DBRS Assigns Ratings of A (low) with Stable Trends to Northern Courier Pipeline Limited Partnership

DBRS Limited (DBRS) assigned an Issuer Rating of A (low) to Northern Courier Pipeline Limited Partnership (NCPLP or the Issuer) as well as a rating of A (low) to its fixed-rate, first-lien senior secured amortizing Senior Notes (the Senior Notes) of $1 billion, maturing June 30, 2042. Both trends are Stable. The Issuer is a non-taxable, bankruptcy-remote special-purpose vehicle (SPV) established to own and operate the Northern Courier Pipeline (NCP), a dual pipeline system to transport 202,000 barrels per day (bpd) of heated bitumen and 90,000 bpd of diluent and diesel between the Fort Hills oil sands project (Fort Hills) and the East Tank Farm (ETF), a bitumen-blending and storage facility located 90 kilometres south of Fort Hills, Alberta. At ETF, the bitumen is blended with diluent and prepared for long-distance transport to end markets. The NCP is thus a mission-critical component of Fort Hills, providing the only means of bitumen transportation out of the mining site.

NCPLP is raising $1 billion in Senior Notes proceeds to fund a recapitalization of the project and distribute a one-time payment to its current 100% owner, TransCanada PipeLines Limited (TransCanada PipeLines or TCPL; rated A (low) with a Stable trend by DBRS) and its ultimate parent, TC Energy Corporation. Concurrent with the close of the Senior Notes issuance, TransCanada PipeLines will also complete the sale of 85% of its interest in NCPLP to PIP6 Courier Holdings LP, an SPV formed and owned by Alberta Investment Management Corporation. After the transaction, TCPL will own only 15% of NCPLP and will serve as operator of the pipeline pursuant to an Operating Agreement to be executed between NCPLP and TCPL. The Issuer’s Limited Partnership Agreement and Unanimous Shareholder Agreement, initially signed in 2013, have been amended to reflect the post-transaction structure.

Construction of the NCP began in 2013 pursuant to the signing of the Pipeline Transportation Services Agreement and the Tank Terminal Services Agreement (together, the TSAs) and was declared in service in November 2017. Starting from the in-service date, NCPLP collects monthly toll revenue under a cost-of-service (COS) model for 25 years under the TSAs from Fort Hills Energy L.P. (FHELP or the Shipper), the limited partnership formed to own and operate Fort Hills. Toll revenue includes a flow-through of NCPLP’s operating costs as well as payments for debt service and distribution payments to its shareholders, which includes a special distribution that effectively serves as the management fee. The COS nature of the tolling TSAs essentially eliminates bitumen volume and commodity price volatility and passes on virtually all operations and maintenance cost (including sustaining capex) as well as the supply risk of bitumen and diluent to the Shipper. The primary rating constraint is, therefore, the Shipper’s counterparty risk.

The Shipper’s three shareholders are Suncor Energy Inc. (Suncor; rated A (low) with a Stable trend by DBRS) with 54.1%; Total E&P Canada (Total Canada; unrated by DBRS), a subsidiary of Total S.A. (Total), with 24.6%; and Teck Resources Limited (Teck; rated BBB (low) with a Stable trend by DBRS) with 21.3%. Under the terms of the FHELP partnership agreement, each shareholder is responsible for its proportionate share of costs and liabilities. Furthermore, both Suncor’s and Teck’s obligations are ultimately guaranteed by their respective rated parent entity while Total Canada’s guarantor is Total Holdings SAS, a wholly owned subsidiary of Total. Because obligations of each shareholder are on a several but separate basis, DBRS views the Shipper’s credit profile to be equivalent to the weighted-average (WA) credit quality of its shareholder and/or guarantor. DBRS notes that provisions allowing FHELP various remedies in the event of a partner default lends additional comfort to FHELP’s ability to pay toll costs.

The A (low) rating is underpinned by the expected highly predictable and high-quality cash flow resulting from the COS nature of the TSAs. The rating is essentially capped by the Shipper’s credit quality, which is assessed at A (low). According to DBRS’s guidance with respect to debt service coverage ratios (DSCRs) in availability-based project finance projects, the minimum DSCR of 1.41 times (x) and an average DSCR of 1.64x are based on DBRS’s rating case and are considered to be commensurate with the rating level. Removing cash flow from the weakest shareholder, Teck, is still projected to result in an average DSCR above 1.0x, which provides further comfort to noteholders. DBRS considers operations to be relatively straightforward with operations services provided by TCPL, a highly experienced and high credit-quality operator with aligned interest.

Because the rating is essentially capped by the WA rating of the FHELP partners, any change in either the partner composition or the ratings of each partner could result in a change to the rating cap, absent any mitigating or altered circumstances or provisions. DBRS will assess the situation when and if necessary. DBRS could also take negative rating action for (1) significant operational underperformance that consistently breaches the required Minimum Service Levels, although this is considered very unlikely, or (2) an extended service interruption triggered by an extraordinary event (fire, spills, etc), which causes significant revenue loss.

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 & Criteria.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below 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.

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