DBRS Confirms Keyera Corp. at BBB, Stable

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Notes rating of Keyera Corp. (Keyera or the Company) at BBB with Stable trends. The confirmation is based on the Company’s solid business risk profile and key credit metrics that remain supportive of the current ratings. The Stable trend reflects DBRS’s expectations that Keyera will continue to fund its significant capital expenditures (capex) program in a prudent manner to keep the debt-to-EBITDA ratio below 4.00 times (x).

Keyera’s business risk profile has continued to show improvements, largely because of the completion of major capital projects in the Gathering and Processing (G&P) sector and Liquids Infrastructure segment. In 2017 and the first half of 2018 (H1 2018), over $800 million of capital projects were brought into service, including a 30% interest in the Norlite pipeline (a joint venture with Enbridge Inc.) and the Keylink pipeline. All these projects are supported by either fee-for-service or take-or-pay contracts with counterparties, the majority of which have investment-grade credit. In 2017, the stable G&P and Liquids Infrastructure segments accounted for approximately 81% of consolidated operating margins (80% in 2016). Additionally, most gas-handling arrangements are cost flow through, which significantly reduces exposure to rising operating costs.

The ratings of Keyera incorporate, among others, the following risks:

(1) The ability to manage 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. DBRS notes that although contributions from the Marketing segment increased significantly in H1 2018, this was largely because of stronger commodity prices and higher volumes sold rather than expansion in this segment.

(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 around $1 billion in 2018. A substantial free cash flow deficit is expected to be incurred in 2018. Keyera plans to finance its free cash flow deficit in a manner that keeps the debt-to-EBITDA ratio below 4.00x. 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 but they should improve once substantial current projects are completed and start generating cash flow. Keyera’s ratings would be negatively affected if Keyera’s business risk increase significantly or debt-to-EBITDA increases to above 4.00x and the cash flow-to-debt ratio declines to below 22% on a sustained basis.

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

The principal methodology is Rating Companies in the Pipeline and Diversified Energy Industry (December 2017), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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