DBRS Confirms Inter Pipeline Ltd. at BBB (high) with a Stable Trend

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 energy infrastructure assets largely supported by medium- to long-term cost-of-service (COS) and fee-based contracts. The ratings are, however, constrained by earnings volatility from exposure to commodity and volume risks in the Company’s natural gas liquids (NGL) processing business and volume risk in its conventional oil pipelines and bulk liquid storage businesses.

DBRS notes that as at Q1 2017, 51% of IPL’s EBITDA was from COS contracts primarily in the oil sands transportation business, with no volume or commodity risk; 24% was fee-based, with no commodity price risk but exposure to volume risk in the conventional oil pipelines and bulk liquid storage segments; and 25% was from commodity-based agreements, with both commodity and volume risks primarily in the NGL extraction business. IPL’s acquisition of Williams Companies, Inc.’s (Williams) Canadian NGL business in September 2016 added incremental commodity exposure, although that exposure is manageable in the context of IPL’s overall business mix. However, as a result of the acquisition, IPL assumed responsibility for the potential construction of a $3.1 billion integrated propane dehydrogenation (PDH) and polypropylene petrochemical (PP) facility, which, if it proceeds, could entail execution risk and, depending on the contractual arrangements, could potentially add volume and commodity risks.

DBRS downgraded the ratings of Inter Pipeline (Corridor) Inc. (Corridor; 100% owned by IPL) to A (low) from “A” on June 23, 2017, because of the weaker counterparty profile resulting from Canadian Natural Resources Limited’s (CNRL; rated BBB (high) with a Stable trend by DBRS) acquisition of Shell Canada Energy’s interest in the Athabasca Oil Sands Project. DBRS notes that IPL’s counterparty risk on the Cold Lake and Polaris Pipelines also increased moderately following Cenovus Energy Inc.’s (Cenovus; rated BBB with a Negative trend by DBRS) acquisition of the remaining 50% interest in the FCCL Partnership from ConocoPhillips (rated BBB (high) with a Stable trend by DBRS) in May 2017. These recent acquisitions by Canadian producers from international producers in Canada’s oil sands have resulted in higher concentration risk among shippers on IPL’s oil sands pipelines. In the event the current credit ratings of either CNRL or Cenovus are downgraded, DBRS will reassess the impact on the credit profile of IPL.

The Company’s consolidated debt of $5.7 billion as at Q1 2017 includes approximately $1.5 billion of non-recourse debt at Corridor. IPL’s non-consolidated financial profile, excluding debt at Corridor, remains reasonable for the current ratings, with key credit metrics such as debt-to-capital and cash flow-to-debt at 56.5 % and 20.3%, respectively, for the last 12 months ended March 31, 2017. DBRS expects IPL’s 2017 leverage and cash flow to improve slightly from the full-year benefit of the Williams acquisition and the Company’s debt-to-capital on a non-consolidated basis to remain in the 50% to 55% range. However, credit metrics could come under pressure, as IPL is expected to make a final investment decision on the $3.1 billion PDH and PP facility shortly, with an expected in-service date of mid-2021. DBRS will review the contractual arrangements and financing plans for the facility as information becomes available to assess the impact on the ratings.

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 principal methodology is Rating Companies in the Pipeline and Diversified Energy Industry
(December 2016), which can be found on dbrs.com under Methodologies.