Morningstar DBRS Confirms North West Redwater Partnership at "A"/R-1 (low) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed North West Redwater Partnership's (NWR or the Issuer) Issuer Rating and the credit rating on its Senior Secured Bonds at "A." Concurrently, Morningstar DBRS confirmed the credit rating on NWR's Commercial Paper at R-1 (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
NWR, a partnership between CNR (Redwater) Limited, a subsidiary of Canadian Natural Resources Limited (CNRL), and APMC (Redwater) L.P., a subsidiary of Alberta Petroleum Marketing Commission (APMC), is responsible for the ownership and operation of a 50,000 barrel per day (b/d) bitumen refinery (the Project) in Alberta's oil sands and refinery and pipeline hub. The Project has the design capacity (intended nameplate capacity) to process approximately 77,000 b/d of bitumen blend feedstock containing approximately 50,000 b/d of bitumen into a variety of refined products, notably ultra-low sulfur diesel, capturing value-add in Alberta instead of shipping bitumen to U.S. refineries. The confirmation is supported by the Project's operational results, which have gradually improved since the Commercial Operations Date in June 2020 and experienced several months of above design capacity throughput for the first time in 2023 and 2024 as process optimization and fine-tuning continued to see results. Morningstar DBRS notes that average processing capacity in 2023 was 79,000 b/d, compared with nameplate capacity of 77,000 b/d. Project availability has also seen steady improvement since the 2022 turnaround.

In 2024, NWR took steps to optimize its financing costs and long-term capital structure by instituting a Commercial Paper program that is intended to complement the revolving bank facility, as well as issuing $1.3 billion of long-term debt to refinance and pay down a bond maturing in 2024 and a portion of its revolving facilities.

NWR continues to focus on the performance of the refinery, with an emphasis on improving facility reliability and availability and optimizing production by processing different crude slates. Although NWR's credit rating is ultimately based on the ratings of its toll payers, demonstrated and sustained ability to perform at or above the nameplate capacity supports APMC's incentive to step in and take over should CNRL default and is a key consideration of the Project's credit rating.

CREDIT RATING DRIVERS
NWR's credit ratings are supported by the ratings of the two toll payer guarantors and indirectly by the value of the bitumen feedstock and refined products that underpin APMC's potential incentive to continue supporting the Project in case CNRL defaults until an alternative solution is found. Given the upgrade of NWR's credit ratings in 2022, Morningstar DBRS believes a further positive rating action is not likely at this time. Negative rating actions taken on the toll payers could result in a downgrade of the credit ratings; however, Morningstar DBRS also believes this is not likely at this time.

CREDIT RATING RATIONALE
The credit ratings of both CNRL (rated A (low) with a Stable trend) and the Province of Alberta (rated AA with a Stable trend) flow directly to form the basis of the credit rating of NWR through the Debt Service Obligation (DSO) structure of the toll Processing Agreements between the two toll payers and NWR. The DSO commits the APMC and CNRL to unconditionally ensure sufficient funds for debt service on a 75%/25% split, respectively, regardless of the operational status of the Project. The DSO is several and not joint, and a default by CNRL on its 25% of the DSO would theoretically lead to a default on the senior debt. However, Morningstar DBRS believes that the APMC has a potential incentive in the form of incremental revenue from the sales of refined products if CNRL should default to keep the Project operational until a solution, such as a replacement toll payer, is secured, which adds additional support to the credit rating. As a result, Morningstar DBRS views NWR's credit rating level at "A", between the ratings of CNRL and the Province, as appropriate. Additionally, Morningstar DBRS views APMC (Redwater) L.P.'s ownership of 50% of the equity interest of the Project, coupled with APMC's willingness to extend its commitment to the Project by 10 years during a capital structure re-optimization, as supportive of this economic incentive and therefore positive to the Project.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on CNRL and the Province of Alberta are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of CNRL or the Province of Alberta are discussed separately at https://dbrs.morningstar.com/issuers/3014 and https://dbrs.morningstar.com/issuers/66.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030.

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

Morningstar DBRS applied the following principal methodology:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186/morningstar-dbrs-global-corporate-criteria), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Global Methodology for Rating Project Finance (April 15, 2024; https://dbrs.morningstar.com/research/431188/global-methodology-for-rating-project-finance).

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

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

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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