Morningstar DBRS Confirms Credit Ratings on Athabasca Indigenous Midstream Limited Partnership at A (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Athabasca Indigenous Midstream Limited Partnership's (AIM or the Issuer) Issuer Rating and the credit rating on its Series 1 Senior Bonds (the Senior Bonds) at A (low). Both trends are Stable. The fixed-rate Senior Bonds of approximately $865 million (outstanding balance: $836 million) will amortize to mature on February 5, 2042, with a small balloon amount of approximately $75 million (or 8.7% of the original Senior Bonds) subject to refinancing.

AIM was established as a special-purpose vehicle (SPV) by a group of 23 First Nation and Métis groups to acquire an indirect minority interest of 11.57% in a pipeline system (the Partnership Assets or the Pipeline) in Alberta's Athabasca oil sands region from Enbridge Inc. (Enbridge; rated A (low) with Stable trend by Morningstar DBRS) in October 2022. Enbridge, through its subsidiary Enbridge Pipelines (Athabasca) Inc. continues to operate the Pipeline under an Operating Agreement. The Partnership Assets are highly connected to both the Edmonton and Hardisty market hubs, which provides critical egress solutions to major oil sands projects in the basin.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect the stable operational and financial performances that were consistent with expectations during the review period. The Stable trends reflect Morningstar DBRS' view that operations and cash flow will continue to be stable in the next 12 months, underpinned by the long-term revenue contracts with creditworthy shippers. For the review period, the financial performance was consistent with Morningstar DBRS' rating-case projections, with debt service coverage ratio (DSCR) at 1.38 times (x) in F2023 and 1.36x for the 12 months ended Q2 2024, respectively. The credit quality of the shipper group remains strong, with major shippers recording high profitability, in an environment of high energy prices. Morningstar DBRS also notes that the pipeline system operated smoothly and no material operational event or power supply disruption had occurred during the review period. Notwithstanding that the cash flow generated from the Partnership Assets was slightly lower-than-expected, driven by lower-than-expected volume and cost recovery from the shippers, the distributions to AIM remained stable because the priority and contingent deficiency distribution mechanism largely bridged the gap. We note that the Issuer continues to have a strong working relationship with Enbridge.

CREDIT RATING DRIVERS
A credit rating upgrade is unlikely given the projected minimum DSCR level, the shipper group's overall credit quality, the Issuer's residual exposure to operational and environmental event risks, and a small refinancing risk that may increase over time. A negative credit rating action may be triggered by a material increase to any of the main risk factors mentioned above, which can negatively affect the credit ratings.

FINANCIAL OUTLOOK
The debt service is sized to an initial DSCR of 1.37x, progressively rising to 1.61x under the credit rating case. With the inclusion of the structural enhancements, the deemed minimum DSCR would be 1.60x, with great resiliency to a variety of downside scenarios tested by Morningstar DBRS.

CREDIT RATING RATIONALE
The credit ratings reflect transaction strengths that include high-quality and predictable cash flow/distributions underpinned by the long-term revenue contracts, significant structural enhancement features, the assets' competitive advantage, operational excellence, and portfolio diversification benefit. The credit ratings also consider challenges that include potential operational and environmental event risk, weakness of a minority holding company structure, potential movement of shippers' credit quality, and refinancing risk albeit assessed as insignificant for the time being.

The debt service is dependent upon the quarterly distributions to AIM, upstreamed from the Pipeline. The Pipeline's cash flow is expected to be predictable, well diversified, and of high quality, underpinned by multiple long-term transportation and services agreements with creditworthy shippers. In addition, the distribution stability is further strengthened through a priority distribution and a series of contingent deficiency distributions to AIM (the minority owner). The standalone environmental, social, and governance (ESG) risk of the Pipeline Assets is reasonably mitigated by the deficiency loan (for potential capital calls) and insurance indemnity provided by Enbridge.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of the Issuer, the Rating Driver factors listed in the primary methodology "Global Methodology for Rating Project
Finance" are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of the Issuer, the following FRA factor listed in the primary methodology "Global Methodology for Rating
Project Finance" is considered more important: DSCR (the sole FRA factor).

(C) Weighting of the BRA and the FRA
In the analysis of the Issuer, the FRA carries greater weight than the BRA.

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

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Project Finance (April 15, 2024), https://dbrs.morningstar.com/research/431188.

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186 , which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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 ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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