DBRS Morningstar Comments on North West Redwater Partnership’s Optimization Transaction

DBRS Limited (DBRS Morningstar) notes that North West Redwater Partnership’s (NWR) Issuer Rating and Senior Secured Bonds rating will both remain at A (low) with a Stable trend following the final issuance of the Series L, Series M, Series N, and Series O Senior Secured Bonds on June 30, 2021, with a total issue amount of $2.6 billion. DBRS Morningstar notes that this issuance consists of (1) $500 million 1.20% Series L Bonds, maturing on December 1, 2023; (2) $500 million 2.00% Series M Bonds, maturing on December 1, 2026; (3) $1,000 million 2.80% Series N Bonds, maturing on June 1, 2031; and (4) $600 million 3.75% Series O Bonds, maturing on June 1, 2051, under supplements to the existing Trust Indenture. DBRS Morningstar observes that a potential offering of similar size, along with the accompanying changes in corporate structure and amendments to project agreements as described next, were taken into account during the most recent annual rating review on June 18, 2021. Consequently, DBRS Morningstar does not view this issuance as changing the basis of the June 18, 2021, rating action.

The additional debt issuance is made in conjunction with a series of transactions aimed at optimizing NWR’s post-Commercial Operations Date structure. This optimization process consisted of the following steps, executed concurrently on the same June 30, 2021, closing date: (1) North West Refining Inc. transferred its 50% equity stake in NWR to the Alberta Petroleum Marketing Commission (APMC), a Crown corporation and agent of the Province of Alberta (rated AA (low) with a Negative trend by DBRS Morningstar) and current 75% toll payer; (2) elimination and paydown of equity and subordinate debt components in NWR’s capital structure funded via approximately $2 billion of the $2.6 billion issuance in additional senior debt; (3) elimination of the subordinate debt repayment and equity payment streams of the Cost of Service Toll following the paydown of equity and subordinate debt; and (4) 10-year extension of the Processing Agreements (PAs) to June 1, 2058, along with a corresponding 10-year extension of the debt repayment profile, as well as other items. Canadian Natural Resources Limited (CNRL; rated BBB (high) with a Stable trend by DBRS Morningstar), through a wholly owned subsidiary, will continue to be a 50% equity holder and 25% toll payer in the project.

DBRS Morningstar believes that the closing of the optimization transaction does not result in a material change to NWR’s credit quality. DBRS Morningstar’s credit rating on NWR and its senior debt flows from the Debt Service Obligation (DSO) of the PAs, which commits both toll payers and their guarantors to unconditionally and severally, though not jointly, guarantee sufficient funds for debt service regardless of the operational status of the facility. This obligation survives termination of the PAs, and forms the core basis of the rating. APMC’s potential economic incentive, in the form of incremental net revenues from sales of refined projects, to step in in the case that CNRL should default and keep the project operational until a solution is found (such as a replacement toll payer) adds support to the rating, and results in the rating level being between that of CNRL and the Province of Alberta. DBRS Morningstar views the assumption of 50% of the equity interest by APMC (along with corresponding governance changes accruing to APMC) and the elimination of the subordinate debt and equity payment components of the toll, coupled with APMC’s willingness to extend its commitment to the project by 10 years, as supportive of this economic incentive and therefore positive to the project. Partially offsetting considerations include a lower debt service coverage ratio as a result of increased leverage and debt principal repayments, particularly in the later years of the project (notwithstanding the unconditional guarantee of debt service by the toll payers).

Subsequent to DBRS Morningstar’s changing the trend on CNRL (one of the project’s two toll payers) to Stable from Negative on June 4, 2021, as a result of significantly improving oil market conditions and visibility, DBRS Morningstar upgraded NWR’s ratings to A (low) from BBB (high) on June 18, 2021. NWR’s ratings continue to be supported by the ratings of the two DSO guarantors and indirectly by the value of the bitumen feedstock and refined products underpinning APMC’s potential incentive to continue supporting the project in case CNRL defaults until an alternative solution is found. Following this upgrade, DBRS Morningstar believes that a further positive rating action is not likely at this time. Negative rating actions on the toll payers could result in a downgrade of NWR’s ratings; however, DBRS Morningstar also believes that this is not likely at this time.

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

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