DBRS Limited (DBRS Morningstar) confirmed Northern Courier Pipeline Limited Partnership’s (NCPLP) Issuer Rating and the rating on its fixed-rate, first-lien senior-secured amortizing $1 billion Senior Notes at A (low). Both trends are Stable. The rating confirmations reflect NCPLP’s smooth operations and satisfactory financial performance during the review period, with required minimum service levels achieved at all times and debt service coverage ratios (DSCRs) reaching 1.49 times (x) in FY2022 in line with DBRS Morningstar’s rating-case expectations. DBRS Morningstar notes that both revenue and costs in 2022 were largely consistent with budgets and rating-case projections, with operating and maintenance (O&M) costs 15% below budget primarily because of revised spending plans following an operational review. In addition, based on the performance of the Fort Hills bitumen mine (Fort Hills), DBRS Morningstar believes that NCPLP will continue to be an essential part of the infrastructure and supply transportation and tank services to the mine, providing the only practical transportation conduit for hot bitumen out of Fort Hills to the East Tank Farm where bitumen is staged and prepared for long-distance transport to end markets.
Strong performance at Fort Hills continued in 2022, leading up to a 36-month mine improvement plan that commenced in Q4 2022, including an accelerated sequence of mine development from the South Pit to the Centre and North Pits. Teck Resources Limited’s (rated BBB with a Stable trend by DBRS Morningstar) sale of its 21.3% stake in Fort Hills to Suncor Energy Inc. (SEI; rated A (low) with a Stable trend by DBRS Morningstar) did not result in any impact to its operations or to the credit metrics of the NCPLP. TotalEnergies EP Canada Ltd. (TotalEnergies Canada) remains a stakeholder in Fort Hills. DBRS Morningstar maintains its view on the credit quality of SEI and Total Holdings SAS, a subsidiary of Total S.A. and guarantor to the obligations of TotalEnergies Canada, which currently hold a 68.8% and 31.2% share in Fort Hills Energy LP (FHELP or the Shipper), respectively. FHELP is the limited partnership formed to own and operate Fort Hills. FHELP is also the counterparty to the Transportation Services Agreement and the Tank Services Agreement (together, the TSAs) with NCPLP and has reported materially improved netbacks amid strong energy prices and the operational ramp-up.
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. NCPLP is 85% owned by a subsidiary of the Alberta Investment Management Corporation and 15% owned by Astisiy Limited Partnership (Astisiy), which is owned by a consortium of Indigenous communities and SEI. Astisiy’s ownership was triggered when SEI exercised its option to acquire ownership from TransCanada PipeLines Limited (rated A (low) with a Stable trend by DBRS Morningstar) and its ultimate parent, TC Energy Corporation, in November 2021. DBRS Morningstar did not expect the change in ownership stake to have a rating impact on NCPLP, owing to the minority nature of the stake; NCPLP’s governance provisions; SEI’s increased alignment of interests as equity stakeholder in both FHELP and NCPLP; and SEI’s experience in operating pipelines of a similar scale and nature.
The NCP has been in service since November 2017 and NCPLP has been collecting monthly toll revenue under a cost-of-service (COS) model under the TSAs from FHELP. 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. Since 2019, 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 is a viable operation, the primary rating constraint is the Shipper’s counterparty risk.
SEI and TotalEnergies Canada or its associated guarantor are only responsible for their proportionate share of costs and liabilities in the partnership. DBRS Morningstar believes that, as FHELP’s majority partner, SEI’s credit profile significantly influences the Shipper's overall credit level because of the impact on its abilities to meet payment obligations if SEI defaulted. DBRS Morningstar also recognizes that certain provisions allow FHELP various remedies in the event that a partner defaults, which can support FHELP’s ability to pay toll costs if this occurred; however, this is subject to prevailing market conditions at the time of any potential default, which may limit the effectiveness of this remedy.
NCPLP’s ratings continue to be underpinned by the expected highly predictable and high-quality cash flow resulting from the COS nature of the TSAs; the 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 for the current rating level. DBRS Morningstar considers operations to be relatively straightforward, with operations services now provided by an SEI subsidiary that is an experienced operator with aligned interest.
Because the ratings are currently capped by DBRS Morningstar’s credit view on FHELP, any change in either the partner composition or the ratings on each partner could result in a change to the rating, absent any mitigating provision. DBRS Morningstar does not view a positive rating action on NCPLP as likely at this time. Similarly, DBRS Morningstar does not believe that there will be pressure on the ratings due to deteriorating credit quality of the Shipper's shareholders or their guarantors at this time. However, 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 could lead to an adverse impact on NCPLP’s ratings.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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/global-methodology-for-rating-project-finance.
The following methodology has also been applied: DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support: (March 28, 2023), https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support.
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/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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 firstname.lastname@example.org.
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 email@example.com.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577