DBRS Morningstar Upgrades Ratings on Northern Courier Pipeline Limited Partnership to A (low), Stable

DBRS Limited (DBRS Morningstar) upgraded Northern Courier Pipeline Limited Partnership’s (NCPLP or ProjectCo) Issuer Rating and the rating on its fixed-rate, first-lien senior-secured amortizing $1 billion Senior Notes to A (low) from BBB (high). Both trends are Stable. The rating upgrades reflect DBRS Morningstar’s positive rating action on Suncor Energy Inc. (SEI; rated A (low) with a Stable trend by DBRS Morningstar), which holds 54.1% of Fort Hills Energy LP (FHELP or the Shipper), as well as DBRS Morningstar’s improved assessment of the credit quality of Total Holdings SAS (Total Holdings), a subsidiary of Total S.A. and guarantor to the obligations of Total E&P Canada Ltd. (Total Canada), a 24.6% partner in FHELP. FHELP is the limited partnership formed to own and operate the Fort Hills mine (Fort Hills) and also the counterparty to the Transportation Services Agreement and the Tank Services Agreement (the TSAs) with NCPLP. DBRS Morningstar’s positive rating action on SEI and improved view of Total Holdings stem from the gradual recovery in the energy markets that positively affected their operational and financial positions. In addition to these positive rating actions, DBRS Morningstar also notes that ProjectCo achieved strong operating and financial results and a debt service coverage ratio (DSCR) of 1.59 times (x) in 2020, with operational metrics that approached service levels of close to 100%. FHELP’s business operations have also improved, and FHELP has reported materially improved netbacks and plans to reactivate its second operations train in Q3 2021. As a result, DBRS Morningstar believes that ProjectCo will continue to be an increasingly essential part of the infrastructure and supply transportation and tank services to the mine.

NCPLP is a nontaxable, bankruptcy-remote special-purpose vehicle established to own and operate the Northern Courier Pipeline (NCP), a mission-critical component of the Fort Hills bitumen mine operation. NCPLP is 85% owned by the Alberta Investment Management Corporation and 15% owned by TransCanada Pipelines Limited (TCPL; rated A (low) with a Stable trend by DBRS Morningstar) and its ultimate parent, TC Energy Corporation. TCPL also serves as operator of the pipeline pursuant to an Operating Agreement executed between NCPLP and TCPL.

The NCP has been in service since November 2017 and ProjectCo 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 operations and maintenance 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 remains a viable operation in post-pandemic conditions, the primary rating constraint is the Shipper’s counterparty risk.

The three partners that make up the Shipper are SEI with 54.1%, Total Canada with 24.6%, and Teck Resources Limited (rated BBB with a Stable trend by DBRS Morningstar) with 21.3%. Each partner or its associated guarantor is only responsible for its proportionate share of costs and liabilities of the partnership. DBRS Morningstar believes that the Shipper's overall credit level is significantly influenced by the credit profile of its majority partner, SEI, because of the impact on FHELP’s abilities to meet payment obligations if it were to default. DBRS Morningstar also recognizes that provisions allowing FHELP various remedies in the event that a partner defaults can provide support to FHELP’s ability to pay toll costs if this were to happen; however, this is subject to prevailing market conditions at the time of any potential default, which may limit the effectiveness of this remedy.

Notwithstanding the one-notch upgrade, the 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 of the current rating level. DBRS Morningstar 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 ratings are currently capped by the credit view of FHELP, any change in either the partner composition or the ratings of each partner could result in a change to the rating, absent any mitigating provision. DBRS Morningstar’s positive rating action on SEI is a result of an improving view of oil and gas over 2021 following improving demand/supply fundamentals in the oil markets and increasing confidence that prices will recover in line with DBRS Morningstar’s base-case assumptions. DBRS Morningstar does not view further positive rating actions on NCPLP as likely at this time. Similarly, DBRS Morningstar does not believe that any further pressure on the ratings due to deterioration of the credit quality of the Shipper's shareholders or their guarantors is likely 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 nonetheless lead to an adverse impact on NCPLP’s ratings.

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 at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Project Finance (September 1, 2020; https://www.dbrsmorningstar.com/research/366229) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577