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 rating confirmations reflect the Company’s solid business risk profile and strong financial performance for the 12 months ended June 30, 2022. The Stable trends reflect DBRS Morningstar’s expectations that Keyera’s credit metrics in the medium term will remain strong and continue to benefit from strong financial performance in the medium term driven by solid demand for its fee-for-service operations at its infrastructure networks, including contractual arrangements in the gathering and processing (G&P) operations, as well as its Liquids Infrastructure businesses. DBRS Morningstar also expects that Keyera will continue to manage its exposure to commodity risk within an appropriate target.

Keyera’s business risk profile was solid in 2021 and improved in the first half (H1) of 2022, as the majority of its EBITDA came from the relatively low-risk G&P and Liquids Infrastructure operations. These businesses have generated relatively predictable cash flow from medium-term to long-term contracts. Contracts are fee for service or take-or-pay (TORP). 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, credit metrics, and cash flow stability. The G&P and Liquids Infrastructure segments benefitted mostly from stronger demand and, to a lesser degree, new projects coming on line in 2021 and 2022.

Benefitting from the strengthened energy price environment, Keyera achieved new records on operating margin and EBITDA in 2021 and H1 2022, with a significant contribution from the Marketing segment and a major contribution from isooctane margins. However, over the long term, DBRS Morningstar believes the Marketing segment will generate approximately 25% of the total operating margin. This expectation is consistent with the Company’s long-term forecast.

DBRS Morningstar’s ratings of Keyera incorporate, among other factors, the Company’s ability to mitigate three notable risks. The first is counterparty risk, which is associated with the shippers' credit quality. Currently, approximately 71% of Keyera's customers are investment grade. The second is risk associated with project development and Keyera’s ability to finance its capital projects (including the KAPS Pipeline; 50% owned), a natural gas liquids and condensate pipeline, which transports Montney and Duvernay production to Keyera's fractionation assets and condensate system in Fort Saskatchewan) within reasonable leverage. DBRS Morningstar notes that the project development risk associated with the KAPS Pipeline was significantly reduced because more than 70% of the project had been completed by the end of June 2022. When this project becomes operational, which is expected in the first quarter of 2023, EBITDA to Keyera from TORP contracts should strengthen. The third risk is the Marketing segment’s volatile cash flow, caused by seasonality and exposure to commodity prices, particularly for the isooctane marketing business, which accounts for a significant portion of the Marketing segment’s operating margin. DBRS Morningstar incorporates Keyera's hedging strategy as a risk mitigating factor; however, hedges act only to mitigate but not to eliminate the commodity price risk.

Keyera’s estimated capital expenditure (capex) is between $780 million and $840 million for 2022 (including maintenance capex), which is higher than 2021. The majority of capex in 2022 will be spent on the KAPS Pipeline project. Free cash flow deficits are expected, but the financing of the deficits should be manageable in the medium term despite rising interest rates given Keyera's currently strong credit metrics. DBRS Morningstar expects Keyera to continue to fund its capex program within its target debt-to-EBITDA ratio within the 4.0 times range. DBRS Morningstar expects the Company's 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. Although 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
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodologies are Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2021; https://www.dbrsmorningstar.com/research/387443) and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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 this 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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