DBRS Confirms Pembina Pipeline Corp. at BBB (high)/BBB & Pembina Income Fund at STA -2 (low)

DBRS has today confirmed the ratings of the 7.38% Senior Secured Notes and Senior Unsecured Notes of Pembina Pipeline Corporation (Pembina or the Company) at BBB (high) and BBB, respectively, both with Stable trends, and the stability rating for its parent, Pembina Pipeline Income Fund (the Fund) at STA-2 (low). The rating confirmations are pursuant to the Company’s proposed acquisition of the Cutbank Complex (Cutbank) from Talisman Energy Canada for $300 million in cash, subject to closing conditions including regulatory approvals. The acquisition will be financed with 50% debt and 50% equity, and DBRS expects the transaction to have little impact on the credit profile of the Company and the Fund. The transaction, anticipated to close in June 2009, is expected to be accretive to earnings and cash flow. The proposed purchase price for Cutbank represents approximately 7.5 times the estimated annual net operating income of $40 million, which is considered reasonable.

With the acquisition, DBRS expects Pembina's business mix to be more diversified and its credit metrics to remain virtually unchanged from the March 31, 2009 levels, with debt-to-capital at 50% and cash-flow-to-total-debt at 0.21 times. As the transaction is expected to be accretive to cash flow, it will enhance Pembina's ability to fund its current per unit distributions of $0.13 per month ($1.56 annualized). Currently, the Company has approximately $122 million available under its existing credit facilities as well as a DRIP program through the Fund that contributes approximately $120 million to $130 million per year, which should provide the bulk of the funding to meet its capital requirements. DBRS expects Pembina to term out its $150 million bridge acquisition facility (recently obtained in support of the Cutback purchase) as well as funding for its expansion projects, principally for the Nipisi pipeline project, over the next 12 to 24 months. Pembina has obtained an equity offering on a fully underwritten basis for $150 million (with a 10% over-allotment option) with closing expected by May 20, 2009.

Cutbank, a high quality energy infrastructure, would add to Pembina's midstream operation. Cutback is a fully interconnected sweet natural gas gathering and processing complex with three gas plants, nine compressor stations and approximately 300 kilometres of gathering systems with a total processing capacity of 360 mmcf per day (305 mmcf net to Pembina). A portion of the assets are subject to rights of first refusal that, if exercised, would reduce Pembina’s net processing capacity to 250 mmcf per day and its purchase price by the value of the assets excluded. The complex is supported by contracts for over 50% of the associated capacity to 2014 with these contracts structured on a fee-for-service basis with all operating costs flowing through to its customers, providing Pembina with a measure of cash flow stability. However, there will still be some throughput risk, although this is considered manageable.

The Company’s Q1 2009 operating results are in line with expectations.

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

The applicable methodology is Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on our website under Methodologies.

This is a Corporate rating.