DBRS Comments on Pembina’s Investment Decision on Petrochemical Facility

DBRS Limited (DBRS) notes that Pembina Pipeline Corporation (Pembina or the Company; rated BBB with a Stable trend by DBRS) today announced its investment decision to construct a 550,000-metric-tonne per-annum integrated propane dehydrogenation (PDH) plant and polypropylene (PP) upgrading facility (the PDH/PP Facility). The investment will be made through a 50/50 joint venture entity, Canada Kuwait Petrochemical Corporation (CKPC). CKPC will be equally owned by Pembina and Petrochemical Industries Company K.S.C. (PIC) of Kuwait, which is indirectly owned by the State of Kuwait.

The PDH/PP Facility will be strategically located in Alberta’s Industrial Heartland, adjacent to Pembina’s Redwater fractionation complex (RFS), and will be designed to consume approximately 23,000 barrels of propane per day of local propane from RFS and other regional fractionation facilities. The PDH/PP Facility has a nameplate capacity of 550,000 metric tonnes of PP per year, including the impact and random copolymers. Located in Alberta, the PDH/PP Facility will have access to an abundant supply of propane feedstock, which is expected to provide the PDH/PP Facility with a structural cost advantage compared with other North American facilities. PP is high value, easily transportable and a fully recyclable polymer that can be used in a wide range of finished products, including automobiles, medical devices, food packaging and home electronics.

The investment brings together two complementary partners with (1) Pembina, which has significant project management experience in Alberta, managing long-term propane supply and operations and (2) PIC bringing comprehensive PDH/PP global project experience and diversified global petrochemical marketing expertise. The total cost of the PDH/PP Facility and the relevant supporting facilities is estimated to be approximately $4.5 billion (on a 100% basis; approximately $4.0 billion for the PDH/PP Facility). Pembina’s investment is approximately $2.5 billion, which represents a 50% interest in CKPC and a 100% interest in the supporting facilities (the Supporting Facilities). The Supporting Facilities will be under a take-or-pay long-term contract between CKPC and Pembina.

Pembina has secured more than 40% of its projected cash flow from the PDH/PP Facility through a portfolio of long-term, primarily take-or-pay, fee-for-service and other similar commercial arrangements, which has a weighted-average life of approximately 14 years, with the majority of counterparties being at investment-grade levels. Pembina is having ongoing negotiations to achieve its target of a minimum 50% fee-for-service adjusted cash flow from the PDH/PP Facility. The PDH/PP Facility is expected to be completed in mid-2023, subject to environmental and regulatory approvals, and is expected to generate adjusted EBITDA of between $275 million and $300 million per year net to Pembina. In addition, CKPC has been awarded $300 million of royalty credits from the Alberta government, of which CKPC has, to date, entered into an agreement to monetize more than 80% over the first several years of the PDH/PP Facility’s operation.

The $4.0 billion PDH/PP project is expected to pursue asset-level financing for 50% of its total costs, with the remaining 50% to be financed through equity contributions from Pembina (approximately $1.0 billion) and PIC (approximately $1.0 billion). Together, with the investment in the Supporting Facilities, Pembina is expected to invest approximately $1.25 billion in equity. Heavy portions of this investment are expected to incur in 2021, 2022 and 2023. Pembina expects to finance its investment in the PDH/PP Facility and the Supporting Facilities with 50% equity and 50% debt.

DBRS does not expect the investment in the PDH/PP Facility and the Supporting Facilities to have a material impact on Pembina’s credit profile, reflecting the following factors: (1) Although a portion of non-contracted cash flow from the PDH/PP Facility exposes Pembina to commodity price risk, this exposure is manageable by Pembina since all of its capital projects coming online over the medium term are under long-term fee-for-service or take-or-pay contracts. It is expected that approximately 85% (or higher) of Pembina’s adjusted EBITDA will be generated from either fee-for-service or take-or-pay contracts when the PDH/PP Facility is completed (for context, this portion was approximately 82% in 2017 and 77% in 2016). (2) Although CKPC is expected to be exposed to project cost overruns and delays, DBRS expects CKPC to mitigate this risk through appropriate construction contracting strategy.

Pembina’s current credit profile is solid for the BBB rating, reflecting (1) strong credit metrics (cash flow-to-debt of 25.1%, EBIT-to-interest of 6.47 times (x), debt-to-EBITDA of 3.15x and debt-to-capital of 38.5% as of September 30, 2018); (2) financing flexibility and sizable operations following the acquisition of Veresen Inc. on October 2, 2017; and (3) strong contractual arrangements. In addition, since most of the funds to finance the PDH/PP Facility will occur in 2021, 2022 and 2023, Pembina has the financing capability and capital expenditure flexibility to minimize the impact of the investment in the PDH/PP Facility and the Supporting Facilities. However, if the construction of the PDH/PP Facility results in significant cost overruns or a lengthy delay or if the Company’s credit metrics weaken substantially during its construction, DBRS may take a negative rating action.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies & Criteria.

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