DBRS Confirms Inter Pipeline Ltd. at BBB (high), Stable

DBRS has today confirmed the Issuer Rating and Unsecured Medium Term Notes of Inter Pipeline Ltd. (IPL, or Company) at BBB (high), both with Stable trends. The confirmation reflects IPL’s strong and diversified business risk profile, underpinned by existing long-term cost of service contracts and major commercially secured oil sands projects coming on-stream in the medium term, and a reasonable financial risk profile supported by stable cash flows from its diversified operations.

The Company’s business risk profile continues to improve with the development of major oil sands transportation projects, which are commercially secured under ship-or-pay contracts. IPL’s expansions of the Cold Lake and Polaris pipeline systems are supported by long-term contracts to provide 850,000 barrels/day (b/d) of bitumen blend and diluent for FCCL projects (business venture of Cenovus Energy Inc. and ConocoPhillips (rated A (low) and “A,” respectively, by DBRS)), and are expected to be in service in phases beginning in mid-2014. During 2013, the Company also entered into new long-term contracts with Canadian Natural Resources, Canexus, Athabasca Oil Corporation and Imperial Oil to supply 245,000 b/d of bitumen and diluent on the Cold Lake and Polaris pipelines. IPL’s $3.2 billion of added capacity projects (approximately, $2.4 billion spent at March 31, 2014) are expected to provide stable, long-term cash flow growth in the medium term. However, the company is exposed to volatile earnings due to commodity and volume risk from NGL extraction and bulk liquids storage business. In 2013, 16% of IPL’s EBITDA was exposed to commodity-based contracts. DBRS expects this exposure to decline as new oil sands projects are placed in service, and long-term cost-of-service contracts, combined with existing contracts, are expected to contribute 60% of IPL’s projected EBITDA by 2015, compared with 43% in 2013.

IPL’s financial profile is supported by stable cash flow generated from its growing portfolio of diversified energy infrastructure assets in both oil sands and conventional transportation segments. DBRS expects leverage to rise in the near term due to IPL’s expansion plans, but become more manageable once these projects are placed in service and provide incremental cash flow. DBRS expects IPL to fund its growth projects with a prudent mix of debt and equity in order to maintain its credit metrics in line with the current ratings, and company’s debt-to-capital ratio to remain in the low-50% range on a non-consolidated 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Pipeline and Diversified Energy Companies (January 2014), which can be found on our website under Methodologies.