DBRS Limited (DBRS Morningstar) downgraded Northern Courier Pipeline Limited Partnership’s (NCPLP or ProjectCo) Issuer Rating and the rating on its fixed-rate, first-lien senior-secured amortizing $1 billion Senior Notes (the Senior Notes) to BBB (high) from A (low). Both trends are Stable. DBRS Morningstar also removed the ratings from Under Review with Negative Implications, where they were placed on March 27, 2020.
ProjectCo achieved strong operating and financial results and a debt service coverage ratio (DSCR) of 1.58 times (x) in 2019 (adjusted to normalize for a one-time catchup operation and maintenance (O&M) payment), which is higher than DBRS Morningstar’s rating-case expectations. However, the rating downgrade reflects DBRS Morningstar’s negative rating action on Suncor Energy Inc. (SEI; rated A (low) with a Negative trend by DBRS Morningstar), which holds 54.1% of Fort Hills Energy LP (FHELP or the Shipper), as well as DBRS Morningstar’s deteriorated assessment of the credit quality of Total Holdings SAS, a subsidiary of Total S.A. and guarantor to the obligations of Total E&P Canada (Total Canada), a 24.6% partner in FHELP. FHELP is the limited partnership formed to own and operate the Fort Hills mine (Fort Hills) and also the counterparty to the Transportation Services Agreement and the Tank Services Agreement (the TSAs) with NCPLP. DBRS Morningstar’s negative rating action on SEI and deteriorated view of Total Holdings SAS stem from the Coronavirus Disease (COVID-19), which continues to affect their profitability and cash flow as well as limit visibility into when oil prices may return to more normalized market conditions. The pandemic has had a similar impact on FHELP, which reported negative netbacks and the shutdown of one operations train in response to disrupted market conditions; however, DBRS Morningstar notes that the mine has largely performed as expected from first oil in January 2018 to early 2020. As a result, DBRS Morningstar considers a permanent impairment and shutdown due to current conditions to be unlikely and believes that ProjectCo will continue to supply transportation and tank services to FHELP.
NCPLP is a nontaxable, bankruptcy-remote special-purpose vehicle established to own and operate the Northern Courier Pipeline (NCP), a mission-critical component of Fort Hills. Alberta Investment Management Corporation, a Crown corporation wholly owned by Her Majesty the Queen in Right of the Province of Alberta, owns 85% of NCPLP while TransCanada PipeLines Limited (TCPL; rated A (low) with a Stable trend by DBRS Morningstar) and its ultimate parent, TC Energy Corporation owns the remaining 15%. TCPL also operates the pipeline pursuant to an Operating Agreement executed between NCPLP and TCPL.
The NCP has been in service since November 2017 and ProjectCo has been collecting monthly toll revenue from FHELP under a cost-of-service (COS) model under the TSAs. The COS nature of the tolling TSAs essentially eliminates bitumen volume and commodity price volatility and passes on virtually all O&M cost (including sustaining capital expenditures) to the Shipper. In 2019 and year-to-date 2020, NCPLP has consistently achieved availability and performance metrics exceeding the service levels specified in the TSAs. Given this positive operating record and DBRS Morningstar’s view that Fort Hills remains a viable operation post-pandemic conditions, the primary rating constraint is the Shipper’s counterparty risk.
The three partners which comprise the Shipper are SEI with 54.1%; Total Canada with 24.6%; and Teck Resources Limited (rated BBB with a Stable trend by DBRS Morningstar) with 21.3%. Each partner or its associated guarantor is only responsible for its proportionate share of the Shipper’s costs and liabilities and has also provided a guarantee to NCPLP for its proportionate share of obligations under the TSAs. DBRS Morningstar believes that, as majority partner, SEI’s credit profile significantly influences the Shipper's overall credit level because of how SEI’s default would affect FHELP’s ability to meet payment obligations. In this respect, for the purposes of an entity guaranteeing any portion of FHELP’s payment obligations (which includes NCPLP’s debt service), DBRS Morningstar considers a Negative trend to be equivalent to a one-notch downgrade. DBRS Morningstar also recognizes that provisions allowing FHELP various remedies if a partner defaults can support FHELP’s ability to pay toll costs in such a situation; however, the current market conditions along with the resulting pressure on the limited partners’ credit quality will likely limit the effectiveness of these remedies.
Notwithstanding the one-notch downgrade, ProjectCo’s ratings continue to be underpinned by the expected highly predictable and high-quality cash flow from the COS nature of the TSAs, expected strong operational performance, and the high quality of the asset, resulting in projected minimum and average DSCRs of 1.41x and 1.64x, respectively, which exceed the requirements at the current rating level. DBRS Morningstar considers operations to be relatively straightforward with TCPL—a highly experienced and high-credit quality operator with aligned interest—providing operations services.
Because DBRS Morningstar’s ratings are currently capped by FHELP, any change in the composition or ratings of the partners could result in a change to ProjectCo’s ratings, absent any mitigating provisions. Additionally, DBRS Morningstar’s Negative trend on many oil and gas credits largely reflect uncertainty on the oil price recovery and outlook. Improving demand/supply fundamentals in the oil markets and increasing confidence that prices will recover in line with DBRS Morningstar’s base-case assumptions (see DBRS Morningstar’s May 15, 2020, commentary titled “As Coronavirus Lockdowns Ease, DBRS Morningstar Resets Outlook for Oil and Natural Gas Prices”) may lead to a positive change in either the rating or the trend on FHELP's partners or guarantors (particularly SEI) and may result in an upgrade to NCPLP’s ratings. Similarly, there could be additional pressure on the ratings with further deterioration in the credit view of the Shipper's partners or their guarantors, significant operational underperformance that consistently breaches the required minimum service levels, or an extended service interruption triggered by an extraordinary event (fire, spills, etc.) that causes significant revenue loss.
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.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Project Finance (August 21, 2019) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 this report, contact us at firstname.lastname@example.org.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577