DBRS Morningstar Confirms Ratings of Keyera Corp. at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating of the Senior Unsecured Notes of Keyera Corp. (Keyera or the Company) at BBB. DBRS Morningstar also confirmed the rating of the Company’s Fixed to Floating Subordinated Notes at BB (high). All trends are Stable. The confirmations are based on the Company’s financial resiliency in coping with the current low oil price environment and the ongoing Coronavirus Disease (COVID-19) pandemic. Keyera’s business risk profile has remained solid in 2020 to date, largely benefitting from integrated midstream infrastructure assets, including gathering and processing (G&P) networks and facilities, and natural gas liquids processing and fractionation facilities. These businesses continue to generate relatively predictable cash flow from medium-term to long-term contracts. The contracts, all fee for service (FFS) with a significant portion under take-or-pay (TORP) arrangements, have effectively mitigated the impact of the currently low oil prices and lower production activities from the oil producers in Western Canada. DBRS Morningstar expects the average contract life to lengthen going forward as many ongoing capital projects are under longer term contracts than those in its current portfolio. The re-contracting risk for continuing contracts has been modest because of the locations of the Company’s facilities, its competitive position, and its integrated infrastructure networks that have provided benefits to the producers. With the relatively stable G&P and Liquids Infrastructure businesses, DBRS Morningstar expects these two segments, which are expected to account for approximately 75% of Keyera’s EBITDA on a long-term basis, will remain as key factors to support the Company’s future busines risk profile, its credit metrics, and cash flow stability.

DBRS Morningstar’s ratings of Keyera incorporate, among other factors, the Company’s ability to mitigate the following risks: (1) increased counterparty risk as the shippers’ credit quality has weakened, reflecting prolonged weak commodity price in the Western Canada region; (2) the risk associated with project development and Keyera’s ability to finance its capital projects within reasonable leverage; and (3) the Marketing segment’s volatile cash flow because of seasonality and exposure to commodity prices, particularly for the iso-octane marketing business, which accounts for a significant portion of the Marketing segment’s operating margin.

The confirmations also take into account DBRS Morningstar’s expectation that Keyera’s credit metrics will remain strong over the medium term. The Company maintained strong credit metrics in the first half of 2020 despite slightly lower volume throughput at both its G&P and Liquids Infrastructure segments. Keyera has benefitted from strong EBITDA contributions from its Marketing segment reflecting the high profit margin at its iso-octane business as butane prices (as feedstocks for iso-octane) were extremely low. However, DBRS Morningstar expects that the iso-octane business will generate lower EBITDA over the next few years (compared with 2020 to date) as the price of feedstocks are rising and that this business will continue to generate positive free cash flow on a long-term basis. This expectation is consistent with the Company’s long-term forecast. Besides the iso-octane business, DBRS Morningstar notes that Keyera’s product margin business, which forms an integral part of the Company’s integrated system and value chain, does not have material exposure to commodity price risk as most commodities (condensate, butane, and ethane) are bought and sold on the same index within weeks. In addition, cash flow from the Marketing business is further protected with Keyera’s hedging program aiming at a significant portion of its inventory within the next 12 months. Despite entailing higher risk than the G&P and Liquids Infrastructure segments, the Marketing segment in general and the iso-octane business in particular has always generated positive free cash flow for Keyera, and this is expected to continue in the medium term.

Keyera is currently undertaking a number of major projects in the G&P and Liquids Infrastructure segments. The Company’s current capital projects are mostly supported by long-term FFS or TORP contracts with a majority of the counterparties being investment-grade or providing security. Keyera’s estimated remaining growth capital expenditure (capex) for its currently approved capital program between $500 million and $550 million for 2020, which is modestly lower than previously planned. Free cash flow deficits are expected to be incurred over the medium term, but the deficits should be lower than previously estimated.

The Stable trend reflects DBRS Morningstar’s expectations that (1) Keyera will continue to fund its capex program within its target of debt-to-EBITDA ratio at around 4.0 times. DBRS Morningstar expects key credit metrics to be modestly pressured over the near to medium term but expects them to remain solid and improve once current projects are completed and begin to generate cash flows. While DBRS Morningstar does not anticipate an upgrade in the near term, Keyera’s ratings could be negatively affected should its key credit metrics weaken substantially over a sustained period or should its business risk profile deteriorate significantly from the current level.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 26, 2019), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577