisions is offset by the decline in Marketing.

FINANCIAL OUTLOOK
Morningstar DBRS expects cash flow from operations in 2025 to be comparable with 2024 based on relatively flat earnings. Pembina's current capex program is modest, with over two-thirds of the capex budget expected to be spent on growth projects across the integrated value chain. Capex for 2025 is estimated to be $1.1 billion, including equity contributions for Cedar LNG and PGI and 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 the stability of Pembina's cash flows, which are backed by ToP and FFS contracts, large well-diversified operations, and a conservative and strong financial risk profile. Pembina's ratings are capped by its exposure to commodity price risk within its Marketing division. Morningstar DBRS expects that the Company's financial risk profile will continue to remain strong over the forecast period, which supports its Stable trend.

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 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 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 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 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 (February 3, 2025; https://dbrs.morningstar.com/research/447186), 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 ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781
-- Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings.

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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