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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Medium Term Notes rating of Inter Pipeline Ltd. (IPL or the Company) at BBB (high) with Stable trends. IPL’s ratings reflect the Company’s earnings from a diversified portfolio of liquids pipelines, bulk liquids storage and natural gas liquids (NGL) extraction businesses supported by medium- to long-term cost-of-service (COS) and fee-based contracts. IPL’s competitive position has improved in the Western Canadian Sedimentary Basin (WCSB) with the completion of major oil sands projects, and ongoing capital expenditure (capex) requirements are significantly lower following the heavy capex cycle from late 2013 to 2015. The Company is, however, exposed to earnings volatility because of commodity and volume risk in its NGL extraction business, as well as volume risk in the conventional oil transportation and bulk liquid storage business.

DBRS notes that at Q1 2016, 61% of IPL’s EBITDA was underpinned by COS contracts, primarily in the oil sands transportation business with no volume and commodity risk, and 39% was fee-based, of which 32% was exposed to volume risk and 7% was exposed to commodity price risk. Despite the weak commodity price environment, volumes flowing on IPL’s oil sands pipelines remained reasonably strong in 2015, driven by the addition of $1.6 billion of new oil sands pipelines on the Cold Lake and Polaris systems. Volumes were steady on the conventional oil pipelines with growing demand from the Viking light oil play serviced by the Mid-Saskatchewan pipeline system offsetting modest declines on the Bow River and Central Alberta pipeline systems. Utilization rates for the bulk storage business was higher at 98% in Q1 2016 due to the acquisition of Inter Terminals Sweden, adding 40% more storage capacity, and strong demand for storage services primarily driven by stronger contango pricing for petroleum products. The NGL extraction segment’s EBITDA was negatively affected in 2015 and Q1 2016, primarily due to lower fractionation (frac) spreads and reduced volumes resulting from weaker downstream demand.

The Company’s consolidated debt of $4.8 billion at Q1 2016 includes $1.5 billion of non-recourse debt at Inter Pipeline (Corridor) Inc. (Corridor; rated “A” and R-1 (low), with Stable trend by DBRS). IPL’s non-consolidated financial profile, excluding debt at Corridor, remains reasonable with key credit metrics (lease-adjusted debt-to-capital and cash flow-to-debt at 54.6% and 22.3%, respectively, for last twelve months (LTM) to March 31, 2016) being consistent with the Company’s current ratings. DBRS expects IPL’s operating cash flow to adequately fund the current capex and relatively high dividend needs, and going forward expects the Company’s total debt-to-capital on a non-consolidated basis to remain in the lower end of the Company’s 50% to 55% target range. While DBRS does not expect an upgrade to IPL’s ratings in the medium term, ratings could come under pressure should non-consolidated leverage exceed or remain at the high end of the target range 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 Companies in the Pipeline and Diversified Energy Industry (December 2015), which can be found on our website under Methodologies.

This rating was initiated at the request of the rated entity.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.