DBRS Confirms Pembina Pipeline Corporation at BBB, Stable Trend

DBRS has today confirmed both the Issuer Rating and the Senior Unsecured Notes of Pembina Pipeline Corporation (Pembina or the Company) at BBB with Stable trends. The confirmation largely reflects DBRS’s view that the Company’s exposure to fractionation spreads and seasonal pricing differentials has been lower while its financial profile has improved modestly since the April 2, 2012, closing of the Provident acquisition (the Acquisition).

The Acquisition significantly increased Pembina’s exposure to the higher volatile product margin and fractionation spread businesses. However, by March 2013 this exposure was reduced, as Provident’s legacy product margin contracts were replaced by fee-for-service (FFS) contracts, providing for more stable cash flow. DBRS estimates the current earnings contribution from FFS and cost-of-service businesses at approximately 70% (51% at the closing of the Acquisition). In addition, all of the Company’s current and future capital projects are, or are expected to be, under FFS contracts, with some of the contracts having firm service commitments from the producers. These relatively stable earnings businesses are expected to increase further over the medium term, once all major projects are completed.

Pembina is currently pursuing a number of large capital projects, mainly on its conventional pipelines and natural gas and natural gas liquids processing plants. A substantial portion of the projects have received contractual commitments from the producers. Capital expenditures (capex) in 2013 are estimated to be $1.04 billion — substantially higher than the 2012 level. Pembina intends to finance its capex program with 50% debt and the remaining 50% with equity and internal cash flow, with dividend payout expected to be at a sustainable level. In March 2013, Pembina closed a $345 million equity issuance to fund its 2013 capex. DBRS believes that Pembina’s financing strategy is reasonable. However, the Company faces project execution risk with respect to cost overruns and project delays. This risk is partially mitigated by the fact that Pembina has a proven track record to complete its projects on time and within budget (the Mitsue and Nipisi projects in 2011).

DBRS recognizes that during the construction phase, Pembina’s credit metrics are expected to deteriorate modestly and should improve once projects are completed. However, should the financial profile deteriorate significantly from the current level, a negative rating action could occur. On the other hand, a positive rating action could be taken should Pembina successfully complete its projects on time and within budget while bringing the debt leverage to below 35% and the cash flow-to-debt to over 25% on a sustained basis.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies (May 2011), which can be found on our website under Methodologies.