DBRS Comments on Pembina’s Announcement to Acquire Vantage Pipeline and Interest in Associated Assets

DBRS notes today that Pembina Pipeline Corporation (Pembina or the Company; rated BBB with a Stable trend by DBRS) has announced that it has entered into an agreement to acquire the Vantage pipeline system (Vantage) and Mistral Midstream Inc.’s interest in the Saskatchewan Ethane Extraction Plant (SEEP) for total consideration of USD 650 million (the Acquisition). DBRS views that the proposed Acquisition is not expected to have a material impact on Pembina’s credit profile in the short term. However, it could have a modestly positive impact on the business risk profile over the long term, reflecting the geographical diversification benefit and relatively stable cash flow from long-term take-or-pay transportation contracts and fee-for-service processing contracts associated with the Acquisition. The proposed Acquisition is subject to regulatory approvals and other customary closing conditions, including the approval of the Toronto Stock Exchange.

The proposed Acquisition includes the following assets: (1) an approximately 700 kilometre, 40,000 barrel per day, higher vapour pressure pipeline that originates in Tioga, North Dakota, and terminates near Empress, Alberta (the Pipeline Assets) and (2) a 90% interest in SEEP, which consists of a development-stage gathering pipeline infrastructure and a development-stage 60 million cubic feet per day deep-cut gas processing facility that is centrally located to service the southeast Saskatchewan Bakken region (the SEEP Assets).

The impact of the proposed Acquisition on Pembina’s business risk profile in the short run is viewed as neutral, reflecting two offsetting factors: (1) the majority of capacity of the Pipeline Assets are under long-term take-or-pay contracts, which should add relatively stable cash flow to Pembina and improve geographic diversification by providing access to a prolific resource play in the Bakken and (2) the benefit provided for by the Pipeline Assets is expected to be offset by the project development risk (albeit manageable) associated with the SEEP Assets, which are still in the development stage and require capital expenditures (which are estimated by DBRS to be modest compared to the Company’s total 2014 capital expenditures). The SEEP Assets are not expected to contribute additional cash flow until completion (expected to be mid-2015). However, over the long term, once the SEEP Assets are completed, Pembina’s business risk is expected to improve as all cash flow from the Acquisition will be from take-or-pay and fee-for-service contracts.

Based on DBRS’s view of Pembina’s long-term corporate financing strategy and its Acquisition financing plan, DBRS believes that the impact on the financial risk profile is expected to be neutral. Pembina intends to finance the Acquisition with a mix of equity (40%), preferred shares (20%) and debt (40%). This financing plan should not have a material impact on the current debt leverage, cash flow and interest coverage metrics, which improved in the last 12 months ended June 2014, compared with 2013 and previous years’ metrics due to much stronger EBIT and cash flow and marginally lower net debt. In the long term, Pembina is committed to maintaining its debt-to-capital ratio around the 40% range. Overall, DBRS does not consider the financing of the proposed Acquisition to have a material impact on the Company’s financial risk profile.

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

The applicable methodology is Rating Pipeline and Diversified Energy Companies, which can be found on our web site under Methodologies.