DBRS Confirms Ratings of Pembina Pipeline Corporation at BBB (high), BBB

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of Pembina Pipeline Corporation (Pembina or the Company) at BBB (high) and BBB, concurrent with that of the Stability rating for its parent, Pembina Pipeline Income Fund (the Fund, rated STA-2 (low), see separate press release). This removes Pembina from Under Review with Developing Implications where it was placed on November 1, 2006, following the federal government’s proposed significant changes to the tax rules for income trusts. Implementation would mean that existing income trusts, including the Fund, would become taxable beginning in 2011.

The rating confirmations reflect the Company’s conservative financial approach, stable credit metrics and substantial growth prospects, underpinned by long-lived assets with low maintenance capex. The Company intends to maintain its focus to steadily grow its business, while keeping its credit metrics close to current levels. The potential return of the Fund to a regular taxable corporation structure prior to 2011 on further clarity of the proposed tax change should not have a material impact on the Company’s credit ratings. There are also certain taxation considerations that could reduce the Fund’s taxes payable in future years.

The Company maintains a stable operation. The Alberta Oil Sands Pipeline (AOSPL) and Fort Saskatchewan Storage Limited Partnership (Storage) operations provide stability to earnings and cash flow, both supported by long-term contracts on a cost of service basis. These operations currently account for approximately 25% of operating income. The contracted portion of earnings should increase over time. The expected in-service of the Horizon Pipeline (Horizon) in mid-2008 would entail firm contracted revenues for 25 years, regardless of usage, with Canadian Natural Resources Limited (rated BBB (high) with a Negative trend). The project’s estimated cost of approximately $338 million is expected to be partly funded by the Company’s recent private notes issue of $200 million and the ongoing dividend reinvestment plan (DRIP) at the Fund, which is expected to be flowed through to the Company. The conventional feeder pipelines, while presenting moderate growth prospect, will maintain the Company’s market position and remain the largest contributor to earnings and cash flow (61% of operating income in the nine months to September 30, 2006 (9M 2006)) in a still active drilling environment.

The growing synthetic crude oil pipeline assets and the expanding midstream operation (with minimal direct commodity pricing risk) should support Pembina’s growth prospects, enhancing earnings and cash flow. The internalization of management in June 2006, while expected to have minimal economic impact in the near to medium term, would eliminate the need to pay out a substantial amount of incentive management fees in the longer term based on the numerous growth projects in process. The related $6 million upfront purchase price was funded by distribution reserves, without affecting cash flow coverages. The deferred payments, payable in 2009, are capped at $15 million and linked to growth in distributable cash at the Fund.

There are limiting factors facing the Company, although these are considered manageable.

(1) The conventional pipelines have experienced declining throughput volumes (except in 9M 2006). However, Pembina has been able to maintain revenues by raising its tolls, and offers the most economic means of shipping oil to the market as the tolls charged are only a fraction of the wellhead price of crude oil. Further, the robust crude oil pricing environment has encouraged drilling activities, resulting in new connections. The rising earnings contribution from AOSPL and midstream are other mitigating factors.

(2) The Company’s financial profile is largely tied to the Fund’s ability to refinance debt or issue trust units and/or convertible debentures to repay the Company’s senior debt, as the Fund generally distributes most of its cash flow to the unitholders as is typical of the trust structure.

DBRS expects Pembina to maintain a satisfactory financial profile underpinned by relatively stable operations. Balance sheet leverage may rise in 2007 and 2008 during the construction of Horizon. This may extend to 2009 should the proposed condensate line for an estimated $1 billion capital cost proceed (currently under discussion with the shippers) for start up in late 2009. However, the Company should be able to keep debt-to-capital in line with the targeted 35% to 40% range (37% in 9M 2006). Debenture conversions and the DRIP (together accounting for about one-third of the equity base at September 30, 2006) at the Fund, which are expected to flow through to the Company, should support the balance sheet, if required. In addition, DBRS expects Pembina to explore avenues, including partnering, to reduce its share of the proposed capital costs of the condensate line, and access the capital market to maintain its credit metrics in line with the parameters of the current credit ratings. Regarding the existing indebtedness, refinancing risk is partly mitigated by the Fund’s recent extension of its $260 million credit lines for five years from a one-year extendable term. Private notes maturities of $82 million in 2009 should be easily refinanced.

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