DBRS Limited (DBRS Morningstar) confirmed North West Redwater Partnership’s (NWR or the Issuer) Issuer Rating and the rating on its Senior Secured Bonds at “A,” both with Stable trends. NWR, a partnership between CNR (Redwater) Limited, a subsidiary of Canadian Natural Resources Limited (CNRL), and APMC (Redwater) L.P., a subsidiary of Alberta Petroleum Marketing Commission (APMC), is responsible for the ownership and operation of a 50,000 barrel per day (b/d) 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 confirmation stems from the Project's continued operational results, which have gradually ramped up since the Commercial Operations Date in June 2020 and, following a two-month shutdown for planned maintenance turnaround in the latter half of 2022, are reaching intended design capacity. DBRS Morningstar notes that the average processing capacity in Q1 2023 was 83,600 b/d compared with nameplate capacity of 77,000 b/d, while Project availability was 98% year to date. NWR also placed focus on the performance of the refinery, with an emphasis on improving reliability and facility availability year over year. Sustained ability to perform at the nameplate capacity supports APMC's incentive to step in and take over should CNRL default and is a key underpinning of the Project's rating.
The credit ratings of both CNRL (rated A (low) with a Stable trend by DBRS Morningstar) and the Province of Alberta (rated AA (low) with a Positive trend by DBRS Morningstar) 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 APMC (Redwater) L.P.'s ownership of 50% of the equity interest of the Project as part of the capital structure optimization transaction undertaken in 2021, coupled with the APMC’s willingness to extend its commitment to the Project by 10 years during this same optimization, 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 price environment, while somewhat beneficial to the APMC and the Project, is not a significant factor in the calculation of the incentive. 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. NWR has finished a planned capital maintenance turnaround in the second half of 2022, which was mainly focused on the heavy oil units and, following the turnaround, on improving unit performance and reliability. DBRS Morningstar notes that a successful ramp up is important as it is an underpinning of the APMC incentive. The next turnaround is being tentatively planned for Spring 2025.
NWR’s ratings are now 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 the upgrade taken in 2022, 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 CONSIDERATIONS
Rating actions on Canadian Natural Resources Limited (CNRL) or the Province of Alberta (Alberta) are likely to have an impact on this rating. ESG factors that have a significant or relevant effect on the credit analysis of CNRL or Alberta 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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodology: Global Methodology for Rating Project Finance (September 6, 2022) https://www.dbrsmorningstar.com/research/402400.
The following methodologies have also been applied: DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694.
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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 rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on 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