DBRS Morningstar Confirms Ratings of Keyera Corp. at BBB and BB (high) with Stable Trends

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 Subordinated Notes at BB (high). All trends are Stable.

The confirmations are based on the Company’s financial resiliency in coping with the low oil price environment and the ongoing Coronavirus Disease (COVID-19) pandemic. Keyera’s business risk profile has remained solid in 2020 and the first half of 2021, largely benefitting from integrated midstream infrastructure assets, including gathering and processing (G&P) networks and facilities and natural gas liquids processing and fractionation facilities. These businesses generate relatively predictable cash flow from medium-term to long-term contracts. The contracts, all fee for service (FFS) with a significant portion under take-or-pay (TORP) arrangements, effectively mitigated the impact of the low oil prices and lower production activities from the oil producers in Western Canada in 2019 and 2020. DBRS Morningstar expects the average contract life to lengthen going forward, as many ongoing capital projects are under longer-term contracts than those in its current portfolio. 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 that have provided benefits to the producers.

DBRS Morningstar believes the relatively stable G&P and Liquids Infrastructure businesses, which are expected to account for approximately 75% of Keyera’s EBITDA on a long-term basis, will remain key in supporting the Company’s future business risk profile, its credit metrics, and cash flow stability. The confirmations also take into account DBRS Morningstar’s expectation that Keyera’s credit metrics will remain strong over the medium term. The Company maintained strong credit metrics in the first half of 2021 benefitting from the G&P and Liquids Infrastructure segments despite a significant decrease in the volatile Marketing segment.

DBRS Morningstar’s ratings of Keyera incorporate, among other factors, the Company’s ability to mitigate the following risks: (1) counterparty risk as the shippers’ credit quality weakened in 2020 and early 2021, reflecting prolonged weak commodity price in the Western Canada region; (2) the risk associated with project development and Keyera’s ability to finance its capital projects (including Key Access Pipeline System (KAPS, 50% owned), a NGL and condensate pipeline, which transports Montney and Duvernay production to Keyera's fractionation assets and condensate system in Fort Saskatchewan) within reasonable leverage; and (3) the Marketing segment’s volatile cash flow because of seasonality and exposure to commodity prices, particularly for the iso-octane marketing business, which accounts for a significant portion of the Marketing segment’s operating margin.

DBRS Morningstar believes the Marketing segment will generate approximately 25% of total operating margin on a long-term basis. The Marketing segment consists of the iso-octane business, which is volatile, and the product margin business, which is relatively stable. Historical operating margins in the iso-octane business were strong but are expected to decrease significantly in 2021 reflecting rising feedstock prices. This expectation is consistent with the Company’s long-term forecast. DBRS Morningstar notes that Keyera’s product margin business, which forms an integral part of the Company’s integrated system and value chain, does not have material exposure to commodity price risk as most commodities (condensate, butane, and ethane) are bought and sold on the same index within weeks. In addition, cash flow from the Marketing business is further protected with Keyera’s hedging program aiming at a significant portion of its inventory within the next 12 months on a rolling basis. Despite entailing higher risk than the G&P and Liquids Infrastructure segments, the Marketing segment in general and the iso-octane business in particular have always generated positive free cash flow for Keyera, and this is expected to continue in the medium term.

Keyera is currently undertaking a number of major projects in the G&P and Liquids Infrastructure segments. The Company’s current capital projects are mostly supported by long-term FFS or TORP contracts with a majority of the counterparties being investment-grade or providing security. Keyera’s capital expenditure (capex) program is between $425 million and $485 million for 2021 (including maintenance capex), which is modestly lower than 2020 and significantly lower than 2019. Free cash flow deficits are expected to be incurred over the medium term, but the deficits should be lower than in previous years. A modest increase in capex is expected in 2022. A majority of capex in 2021 and 2022 will be spent on the KAPS project.

The Stable trends reflect DBRS Morningstar’s expectations that (1) Keyera will continue to fund its capex program within its target of debt-to-EBITDA ratio within the 4.0 times range. DBRS Morningstar expects key credit metrics to be modestly pressured over the near to medium term but expects them to remain solid and improve once current 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 should its key credit metrics weaken substantially over a sustained period or should its business risk profile deteriorate significantly from the current level.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 19, 2020; https://www.dbrsmorningstar.com/research/370267) and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/369165). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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@dbrsmorningstar.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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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

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

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