DBRS Confirms North West Redwater Partnership’s Senior Secured Bonds at A (low), Stable Trend

DBRS Limited (DBRS) confirmed the Senior Secured Bonds (the Bonds) issued by North West Redwater Partnership (NWR or the Issuer) at A (low) with a Stable trend. NWR is responsible for the construction, ownership and operation of a 50,000 barrels of bitumen per day (bpd) upgrader-refinery (the Project) in Sturgeon County, Alberta, the province’s oil sands pipeline and refinery hub. The Issuer is a partnership between CNR (Redwater) Limited, wholly owned by Canadian Natural Resources Limited (CNRL; rated BBB (high)/R-2 (high) with Stable trend by DBRS) and NWU Limited Partnership, indirectly owned by North West Refining Inc. (unrated, privately held).The upgrader-refinery will process approximately 79,000 bpd of bitumen blend or feedstock, 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 shipping bitumen blend to U.S. refineries for processing.

Alberta Petroleum Marketing Commission (APMC), an agent of the Crown of the Province of Alberta (the Province; rated AA with a Negative trend by DBRS), and Canadian Natural Resources Partnership (CNR) are the toll payers and feedstock suppliers under separate 30-year toll-based Processing Agreements (PAs) with NWR. CNRL is the general partner of CNR and ultimately responsible for CNR’s liabilities, including obligations under the CNR PA. The toll payers commit to supply bitumen blend that contains 50,000 bpd of bitumen, and pay a cost-of-service toll (COST) to the Issuer for refining the feedstock (or selling unprocessed bitumen and diluent if the plant is operating below capacity). The toll payers have an unconditional obligation to pay debt service (DSO) if revenues are insufficient, whether the plant runs or not, and such DSO survives termination of the PAs. These obligations are not joint, but only several: both the DSO and the bitumen supply commitments are split between APMC (75%) and CNRL (25%).

The essentially complete construction phase and the expected moderate complexity, with relative budget certainty, of the remaining commissioning processes, are supportive of the rating. The rating also benefits from the continued strong economic incentives for APMC, as agent of the Province, to provide support to the Project, providing a rating uplift above that of CNRL’s Issuer Rating. DBRS views this rating uplift as driven by the strong economic incentive, and DBRS’s one notch rating downgrade on the Province in late 2017 therefore does not have a corresponding impact. Toll Commencement Date is in effect as of June 1, 2018, which under the terms of the PA marks the date on which APMC and CNRL are required to begin making DSO payments regardless of whether or not the facility is complete and generating revenue.

After commissioning is complete and commercial operation date is reached, the rating will not be anchored by a fixed-price operating and maintenance contract or high net debt service coverage ratios, but instead is supported by the feedstock and refined product value, significant recourse to toll payers through the DSO, expected improved replaceability of CNR and APMC’s stronger incentives to keep the Project operational, which exhibits high resilience against operation cost overruns. However, the rating will be constrained on the basis that NWR still entails a single-asset risk with a self-perform strategy, high production complexity, a level of refinancing risk and the merchant risk exposure to volatility in the price of oil, the heavy-light oil price differential and the refined products markets that will have an impact on APMC’s economic incentives. Additionally, the assigned rating may be downgraded if the DSO obligation is not met by either toll payer, either the Province’s rating or CNRL’s rating is downgraded or significant issues are encountered during commissioning process leading to additional cost overruns.

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

The principal methodology is Rating Project Finance, which can be found on dbrs.com under Methodologies.

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 info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS 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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