DBRS Confirms Pembina Pipeline Corporation at BBB and Pfd-3, Stable TrendsEnergy
DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Notes rating of Pembina Pipeline Corporation (Pembina or the Company) at BBB and the Company’s Preferred Shares rating at Pfd-3. All trends remain Stable. The confirmations incorporate Pembina’s solid financial performance in 2018 and the continued improvement of its business risk profile. The Stable trends reflect DBRS’s expectation that Pembina will maintain a stable credit profile through its prudent financing of the next phase of expansion over the next few years.
Pembina’s business risk profile stabilized in 2018 as a result of the successful integration of the Veresen Inc. (Veresen) acquisition in October 2017 and the completion of expansion projects (Conventional Pipeline Phase IV and Phase V in 2018 and Burstall Ethane Storage in early 2019). Veresen’s assets and Pembina’s existing assets are organized into three new divisions: Pipelines, Facilities and Marketing & New Ventures (MK&NV). The Pipelines and Facilities divisions provide Pembina with a large, strong asset portfolio to generate stable cash flow. At the end of 2018, approximately 85% of EBITDA was generated from these two divisions (approximately 81% in 2017). Revenues from these two divisions are mostly under long-term, fee-for-service (FFS) contracts with a significant portion under take-or-pay arrangements. Throughput levels in all segments increased meaningfully during 2018, reflecting solid demand from the shippers, the Veresen acquisition and expansion projects. The MK&NV division is subject to commodity price volatility risk. However, this risk is mitigated with Pembina’s hedging program. DBRS notes that Pembina’s overall exposure to market price volatility has been meaningfully reduced over recent years because the majority of revenues from the expansion projects are under long-term FFS or take-or-pay contracts. DBRS expects Pembina to maintain its commodity exposure within 20% of EBITDA going forward. A significant increase in this exposure could have a negative impact on the current ratings.
Pembina’s financial profile remained strong in 2018 with solid liquidity and strong credit metrics. Most of the new projects and expansion projects in 2019 and 2020 are under long-term, FFS contractual arrangements. Capex in 2019 and 2020 is estimated to be approximately $1.6 billion and $1.2 billion, respectively. These capex levels should result in free cash flow deficits that require external funds. DBRS expects Pembina to continue to maintain its long-term financing plan of 50% debt and 50% equity. Pembina’s 2018 credit metrics are strong for the BBB ratings. DBRS could take a positive rating action if Pembina (1) maintains its current exposure to commodity price risk within 20% of its consolidated EBITDA on a long-term basis; (2) completes its major projects on time and within budget; and (3) maintains its adjusted debt/EBITDA of around 4.0 times and cash flow/adjusted debt of at least 17.5%. However, should Pembina’s exposure to commodity price risk increase materially from the current level and its credit metrics weaken significantly on a sustained basis, it could pressure the ratings.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies & Criteria.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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