DBRS Assigns Provisional Ratings of BBB (high), Stable Trends, to First Nations ETF Limited Partnership’s Proposed CAD 545 million Senior Note Issuance

DBRS Limited (DBRS) assigned a provisional rating of BBB (high) with a Stable trend to the Series 1A-2041 Notes (largely targeting Canadian investors) and the Series 1B-2041 Notes (largely targeting U.S. investors) (collectively, the Senior Notes) totalling approximately [$545 million] to be issued by First Nations ETF Limited Partnership (the Issuer), a non-taxable special-purpose vehicle (SPV). Both tranches of the Senior Notes will be denominated in Canadian dollars and rank equally. The fixed-rate Senior Notes will fully amortize and mature on December 31, 2041. The Issuer will use the Senior Note proceeds to primarily fund the acquisition of a 49% ownership interest in Thebacha Limited Partnership (ProjectCo) from its current owners, Suncor Energy Oil Sands Limited Partnership (SEOSLP; unrated) and Suncor Energy Inc. (Suncor; rated A (low), Stable. See notes below). SEOSLP is a subsidiary of Suncor, which is Canada’s largest integrated oil and gas (O&G) company. The Issuer is co-owned by wholly owned subsidiaries of Fort McKay First Nation (FMFN; 70%) and Mikisew Cree First Nation (30%, and together with FMFN, the Sponsors), two significant First Nations in Alberta. This landmark transaction will set a precedent for future partnerships between the First Nations and the O&G industry in Canada. After the transaction closes, Suncor and SEOSLP will collectively retain a 51% ownership interest in ProjectCo.

ProjectCo, a non-taxable SPV, was established to develop and operate the approximately $1 billion East Tank Farm Project (ETF), which provides bitumen cooling, blending and storage infrastructure to the $17 billion Fort Hills Oil Sands Project (Fort Hills), located 90 kilometres north of Fort McMurray, Alberta. ETF’s terminal services are essential to Fort Hills because only blended bitumen with reduced viscosity can be shipped via long-distance pipelines to refineries and other markets. ETF’s construction is practically completed and the in-service date was achieved in July 2017, while Fort Hills is on track to commence production by 2017 year end. Starting from the in-service date, ProjectCo collects revenue under three substantially similar 25-year terminal services agreements (TSAs) from three shippers: Suncor (50.8%), Total E&P Canada Ltd. (Total Canada; 29.2%) and Teck Canadian Energy Sales Limited (Teck Energy; 20%). These shippers also proportionally own Fort Hills. Teck Resources Limited (Teck; rated BB (high), Stable) provides a full parent guarantee for Teck Energy’s contractual obligations under the TSAs, while Elf Aquitaine, a subsidiary of Total S.A. (Total; unrated), provides a capped guarantee for Total Canada. DBRS estimates that the three shippers (collectively known as the shipper group. See notes below.) have a volume-adjusted aggregate credit quality of A (low), driven primarily by Suncor’s rating. The Senior Notes will fully amortize six months before the TSAs expire in July 2042.

The assigned BBB (high) rating is underpinned by the expected highly predictable and high-quality cash flow resulting from the take-or-pay and cost-of-service nature of the tolling TSAs, which eliminate volume and commodity price volatility and pass on to the shippers virtually all the operations and maintenance cost (including sustaining capital expenditures) as well as the supply risk of bitumen and diluent. The primary rating constraint is therefore the shipper group’s overall credit quality. In assigning the rating, DBRS also considers other strengths, which include (1) construction is practically completed, and straightforward operations are expected; (2) ETF’s being essential to Fort Hills; (3) the Sponsors’ aligned interest with the highly rated Suncor; and (4) a robust governance framework and debt package that further protects noteholders. The assigned rating also incorporates the following challenges: (1) the shipper group’s credit quality can change over time, which could move the rating; (2) the Sponsors will only have a partial ownership interest (49%) in project assets; (3) poor performance of Fort Hills could indirectly affect the shipper group’s stability; and (4) ETF is also exposed to event risk (e.g., fire, bitumen spills, etc.), albeit being substantially mitigated in DBRS’s view.

The Senior Notes will reside at a holding company (holdco) that will partially own ProjectCo. Debt service will therefore depend on cash flow to be upstreamed by ProjectCo. This structure is inherently weaker than a typical project finance entity that would otherwise directly and fully control the underlying assets and cash flow. Nonetheless, the structural weakness is substantially reduced through a robust governance framework and a debt covenant package akin to a traditional project finance structure, which grants noteholders veto power over ProjectCo’s fundamental governance and financing decisions. The structural subordination is not a material concern to noteholders because only potential Asset Retirement Obligation advances (capped at $10 million at the Issuer level) would practically rank ahead of the Senior Notes. The forecast minimum and average debt service coverage ratios (DSCRs) of 1.40 times (x) and 1.62x, respectively, are fairly resilient to a variety of stressed scenarios. If the weakest shipper Teck were to default, the remaining cash flow would be sufficient to continue debt service with an acceptable minimum and average DSCR of 1.12x and 1.30x, respectively. DBRS considers this scenario to be a low probability: It could only happen if the defaulted contractual volumes were unfilled by alternative shipper(s).

DBRS lowers the rating to BBB (high) from the shippers’ aggregate rating estimated at A (low) to reflect the imperfection of a holdco and partial ownership structure and the capped guarantee by Elf Aquitaine. DBRS will likely take a negative rating action if (1) the shipper group’s aggregate credit quality deteriorates to the BBB level or below; (2) operational difficulty causes frequent breaches of the required minimum service levels pursuant to the TSAs; or (3) a major adverse event results in a protracted period of service interruption/revenue loss. A positive rating action can be triggered by an upgrade of the shipper group’s overall credit quality to above A (low).

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

Unless otherwise specified, all ratings cited in this report are in reference to DBRS’s rating scale.

In this report, unless otherwise specified, shipper generally refers to Suncor, Teck or Total that is either the direct counterparty (i.e., Suncor) or a direct counterparty’s parental guarantor (i.e., Teck) or its indirect guarantor (i.e., Total via Elf Aquitaine), both of which are considered creditworthy to support their respective subsidiary’s contractual obligations under the TSAs.

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 principal methodologies are Rating Project Finance and Rating Corporate Holding Companies and Their Subsidiaries, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.