DBRS Morningstar Confirms Northern Courier Pipeline Limited Partnership at A (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Northern Courier Pipeline Limited Partnership’s (NCPLP) Issuer Rating and the rating on its fixed-rate, first-lien senior-secured amortizing $1 billion Senior Notes at A (low). Both trends are Stable. The rating confirmations reflect NCPLP’s strong operational and financial performance, which met DBRS Morningstar’s rating case expectations with respect to operating availability and minimum service levels as well as debt service coverage ratios (DSCRs), which reached 1.49 times (x) in FY2021 compared with a similar 1.47x in the rating case. DBRS Morningstar notes that both revenue and cost in 2021 were in line with budgeted values and were largely consistent with projections in the rating case. In addition, based on the performance of the Fort Hills bitumen mine (Fort Hills), DBRS Morningstar believes that NCPLP will continue to be necessary as an essential part of the infrastructure and supply transportation and tank services to the mine, providing the only practical transportation conduit for hot bitumen out of Fort Hills to the East Tank Farm, where bitumen is staged and prepared for long-distance transport to end markets.

Following the discovery of slope instability issues in mid-2021 and a subsequent delay of approximately six months in the reactivation of the second train (following its pandemic-related shutdown in 2020), Fort Hills successfully ramped up through Q1 2022 with February and March production averaging approximately 90% nameplate capacity. DBRS Morningstar currently maintains its view of the credit quality of Suncor Energy Inc. (SEI; rated A (low) with a Stable trend by DBRS Morningstar), and of Total Holdings SAS (Total Holdings), a subsidiary of Total S.A. and guarantor to the obligations of TotalEnergies EP Canada Ltd. (TotalEnergies Canada), which hold 54.1% and 24.6% of Fort Hills Energy LP (FHELP or the Shipper), respectively, after upgrading SEI and improving its assessment of the Total Holdings in 2021. FHELP is the limited partnership formed to own and operate Fort Hills and also the counterparty to the Transportation Services Agreement and the Tank Services Agreement (the TSAs) with NCPLP and has reported materially improved netbacks amid strong energy prices and the operational ramp-up.

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 a subsidiary of the Alberta Investment Management Corporation and 15% owned by Astisiy Limited Partnership (Astisiy), which is owned by a consortium of Indigenous communities and SEI. Astisiy’s ownership was triggered by SEI exercising an option to acquire the stake from TransCanada PipeLines Limited (TCPL; rated A (low) with a Stable trend by DBRS Morningstar) and its ultimate parent, TC Energy Corporation, in November 2021. DBRS Morningstar does not view the change in ownership stake to have a rating impact on NCPLP, owing to the minority nature of the stake; the governance provisions of the NCPLP; SEI’s increased alignment of interests as equity stakeholder in both FHELP and NCPLP; and SEI’s experience in operating pipelines of a similar scale and nature.

The NCP has been in service since November 2017 and NCPLP 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 is a viable operation, the primary rating constraint is the Shipper’s counterparty risk.

Alongside SEI and TotalEnergies Canada, Teck Resources Limited (rated BBB with a Stable trend by DBRS Morningstar) is the third partner in the Shipper, accounting for 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.

NCPLP’s 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 now provided by a subsidiary of SEI which is an experienced 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. Notwithstanding the current strong oil price environment, DBRS Morningstar does not view a positive rating action on NCPLP as likely at this time. Similarly, DBRS Morningstar does not believe that there will be pressure on the ratings due to deterioration of the credit quality of the Shipper's shareholders or their guarantors 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 lead to an adverse impact on NCPLP’s ratings.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Rating actions on SEI or Teck are likely to have an impact on this rating. ESG factors that have a significant or relevant effect on the credit analysis of SEI and Teck are discussed separately at https://www.dbrsmorningstar.com/issuers/412 and https://www.dbrsmorningstar.com/issuers/420/teck-resources-limited.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodologies are Rating Project Finance (August 18, 2021; https://www.dbrsmorningstar.com/research/383185/rating-project-finance) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings).

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.

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

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