Pembina Pipeline's Preferred Shares: Navigating Rate Resets and Dividend Reliability

Investors seeking stable income streams often turn to preferred shares, and Pembina Pipeline Corporation's Cumulative Redeemable Rate Reset Preferred Shares, Series 7 (TSX: PPL.PR.G), offer a compelling opportunity—provided investors understand the nuances of their upcoming rate reset and dividend structure. While the market occasionally references these shares as the “4.5% PFD CL A7,” the correct designation is Series 7, with its dividend rate now reset to 5.953% for the 2024–2029 period. Here's a deep dive into what makes these shares worth considering and how to capitalize on their terms.

The Dividend Reliability Factor

Pembina's Series 7 shares have a proven track record of dividend reliability. As a cumulative redeemable preferred share, missed payments are accumulated and must eventually be paid out, offering a safety net for income-focused investors. The current fixed dividend rate of 5.953% annually (equivalent to $0.273750 per share quarterly) is backed by Pembina's strong credit profile and stable cash flows from its pipeline and logistics operations.

However, the key question for investors is: How reliable is this dividend going forward? The answer hinges on Pembina's ability to maintain its current financial health. The company's investment-grade credit ratings (BBB+/Baa1 as of 2024) and diversified energy infrastructure portfolio—spanning oil sands, crude oil, and natural gas—provide a stable foundation. A

underscores the operational scale supporting these dividends.

Navigating the 2024 Rate Reset and Conversion Opportunity

The Series 7 shares underwent a critical rate reset on December 1, 2024, but instead of redemption, Pembina offered holders a conversion right to Series 8 floating-rate preferred shares. This decision presents a strategic crossroads:

1. Stay with Series 7 (Fixed Rate):
   Holders who do not convert retain the 5.953% fixed dividend rate through December 1, 2029. This offers predictability and shields investors from rising interest rates, which could otherwise erode the value of fixed-rate securities.

2. Convert to Series 8 (Floating Rate):
   By electing conversion during the November 1–18, 2024, window, investors gain exposure to a floating rate that resets quarterly. The initial rate for Series 8 is 6.583% (as of early 2025), tied to the 90-day Canadian T-bill rate plus a 2.94% spread. This option benefits investors who anticipate declining rates or seek income volatility tied to market conditions.

The conversion mechanics also include minimum thresholds:
- If fewer than 1 million Series 7 shares remain, all remaining shares auto-convert to Series 8.
- If fewer than 1 million Series 8 shares would exist post-conversion, no conversion occurs.

Data-Driven Insights

To contextualize Pembina's preferred shares, consider these metrics:

This comparison shows how the Series 7 rate has historically outperformed benchmark bonds, offering a premium that rewards investors for taking on corporate credit risk.

Investment Considerations

1. Interest Rate Environment:
   If you believe short-term rates will decline or stabilize, Series 8's floating rate could outperform the fixed Series 7. Conversely, in a rising rate environment, sticking with the fixed rate avoids reinvestment risk.

2. Company-Specific Risks:
   Pembina's dividend reliability is tied to its oil and gas operations. Investors must monitor commodity price volatility, regulatory changes (e.g., pipeline permits), and operational disruptions.

3. Liquidity and Market Demand:
   With 10 million shares outstanding, liquidity is sufficient for most investors. However, Series 8's floating rate may attract more trading activity, impacting price volatility.

Recommendation

For income investors prioritizing stability, holding Series 7 through 2029 offers a predictable 5.95% yield—especially in a rising rate environment. For those willing to accept income variability, converting to Series 8 provides exposure to a higher initial rate (6.58%) and quarterly resets that could benefit from future rate cuts.

Final Thoughts

Pembina's preferred shares are a testament to the importance of understanding rate reset mechanics and conversion options. Investors must weigh their tolerance for income volatility against the safety of fixed returns. With Pembina's solid fundamentals and the Series 7's robust dividend history, these shares remain a viable option for portfolios seeking balance between risk and reward.

As always, consult your financial advisor to align your decision with your broader investment strategy.