Morningstar DBRS Confirms Northern Courier Pipeline Limited Partnership at A (low) with Stable Trend

DBRS Limited (Morningstar DBRS) 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.

KEY CREDIT RATING CONSIDERATIONS

The rating confirmations reflect NCPLP's smooth operations and satisfactory financial performance during the review period, with required minimum service levels achieved at all times. The Debt Service Coverage Ratio (DSCR) was 1.35 (x) in FY2023, slightly below Morningstar DBRS' rating-case expectations, because of an operating cost over-recovery in 2022, which was then deducted in 2023. Morningstar DBRS notes that the 2022 over-recovery was due largely to adjustments to the operating plan made by Suncor Energy Inc. (SEI; rated A (low) with a Stable trend by Morningstar DBRS) after its exercising of its purchase option of NCPLP from TC Energy, as well as different corporate overhead allocations. Morningstar DBRS views this decrease in DSCR as a one-time occurrence and not indicative of any structural issue, and notes that both revenue and costs in 2023 were largely consistent with budgets. In addition, based on the performance of the Fort Hills bitumen mine (Fort Hills), Morningstar DBRS believes that NCPLP will continue to be 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 stored and prepared for long-distance transport to end markets.

NCPLP is a nontaxable, bankruptcy-remote special-purpose vehicle established to own and operate the Northern Courier Pipeline (NCP), a mission-critical component of Fort Hills. 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 when SEI exercised its option to acquire ownership from TransCanada PipeLines Limited (rated A (low) with a Stable trend by Morningstar DBRS) and its ultimate parent, TC Energy Corporation, in November 2021. The change in ownership stake did not have a credit rating impact on NCPLP, given SEI's involvement in the management of NCPLP.

CREDIT RATING DRIVERS

The credit ratings are supported by 1) the highly predictable cash flow expected under the Transportation Services Agreements; 2) the criticality of the asset as an essential infrastructure component of the Fort Hills operation; 3) the alignment of interest among the parties to the contract structure; and 4) supportive debt package and covenants. Challenges to the credit rating include: 1) the cap on the credit rating by the Shipper's credit quality; 2) the effect that the economics of the Fort Hills operation could have; and 3) the exposure to operational and environmental event risk.

FINANCIAL OUTLOOK

NCPLP's credit ratings continue to be underpinned by the expected highly predictable and high-quality cash flow resulting from the cost-of-service (COS) nature of the Transportation Services Agreement and the Tank Services Agreement (together, 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 for the current credit rating level. Morningstar DBRS considers NCPLP's operations to be relatively straightforward, with operations services now provided by an SEI subsidiary that is an experienced operator with aligned interest.

CREDIT RATING RATIONALE

The NCP has been in service since November 2017 and NCPLP has been collecting monthly toll revenue under the COS model under the TSAs from Fort Hills Energy LP (FHELP or the Shipper). The COS nature of the tolling TSAs essentially eliminates bitumen volume and commodity price volatility and passes on virtually all O&M 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 Morningstar DBRS' view that Fort Hills is a viable operation over the term of the debt, the primary credit rating constraint is the Shipper's counterparty risk.

Strong performance at Fort Hills continued in 2023 and the first half of 2024, following a mine improvement plan that commenced in Q4 2022, including an accelerated sequence of mine development from the South Pit to the Centre and North Pits, which has now resulted in the second train being operational. Since the NCLPL's financial close in 2019, FHELP has undergone a significant change in ownership structure, with both Teck and TotalEnergies EP Canada Ltd. (TotalEnergies Canada) selling their interests in the bitumen mine back to SEI, and resulting in SEI being the sole shareholder and guarantor of FHELP's obligations. Morningstar DBRS maintains its view on the credit quality of SEI as the guarantor of FHELP's obligations. FHELP is the limited partnership formed to own and operate Fort Hills. FHELP is also the counterparty to the TSAs with NCPLP and has reported materially improved netbacks amid strong energy prices and the operational ramp-up. Morningstar DBRS also recognizes that certain provisions allow FHELP various remedies in the event that a guarantor defaults, which can support FHELP's ability to pay toll costs if this occurred; however, this is subject to prevailing market conditions at the time of any potential default, which may limit the effectiveness of this remedy.

Because the credit ratings are currently capped by Morningstar DBRS' credit view on FHELP, any change in either the partner composition or the credit ratings on SEI could result in a change to the credit rating, absent any mitigating provision. Morningstar DBRS does not view a positive credit rating action on NCPLP as likely at this time. Similarly, Morningstar DBRS does not believe that there will be pressure on the credit ratings due to deteriorating credit quality of the Shipper's shareholder or guarantor 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 credit ratings.

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 Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of BRA Factors

In the analysis of Northern Courier Pipeline Limited Partnership the Rating Driver factors listed in the methodology are considered in the order of importance.

B) Weighting of FRA Factors

In the analysis of Northern Courier Pipeline Limited Partnership, the following FRA factor listed in the methodology was considered more important: DSCR (the only applicable factor)

C) Weighting of the BRA and the FRA

In the analysis of Northern Courier Pipeline Limited Partnership the FRA carries greater weight than the BRA.

Notes:

All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Project Finance (15 April 2024)

https://dbrs.morningstar.com/research/431188

Morningstar DBRS Global Corporate Criteria (15 April 2024)

https://dbrs.morningstar.com/research/431186/

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/397223.

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 [e-mail].

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 [e-mail].

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