Morningstar DBRS Confirms Credit Ratings on NRM Cabin Intermediate #2 Limited Partnership and NRM Cabin Finance #2 Limited Partnership at BBB (low) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of NRM Cabin Intermediate #2 Limited Partnership (Issuer 2) and NRM Cabin Finance #2 Limited Partnership (Co-Borrower 2) at BBB (low), and the rating of its Senior Secured Bonds (the Bonds 2) co-issued by Issuer 2 and Co-Borrower 2 at BBB (low). Both trends are Stable. The Bonds 2 are the joint and several obligation of both Issuer 2 and Co-Borrower 2. The fixed-rate Bonds 2 of approximately $222 million (principal amount at issuance) will fully amortize to mature on July 31, 2033. As of January 31, 2025, approximately $204 million of the Bonds 2 were outstanding.

KEY CREDIT RATING CONSIDERATIONS
The assigned credit ratings reflect transaction strengths that include (1) high-quality and highly stable cash flow, underpinned by the long-term revenue contract; (2) de minimis operational risk; and (3) bondholders' veto power over key decisions, mitigating minority ownership risk. The credit ratings also consider certain challenges that include (1) rating movement tied to the revenue counterparty credit quality; (2) decommissioning risk; and (3) bondholders' indirect and partial ownership interest.

CREDIT RATING DRIVERS
The ratings would be constrained by the credit quality of the revenue counterparty, i.e., Ovintiv Canada. The assessment is based upon implicit support from its parent, when essentiality, reputation, and integration are considered. Any material weakening of implicit support may cause Morningstar DBRS to reassess Ovintiv Canada's credit quality.

A positive rating action is unlikely, but a materially adverse movement in Ovintiv Canada's credit quality, including a reassessment of implicit support by its parent, may cause a negative rating action. A reassessment of future decommissioning risk and mitigants may also move the ratings.

FINANCIAL OUTLOOK
The Bonds 2 are sized to yield a minimum debt service coverage ratio (DSCR) of 1.06 times (x) over the entire debt term. The net cash flow is primarily secured through Issuer 2's contractual rights to receive the cash flows generated under the revenue contract as a limited partner of New LP. The low DSCR, in this case, does not represent a material credit weakness as net cash flow is essentially fixed.

For the nine-month period ended September 23, 2024, the DSCR was 1.21x, higher than the expected DSCR of 1.06x. This increase is attributable to timing differences of cash flows receivable, which is unlikely to be repeated in the future.

CREDIT RATING RATIONALE
NorthRiver Midstream Inc. (NRM), through a subsidiary, currently owns approximately 70% interest in a natural gas gathering and processing (G&P) facility (the Cabin Facility or the Cabin Assets) in the Horn River Basin in British Columbia. It is also the facility operator under the Agreement for the Construction, Ownership, and Operation of the Cabin Gas Plant (the CO&O). The construction of the Cabin Facility was never fully completed, and the facility has been in cold preservation mode since late 2021. As a result, the operator's performance obligations are de minimis. The Cabin Facility is expected to stay dormant for the foreseeable future, since it is economically unviable to use the facility, given the relatively high cost of producing natural gas in the basin. Nonetheless, NRM continues to benefit from the stable cash flows generated from four midstream service agreements (MSAs). The effective revenue counterparties of the MSAs are major oil and gas producers: Chevron Canada Limited (Chevron Canada), EOG Resources, Inc. (EOG), Ovintiv Canada ULC (Ovintiv Canada), and Devon Canada ULC. The Devon MSA is not part of the Transactions. By Morningstar DBRS' assessment, Chevron Canada and EOG have a high investment-grade credit quality; Ovintiv Canada has a credit quality similar to that of its parent Ovintiv Inc. (rated BBB (low) with a Stable trend by Morningstar DBRS).

