Morningstar DBRS Assigns Issuer Rating and Series 1 Senior Bonds Credit Rating of "A" With Stable Trends to Stonlasec8 Indigenous Investments Limited Partnership
Project FinanceDBRS Limited (Morningstar DBRS) assigned an Issuer Rating of "A" to Stonelasc8 Indigenous Investments Limited Partnership (the Issuer) and a Credit Rating of "A" on its CAD 336 million Senor 1 Bonds. All trends are Stable.
KEY CREDIT RATING CONSIDERATIONS
The "A" credit ratings are underpinned by (1) stable and high-quality cash flow based on a cost-of-service (COS) revenue model; (2) the essentiality of the pipeline; (3) significant structural enhancements, which preserve cash flow for debt service and operations costs; and (4) a highly experienced pipeline operator. The credit ratings are constrained by the (1) demand risk; (2) re-contracting risk; and (3) regulatory parameter uncertainty.
CREDIT RATING DRIVERS
A credit rating upgrade is unlikely, given the already high debt service coverage ratios (DSCRs) and strong structural protections that already provide substantial mitigation against normal project finance risks, as well as ultimate cash flow dependency on the underlying pipeline asset. A negative credit rating action could be taken if (1) the Issuer consistently underperforms financially or operationally; (2) cost of service (COS) regulatory parameters or the regulatory regime becomes consistently and structurally unfavourable; (3) there is a fundamental and structural change to long-term demand for natural gas in the target markets of the pipeline; (4) there is any material dilution from consistent occurrences of Enbridge Inc. (Enbridge) funding more than its pro rata share of maintenance costs.
Morningstar DBRS could potentially take a negative credit rating action if debt issued to finance investment¿in an equity interest in system expansions¿results in a DSCR of 1.25 times (x), which is a coverage ratio level that is permitted in the Additional Debt provisions of the debt documents.
FINANCIAL OUTLOOK
The Project is expected to generate predictable cash flows from its COS model. The ability to pass through almost all operating costs reduces the Project's exposure to sustained cost increases. The debt service is sized to a minimum DSCR of 2.40x and an average DSCR of 2.67x. The Project has strong resilience given the significant structural enhancements provided under the terms of the transaction. The debt will be fully amortized in 2055 with no attendant refinancing risk.
CREDIT RATING RATIONALE
The credit rating recommendation is based on steady and predictable cash flows generated by the pipeline system derived from the regulatory framework and significantly enhanced by additional structural enhancements offered by Enbridge. The Project's revenue is based on a COS regulatory framework, which is based on regulatory parameters, which Morningstar DBRS views to be reasonably stable and allows for full recovery of almost all costs except for nonintegrity operating and maintenance cost overrun. The offtake contracts entered into with shippers vary in terms, and none cover the full term of the debt. However, despite the re-contracting risk, Morningstar DBRS believes the stability of revenue to be very high, as the COS is always divided among all shippers, and if one shipper were to not renew, the cost would be spread among fewer shippers. Unless so many shippers drop out that the COS toll becomes completely uneconomical to the remaining shippers, revenue is likely to be fairly steady.
Morningstar DBRS does not believe this to be very likely and notes that the pipeline has been in operation for 68 years (since 1957), with market dynamics driven by demand for natural gas in British Colombia, the Pacific Northwest and export markets, and that given sufficient demand, shippers will be required to book capacity on the pipeline. The pipeline has experienced generally steady and growing revenues since 1957, despite a changing mix of shippers.
In addition to the Issuer's 12.5% pro rata distribution of free cash flow generated by the Project, several important structural enhancements have been factored into the terms of the transaction to reinforce the stability of revenue at both the Issuer and its parent. The Issuer is further protected from exposure to maintenance cost overruns via an Enbridge-provided backstop, which shields the Issuer from having to fund its pro rata share of such overruns if it does not have the financial capacity to do so. If Enbridge is required to cover the cost overrun, however, the Issuer's ownership stake will be diluted proportionate to the amount of maintenance requirement, which Enbridge has funded.
The combination of the above factors leads Morningstar DBRS to view the credit as essentially an availability-based project with application of availability financial metrics of the Project finance methodology. A one-notch penalty is applied in recognition that the revenue arrangement is weaker than a fully contracted offtake.
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 (May 16, 2025) https://dbrs.morningstar.com/research/454196.
BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Credit Rating Driver Factors
In the analysis of the Issuer, the Credit Rating Driver factors listed in the methodology 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 methodology was considered more important: DSCR (the only factor).
(C) Weighting of the Credit Rating Drivers and the FRA
In the analysis of the Issuer, the FRA carries greater weight than the Credit Rating Drivers.
Notes:
All figures are in Canadian dollars unless otherwise noted.
Morningstar DBRS applied the following principal methodology: Global Methodology for Rating Project Finance (December 10, 2024) https://dbrs.morningstar.com/research/444393
Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025 https://dbrs.morningstar.com/research/447186), 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 (May 16, 2025) https://dbrs.morningstar.com/research/454196
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.
For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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