DBRS Morningstar Confirms Ratings of Keyera Corp. at BBB, Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating of the Senior Unsecured Notes of Keyera Corp. (Keyera or the Company) at BBB. DBRS Morningstar also confirmed the rating of the Company’s Fixed to Floating Rate Subordinated Notes at BB (high). All trends remain Stable. The confirmation is based on the Company’s solid business risk profile and strong financial profile as demonstrated over the last 12 months ending June 30, 2019 (LTM 2019). The Stable trend reflects DBRS Morningstar’s expectations that (1) Keyera will continue to fund its significant capex program within its target of debt-to-EBITDA ratio below 4.0 times (x), (2) all the major projects will be completed on time and within budget and (3) other key credit metrics will remain supportive of the current ratings.

Keyera’s business risk profile continued to improve in LTM 2019, largely because of the completion of major capital projects, including the South Grand Rapids Pipeline and the Pipestone Liquids Hub in September 2018, the Base Line Terminal (crude oil) in October 2018, the Wapiti gas plant in May 2019, the Simonette Inlet Liquids Separation Facilities in March 2019 and the Simonette Acid Gas Injection in July 2019. The Company’s current capital projects are mostly supported by long-term fee-for-service or take-or-pay contracts with a majority of the counterparties being investment grade or having a strong credit profile or providing security.

The ratings of Keyera incorporate, among others, its ability to mitigate the following risks:

(1) The Marketing segment’s cash flow has been volatile because of seasonality and commodity price volatility, particularly for iso-octane, which accounts for approximately 50% of the segment’s operating margin or approximately 12.5% of the Company’s operating margin on a long-term basis.

(2) The midstream industry, in general, currently faces higher counterparty risk as the shippers’ credit quality has weakened, reflecting prolonged weak commodity price in the region.

(3) The risk associated with project development and Keyera’s ability to finance its capital projects while maintaining the debt-to-EBITDA ratio at or below 4.0x. DBRS Morningstar 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, its competitive position and its integrated infrastructure networks, which have provided benefits to the producers.

Keyera’s estimated remaining growth capex for its currently approved capital program is around $1.6 billion to be spent during 2019 to 2021. A substantial free cash flow deficit is expected to be incurred over the medium term. Based on Keyera’s target of maintaining debt-to-EBITDA below 4.0x, DBRS Morningstar expects key credit metrics to be modestly pressured over the near to medium term but expects them to improve once current substantial projects are completed and begin to generate cash flows. While DBRS Morningstar does not anticipate an upgrade in the near term, Keyera’s ratings could be negatively affected if the debt-to-EBITDA increases to above 4.0x and/or the cash flow-to-debt ratio declines to below 22% on a sustained basis or in the unlikely scenario that the Company’s business risk profile deteriorates significantly.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

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 Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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