To monetize long-term revenue contracts, NRM raised funds by way of two separate nonrecourse project bond issuances (Transaction 1 and Transaction 2, collectively known as the Transactions). Transaction 1 involved the formation of Issuer 1 and Co-Borrower 1 as two special-purpose vehicles (SPVs) to raise the Bonds 1 against the cash flow generated from the MSAs with two separate counterparties Chevron Canada and EOG, respectively. Transaction 2 involved the formation of two limited partnership SPVs (Issuer 2 and Co-Borrower 2)¿to raise the Bonds 2 (together with the Bonds 1, known as the Bonds) against the cash flow generated from the MSA with Ovintiv Canada. These two Transactions are structurally separate from each other. The revenue contracts, on similar terms (except for the different revenue level, etc.), will expire in 2033, with the last payment to coincide with the maturity of the Bonds. The Transactions also involved the formation of another limited partnership SPV (New LP) to hold the Assets. The NRM subsidiary that was holding the Assets assigned to New LP (1) its ownership interest in the Assets and (2) the corresponding benefits and obligations under the revenue contracts and the operating agreement. The New LP receives monthly net cash flows (after negligible operating costs are deducted) under the revenue contracts to Issuer 1 and Issuer 2, respectively, both entities being the limited partners of New LP and entitled to these cash flows. The risk of commingling funds at the New LP level is not considered material.

With the Facility being nonoperational, the operating cost is negligible. Nonetheless, under the operating agreement, any operating and potential decommissioning costs are borne by each owner on a proportionate basis. As the processor/operator, New LP can subsequently flow through its share of operating cost (as a partial owner) to the revenue counterparties (with a slight premium). Future decommissioning cost (if any) borne by New LP, however, cannot be passed on to the revenue counterparties. However, Brookfield Corporation (Brookfield; rated "A" with a Stable trend by Morningstar DBRS) provides a financial guarantee in relation to the operating agreement, effectively backstopping all operating and decommissioning costs.

The contracted revenue consists primarily of a fixed toll and a small variable toll to offset negligible operating costs. Therefore, net cash flow available for debt service is essentially fixed until the Bonds fully amortize in 2033. The only express termination right in each revenue contract arises on an insolvency of New LP or the corresponding revenue counterparty. Given the highly stable cash flow, Morningstar DBRS has applied the Indirect Third-Party Support section of the "Guarantees and Other Forms of Support" under "Morningstar DBRS Global Corporate Criteria" to determine the starting point for each Transaction's rating. Morningstar DBRS' "Global Methodology for Rating Project Finance" is further cited as the basis of the secondary level of analysis with respect to the structural elements of the Transactions. In Transaction 2, the ratings start with the credit quality of the revenue counterparty, which are further adjusted (if applicable) when project finance structural features are considered. The ratings also take into consideration the decommissioning risk and mitigants, which include Brookfield's guarantee to backstop future decommissioning cost.

TRANSACTION-SPECIFIC DISCLOSURES
The Transactions include standard project finance structural features such as a first-ranking security package; a cash flow waterfall subject to a blocked accounts agreement; a three-month debt service reserve account (DSRA); and a restricted payment test (with a lock-up DSCR set at 1.03x). The three-month DSRA is considered sufficient given the negligible operational risk associated with the Transactions.

Since New LP is the majority owner of the Facility, its consent will be required for key governance and financing matters under the operating agreement. The New LP partnership agreement, through a unanimous approval process, essentially gives Issuer 1 or Issuer 2 the power to approve or disapprove material decisions over the Facility, which may negatively affect the credit. Each Issuer's consent rights are further subject to their respective bondholders' approval. As a result, bondholders' rights over these important decisions are protected, despite having only an indirect minority interest in the Assets.

A comprehensive nonconsolidation legal opinion is provided to Morningstar DBRS by NRM's legal counsel on closing of the Transactions. The legal opinion opines as to the likelihood, in a future insolvency proceeding, of substantive consolidation of the assets of the Issuer entities with those of certain other entities within the corporate structure, as well as the separateness of the Issuer 1 entities from the Issuer 2 entities, such that in the opinion of NRM's counsel, the Issuer entities would not be pulled into the bankruptcy proceedings of the other corporate entities under a court order of substantive consolidation.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Morningstar DBRS considered passed-through environmental credit considerations as a relevant environmental factor for this credit rating due to the revenue counterparty's exposure to the oil and gas sector. This factor is relevant because of the ever-increasing environmental regulations targeting the reduction of carbon and greenhouse gas emissions, which will likely limit growth potential and add costs for all oil and gas companies.

There were no Social or Governance factors 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

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

Morningstar DBRS applied the following principal methodology:

Morningstar DBRS Global Corporate Criteria (February 3, 2025),
https://dbrs.morningstar.com/research/447186

The following methodologies have also been applied:

-- Global Methodology for Rating Project Finance (December 10, 2024),
https://dbrs.morningstar.com/research/444393
-- Morningstar DBRS Criteria: Approach to ESG 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 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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