DBRS Morningstar Upgrades North West Redwater Partnership to A (low), Stable TrendProject Finance
DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and the rating on the Senior Secured Bonds issued by North West Redwater Partnership (NWR or the Issuer) to A (low) from BBB (high). All trends are Stable. NWR, a partnership between CNR (Redwater) Limited (CNR Redwater) and NWU LP (North West Upgrading) as of the date of this press release, is responsible for the construction, ownership, and operation of a 50,000 barrel per day (b/d) upgrader bitumen refinery (the Project) in Alberta’s oil sands and refinery and pipeline hub. The Project has the capacity to process 79,000 b/d of bitumen blend (feedstock) into a variety of refined products, notably ultra-low sulfur diesel (ULSD), capturing value-add in Alberta instead of shipping bitumen to U.S. refineries. The upgrade is due to the June 4, 2021, trend change to Stable from Negative DBRS Morningstar took on Canadian Natural Resources Limited (CNRL), one of the Project’s two toll payers, as a result of significantly improving oil market conditions and visibility following more than a year of energy market disruption beginning in March 2020 after the onset of the Coronavirus Disease (COVID-19) pandemic and the price war between Saudi Arabia and Russia in early 2020. DBRS Morningstar downgraded NWR in June 2020 to BBB (high), Stable from A (low), Stable after changing the trend on CNRL’s BBB (high) rating to Negative from Stable. DBRS Morningstar views this trend change as an effective one-notch downgrade in credit quality for the purpose of its role as guarantor to one of the Project’s toll payer counterparties.
The disruption significantly affected both the Province of Alberta (whose agent, the Alberta Petroleum Marketing Commission (APMC), serves as the 75% toll payer to the Project) and CNRL, the guarantor of Canadian Natural Resources’ 25% toll payer obligation, leading to negative rating actions on both entities. Since November 2020, however, West Texas Intermediate and Brent crude prices have steadily risen to levels equal to, and even exceeding, prepandemic prices, and Western Canadian Select (WCS) has followed suit. A key driver for the price recovery has been the gradually improving outlook for global demand. As vaccinations increase around the world, confidence is building that many regions will return to “normalcy” including a more normalized level of economic activity by the end of 2021. On the basis of this improving outlook, DBRS Morningstar changed the trend on CNRL to Stable from Negative on June 4, 2021, and has noted that, although Alberta’s rating continues to have a Negative trend, an improving oil price outlook should cause deficits to moderate and growth in public debt to slow.
The credit ratings of CNRL and Alberta flow directly through to form the basis of the credit rating of NWR through the Debt Service Obligation (DSO) structure of the toll Processing Agreements (PAs) between the two toll payers and NWR. The DSO commits APMC and CNR Redwater (and/or their guarantors) to unconditionally ensure sufficient funds for debt service on a 75%/25% split, respectively, regardless of the operational status of the Project. Both toll payers fulfilled their DSOs through the Project’s two-year construction delay and corresponding cost overrun, allowing NWR’s rating to remain unchanged through the delays to the achievement of Commercial Operation Date (COD) in May 2020 and insulating bondholders from the effects of the delay. DBRS Morningstar notes the DSO is several and not joint, and a default by CNRL on CNR Redwater's 25% of DSO would theoretically lead to a default on the senior debt. However, DBRS Morningstar believes that the APMC has potential incentives in the form of incremental revenue from sales of refined products to step in if CNRL should default to keep the Project operational until a solution, such as a replacement toll payer, is secured, which adds additional support to the rating. As a result, DBRS Morningstar views NWR’s rating level as between the ratings of CNRL and Alberta.
NWR met final commissioning milestones in May 2020, declaring COD on June 1, 2020, and has since focused on ramping up facility operations. DBRS Morningstar notes that production levels have steadily risen since COD, and following a brief, planned service outage in March 2021 during which catalyst in the reactor units was replaced, production reached slightly above full capacity in April and May. DBRS Morningstar views the demonstrated ability of the facility to operate at or above design capacity over this time period positively and will look to see evidence of its ability to sustain production at these levels. Notwithstanding, DBRS Morningstar notes that NWR’s current plan will see production temporarily decrease in 2022 because of turnaround maintenance.
Following commissioning, NWR has also announced a series of transactions aimed at optimizing its post-COD capital and ownership structure. This optimization process will see the following steps take place by a target date of June 30, 2021: (1) North West Refining Inc. transfers its 50% equity stake in NWR to APMC; (2) elimination and paydown of equity and subordinate debt components in NWR’s capital structure funded via the issuance of approximately $2 billion in additional senior debt; (3) elimination of the subordinate debt repayment and equity payment streams of the Cost of Service Toll following the capital structure optimization; (4) 10-year extension of the PA to May 31, 2058, along with a corresponding 10-year extension of the debt repayment profile; and (5) other miscellaneous items. In its comment on the transaction, DBRS Morningstar viewed the transaction as not materially affecting the credit quality of the Project (“DBRS Morningstar Comments on North West Redwater Partnership’s Optimization Transaction,” published June 16, 2021). DBRS Morningstar views the transfer of 50% of the equity interest to APMC (along with corresponding governance changes) and the elimination of the subordinate debt and equity payment components of the toll, coupled with APMC’s willingness to extend its commitment to the Project by 10 years, as supportive of this economic incentive and therefore positive to the Project. Partially offsetting considerations include a lower debt service coverage ratio as a result of increased leverage and debt principal repayments particularly in the later years of the Project (notwithstanding the unconditional guarantee of debt service by the toll payers).
After COD, the ratings are supported by the ratings of the two DSO guarantors and indirectly by the value of the bitumen feedstock and refined products underpinning APMC’s potential incentive to continue supporting the Project in case CNRL defaults until an alternative solution is found. Following this upgrade, DBRS Morningstar believes a further positive rating action is not likely at this time. Negative rating actions on the toll payers could result in a downgrade of the ratings; similarly, however, DBRS Morningstar also believes this is not likely at this time.
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/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Project Finance (September 1, 2020; https://www.dbrsmorningstar.com/research/366229) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. 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).
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 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 email@example.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.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577
ALL DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.