OREANDA-NEWS. S&P Global Ratings today said it affirmed its ratings, including its 'BBB+' long-term corporate credit rating, on Calgary, Alta.-based Inter Pipeline Ltd. (IPL) The outlook is stable.

IPL announced it has acquired Williams Cos. Inc.'s natural gas liquids (NGL) midstream assets (off-gas facilities, Boreal pipeline, and olefinic fractionator) for C$1.35 billion. We expect IPL to finance the transaction through a C$600 million bought deal equity financing; an expected new-term debt issuance; draws on IPL's revolving credit facility, which the company anticipates increasing to C$1.50 billion from C$1.25 billion before the transaction's close; and future dividend reinvestment program (DRIP) issuance.

We expect the acquisition will increase IPL's overall commodity exposure by approximately 5% of EBITDA in the near term, rising to about 10% by 2017; and will reduce the proportion of take-or-pay, cost-of-service cash flows by up to 8% in 2018. In addition, there is a small decrease in the proportion of investment-grade counterparties, primarily due to the increased exposure to Nova Chemicals Corp. as the buyer of ethane and ethylene. An offset to these factors is a slight increase in IPL's scale from the acquisition. However, the acquisition is small relative to the company's existing size, and we expect that it will contribute about 5% of consolidated EBITDA per year through our two-year forecast horizon. "As a result, we do not believe that the incremental cash flow volatility would be enough to change our assessment of the strong competitive position and strong business risk profile," said S&P Global Ratings credit analyst Gerry Hannochko.

Financial metrics are still in the significant financial risk profile category using the medial cash flow volatility table. The financing plan as presented has a minimal effect on our forecast financial ratios and does not materially deviate from our current base case forecasts. We continue to expect adjusted funds from operations (AFFO)-to-debt in the 19%-22% range in our revised forecasts after the transaction. We expect slightly weaker 2016 metrics due to the timing of the transaction's close, but we expect metrics to improve from 2017 as the company realizes full year cash flows from the acquired assets. In addition, we also expect credit metrics to benefit from the cumulative effect of the DRIP and premium dividend program, which IPL expects to reinstate before the transaction closes. Historically, the company has raised approximately C$25 million per month from this program.

We continue to assess a positive comparable rating analysis modifier to the 'bbb' stand-alone credit profile, arriving at a final corporate credit rating of 'BBB+'. We base this on the still high proportion of stable take-or-pay, cost-of-service cash flows, which we expect to be 85%-90% in 2017.

The stable outlook on IPL reflects our view that the incremental and increasing commodity-related cash flows from the Williams assets (approximately 8% of 2018 cash flows), combined with the company's financing strategy to sustain AFFO-to-debt in the 19%-22% range from 2017-2019, will lead to the metric staying above our 19% downgrade threshold. Our deconsolidated credit metrics excludes approximately C$1.55 billion in debt from subsidiary Inter Pipeline (Corridor) Inc.

We could lower our ratings if deconsolidated AFFO-to-debt deteriorates and stays below 19%, or if there are further material increases in commodity exposure, either through acquisition or substantial margin expansion, that are not accompanied by deleveraging.

An upgrade during our outlook period would likely require about 90% of stable, low-risk cash flow from the oil sands transportation business or similar contractual arrangements, or deleveraging such that FFO-to-debt is firmly at the high end of the intermediate financial risk profile category.