DBRS Limited (DBRS Morningstar) upgraded North West Redwater Partnership’s (NWR or the Issuer) Issuer Rating and the rating on its Senior Secured Bonds to “A” from A (low). All trends are Stable. NWR, a partnership between CNR (Redwater) Limited and APMC Redwater (LP), a subsidiary of Alberta Petroleum Marketing Commission (APMC), is responsible for the 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 design capacity (intended nameplate capacity) to process approximately 77,000 b/d of bitumen blend (feedstock) containing approximately 50,000 b/d of bitumen into a variety of refined products, notably ultra-low sulfur diesel, capturing value-add in Alberta instead of shipping bitumen to U.S. refineries. The upgrade is a result of the positive rating actions on the Project’s toll payers (or their guarantors), most significantly Canadian Natural Resources Limited’s (CNRL) ratings upgrade to A (low) from BBB (high), which DBRS Morningstar made on June 4, 2022, as well as the trend change to Stable from Negative on the Province of Alberta’s (the Province) ratings, which DBRS Morningstar made earlier this year. These positive rating actions are a result of structural improvements in the economic and financial positions of both toll payers, including a significant and sustainable deleveraging by CNRL, which improved its lease-adjusted debt-to-cash flow ratio to 1.20 times (x) in 2021 from 4.74x in 2020, and a notable improvement in the debt-to-GDP metrics achieved by the Province.
The credit ratings of CNRL and the Province flow directly to form the basis of the credit rating of NWR through the Debt Service Obligation (DSO) structure of the toll Processing Agreements between the two toll payers and NWR. The DSO commits the APMC and Canadian Natural Resources Partnership (CNR; by its managing partner CNRL) to unconditionally ensure sufficient funds for debt service on a 75%/25% split, respectively, regardless of the operational status of the Project. The DSO is several and not joint, and a default by CNRL on CNR’s 25% of the DSO would theoretically lead to a default on the senior debt. However, DBRS Morningstar believes that the APMC has a potential incentive in the form of incremental revenue from the sales of refined products 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 being between the ratings of CNRL and the Province. Additionally, DBRS Morningstar views the APMC’s assumption of 50% of the equity interest (along with corresponding governance changes) of the Project as part of the capital structure optimization transaction undertaken in 2021, and the elimination of the subordinate debt and equity payment components, coupled with the 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. DBRS Morningstar notes that its view of the incentive is based on long-term average pricing and cost projections over the term of the bonds, and the current high price environment, while certainly beneficial to the APMC and the Project, is not a significant factor in the calculation of the incentive.
NWR met the final commissioning milestones in May 2020, declaring Commercial Operation Date (COD) on June 1, 2020, and has since focused on ramping up facility operations. DBRS Morningstar notes that facility performance continues to improve, and the lifetimes of the Gasifier unit’s burners, whose commissioning issues were a cause of the delay in achieving COD, are now meeting expectations. Production volumes currently average 71,000 b/d of refined products and by-products compared with 56,000 b/d in the same period in 2021. End markets remain largely domestic, which helps to maximize realized revenue by avoiding relatively high per barrel transport costs over rail or truck to the United States. DBRS Morningstar notes that the structure of the contracts that NWR has entered into allow the Project (and thereby the toll payers/equity holders) to largely capture the full benefit of the current high price environment where the per barrel rack price of diesel has almost doubled over the past year. NWR will enter a planned capital maintenance turnaround period in the latter half of 2022 prior to continuing ramp up activities. DBRS Morningstar notes that a successful ramp up to full capacity is important as it is an underpinning of the APMC incentive.
After COD, NWR’s ratings are supported by the ratings of the two DSO guarantors and indirectly by the value of the bitumen feedstock and refined products that underpin the 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 taken on the toll payers could result in a downgrade of the ratings, however, DBRS Morningstar also believes this is not likely at this time.
ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) CONSIDERATIONS
Rating actions on CNRL and the Province are likely to have an impact on this rating. ESG factors that have a significant or relevant effect on the credit analysis of these two entities are discussed separately at https://www.dbrsmorningstar.com/issuers/66 and https://www.dbrsmorningstar.com/issuers/3014.
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.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Project Finance (August 18, 2021; https://www.dbrsmorningstar.com/research/383185) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), 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 (May 17 2022; https://www.dbrsmorningstar.com/research/396929).
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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.
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