DBRS Assigns Issuer Rating of BBB to Keyera Corp.

DBRS Limited (DBRS) assigned an Issuer Rating to Keyera Corp. (Keyera or the Company) at BBB with a Stable trend. The assigned rating reflects Keyera’s solid business risk profile and strong (albeit modestly weaker than the 2013–2015 period) financial performance in the 12 months ended June 30, 2017 (LTM June 2017). This performance was achieved in light of a high capital expenditure (capex) period. All credit metrics for LTM June 2017 were solidly supportive of the assigned rating.

Keyera’s business risk profile continued to show improvements in 2016 and the first half of 2017 (H1 2017), largely because of the completion of major capital projects in the Gathering and Processing (G&P) sector and Liquids Infrastructure segment. In 2016 and H1 2017, nearly $600 million of capital projects were brought into service, including a 30% interest in the Norlite pipeline (a joint venture with Enbridge Inc.) and the Fort Saskatchewan Fractionation Expansion. All of these projects are supported by either fee-for-service (FFS) or take-or-pay (ToP) contracts with counterparties, the majority of which have investment-grade credit. In 2016, the stable G&P and Liquids Infrastructure segments accounted for approximately 80% of consolidated operating margins (66% in 2015). Additionally, most gas-handling arrangements are cost flow-through, which significantly reduces exposure to rising operating costs.

The rating of Keyera incorporates, among others, the following risks: (1) The ability to manage its exposure to commodity risk in the Marketing segment. This segment’s cash flow has been volatile because of seasonality and commodity price volatility, particularly for iso-octane, which is in high demand in the summer. Propane is largely stored in the summer and sold in the winter, exposing the Company to seasonal price risk. This segment has become the smallest EBITDA contributor to Keyera because of the growth in the G&P and Liquids Infrastructure segments. (2) Weaker counterparties: In general, DBRS notes that although the negative impact of prolonged weak energy prices is mitigated by current contractual arrangements in place for the Company’s core assets, the midstream industry in general currently faces higher counterparty risk as the shippers’ credit quality has weakened. (3) The ability to manage the weighted-average length of the external contracts. DBRS expects the average contract life to lengthen going forward, as many ongoing capital projects have longer durations. The re-contracting risk for continuing contracts has been modest because of the locations of the Company’s facilities and its integrated infrastructure networks that have provided benefits to the producers.

DBRS notes that Keyera’s estimated growth capex is between $800 million and $900 million in 2017, including the South Grand Rapids project. A substantial free cash flow deficit is expected to be incurred in 2017. Keyera plans to finance its free cash flow deficit in a manner that keeps the debt-to-EBITDA ratio below 4.00 times (x). DBRS notes that completing these projects on time and within budget is important, as delays and cost overruns could affect the timing of the incremental cash flow and the balance sheet. DBRS expects key credit metrics to be under pressure over the near to medium term. If debt-to-EBITDA increases to above 4.00x and the cash flow-to-debt ratio declines to below 22%, the rating would be negatively affected.

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, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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