DBRS Assigns A (low) Rating to North West Redwater Partnership’s Senior Secured Bonds, Stable Trend

DBRS Limited (DBRS) has today assigned a rating of A (low) with a Stable trend to the Senior Secured Bonds (the Bonds) issued by North West Redwater Partnership (NWR, the Issuer or the Borrower). NWR is responsible for the construction, ownership and operation of a 50,000 barrel per day (bpd) upgrader-refinery (the Project) in Sturgeon County, Alberta, the province’s oil sands pipeline and refinery hub. NWR is a partnership between Canadian Natural Upgrading Ltd. (CNUL), wholly owned by Canadian Natural Resources Limited (CNRL; rated BBB (high) with a Negative trend by DBRS), and NWU Limited Partnership (NWU; with CNUL, the Partners), indirectly owned by North West Upgrading Inc. (unrated, privately held). The upgrader-refinery will process approximately 79,000 bpd of bitumen blend (which represents 50,000 bpd of bitumen plus approximately 29,000 bpd of diluent for the blend) into refined products, including diesel, condensate and naphtha, vacuum gas oil, butane, propane and carbon dioxide. The value proposition for NWR is to capture the refining margin and heavy oil differentials within Alberta, instead of relying on existing U.S. capacity.

Alberta Petroleum Marketing Commission (APMC), an agent of the Crown of the Province of Alberta (the Province, rated AA (high) with a Stable trend by DBRS), and Canadian Natural Resources Partnership (CNR) are toll payers and feedstock suppliers under separate 30-year toll-based Processing Agreements with NWR. CNRL is the general partner of CNR and ultimately responsible for CNR’s liabilities, including obligations under the CNR Processing Agreement. The toll payers commit to supply approximately 79,000 bpd of bitumen blend (or feedstock) and pay a cost-of-service toll to NWR for refining the feedstock (or selling unprocessed bitumen if the plant is operating below capacity). All monthly refined product revenues will be received into a trust that pays debt service first before a net payment to the toll payers. The toll payers have an unconditional obligation to pay debt service (the Debt Service Obligation or DSO) if revenues are insufficient, whether the plant runs or not and such DSO survives termination of the Processing Agreements. These obligations are several: both the DSO and the bitumen supply commitments are split 75% APMC/25% CNRL. The toll payment obligation does not begin until the earlier of the Commercial Operation Date (COD) or June 1, 2018.

Construction works started in April 2014. The total capital cost before interest during construction is estimated at $8.532 billion, out of which approximately 70% has been spent by March 2016. The Project is currently projected to be materially on budget and on schedule, and is expected to reach 90% overall completion by the end of this year and reach COD by Q4 2017. To date, the Project has been funded through seven series of Canadian dollar bonds through four issuances totalling $3.65 billion, $638 million of equity funding from the Partners and $649 million of subordinated debt from CNUL and APMC. NWR plans to issue another $3.85 billion of bonds in 2016 and 2017 to fund the remaining construction costs. A $3.5 billion credit facility was also established in June 2014 to bridge the funding requirements between bond issuances.

The Borrower is responsible for managing construction execution and start-up. Although the Project does not feature a general contractor with an overall fixed-price wrap of the construction risk, the cost certainty of the Project has significantly improved since the onset of the construction, as more accurate quantity estimates have been established with the detailed design and all the procurements essentially complete. Under major downside scenarios, such as a CNRL insolvency event prior to COD (that is within the next 16 months to 18 months based on the current schedule) or a CNUL failure to advance subordinated debts to fund material cost overruns, it is reasonable to expect that APMC will be economically motivated to step up and become a 100% feedstock provider or cover any unfunded subordinated debts in order to bring the Project to COD.

After COD, the rating is not anchored by a fixed-price operations and maintenance contract or high net debt service coverage ratios, but instead is supported by the feedstock value, significant recourse to toll payers through the DSOs, the high resilience against operation cost overruns, expected improved replaceability of CNR and APMC’s stronger incentives to keep the Project operational. However, the rating will be constrained on the basis that NWR still entails a single-asset risk with a self-perform strategy, medium production complexity, certain level of refinancing risk and merchant risk exposure to an unpredictable world oil price and refined products markets (in terms of driving APMC’s incentives to refine).

On balance, DBRS considers the potential support of APMC to raise the rating beyond that of CNRL’s Issuer Rating of BBB (high) with a Negative trend, taking into account the Project’s overall progress and the complexity of remaining works and operation activities, to A (low) with a Stable trend. Should the rating of CNRL be stabilized or downgraded to BBB with a Stable trend, all else being equal, the rating of the Bonds is unlikely to be affected.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Project Finance, which can be found on our website under Methodologies.