DBRS Morningstar Assigns Ratings of A (low) with Stable Trends to Athabasca Indigenous Midstream Limited Partnership’s Newly Issued Senior Bonds of Approximately CAD 865 Million

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating and Series 1 Senior Bonds (the Senior Bonds) rating of A (low) to Athabasca Indigenous Midstream Limited Partnership (AIM or the Issuer). Both trends are Stable. The Issuer is formed as a nontaxable special-purpose vehicle. The Senior Bonds of approximately $865 million on a fixed interest rate will amortize to mature on February 5, 2042, with a small balloon amount of approximately $75 million subject to refinancing. The ratings reflect transaction strengths, including high-quality and highly predictable cash flow/distributions underpinned by the long-term revenue contracts; significant structural enhancements; the assets’ competitive advantage; operational excellence; and portfolio diversification benefit. The ratings also consider certain challenges, including potential operational and environmental event risk; weakness of a minority holding company structure; constraint of shippers’ credit quality; and refinancing risk, albeit being assessed as insignificant for the time being.

AIM will use the proceeds of the Senior Bonds to finance the acquisition of an indirect minority interest of 11.57% in a pipeline system (the Partnership Assets or the Pipeline) in Alberta’s Athabasca oil sands region. This landmark transaction is intended to cultivate a long-lasting cooperative relationship between Enbridge Inc. (Enbridge; rated BBB (high) with a Stable trend by DBRS Morningstar) and the Indigenous groups. Enbridge through its subsidiary Enbridge Pipelines (Athabasca) Inc. (EPAI or the Operator) will continue to operate the Pipeline under an Operating Agreement. The Partnership Assets are highly connected to both the Edmonton and Hardisty market hubs. The Pipeline provides critical egress solutions to major oil sands projects in the basin. The Partnership Assets are directly owned by Enbridge Athabasca Midstream Trunkline Limited Partnership (Trunkline LP), which, in turn, is owned by Enbridge Athabasca Midstream Investor Limited Partnership (Investor LP) and EPAI on an ownership split of 62.6% to 37.4%. AIM's ownership interest in the Trunkline LP/Partnership Assets is indirectly held through its partial ownership interest of 18.5% in Investor LP. On financial close, Enbridge, the current indirect owner of the Issuer, will be replaced by a group of 23 First Nation and Métis groups through a permitted transfer transaction. As a result, AIM and Enbridge will indirectly own the Partnership Assets on an ownership split of 11.57% to 88.43%.

The debt service is dependent upon the quarterly distributions to AIM, upstreamed from the Pipeline. The Pipeline’s cash flow is expected to be highly predictable, well diversified, and of high quality, underpinned by multiple long-term transportation and services agreements with creditworthy shippers. Approximately 98% of the revenue is currently contracted with major producers/shippers operating in the basin. In addition, the transaction is further strengthened through a priority distribution and a series of contingent distributions to the minority owner AIM during the debt term. The cash flow to support these structural enhancements is based upon Enbridge’s 81.5% ownership interest in Investor LP. AIM is obligated to fund potential capital calls (e.g., for major operational or environmental emergencies). It is also exposed to decommissioning obligations, when they become necessary, but in no event will any annual contributions be required before 2042. With an increasing focus on environmental, social, and governance (ESG) risk in the oil sands and pipeline sectors, the Pipeline may also face increasing difficulty in securing future insurance coverage on a standalone basis. DBRS Morningstar notices that there are several mitigants to these risks, including (1) Enbridge is to provide a deficiency loan with flexible repayment terms to AIM for funding of capital calls to allow the Issuer to continue servicing its debt; (2) Enbridge is to insure the Pipeline on a 100% basis through its corporate insurance program while providing an insurance indemnity to AIM; (3) AIM’s annual contribution to the decommissioning trust (the earliest start date being after debt maturity) will be capped to ensure sufficient distribution available to service the refinanced balloon debt amount.

The debt payments are sized to yield a minimum debt service coverage ratio (DSCR) of 1.37 times (x), progressively rising to 1.61x under the rating case. With the inclusion of the structural enhancements, the deemed minimum DSCR would be 1.60x. Factoring in the structural enhancements, AIM is highly resilient to a variety of downside scenarios tested by DBRS Morningstar. For instance, the DSCR would stay at above 1.00x, assuming the largest revenue-generating pipeline were inoperable. This further demonstrates the diversification benefit, which is uncommon in a typical single-asset project finance transaction. A small balloon amount of $75 million (or 8.7% of the original Senior Bonds) will be subject to refinancing. For the time being, DBRS Morningstar believes that the refinancing risk is insignificant.

The Senior Bonds will reside at a minority holding company that will only partially and indirectly own the Partnership Assets. This structure is inherently weaker than a typical project finance entity that would otherwise directly and fully control the underlying assets and cash flow. Nonetheless, the structural weakness is substantially mitigated through unanimous partner approval under the two limited partnership agreements and a debt covenant package akin to a traditional project finance structure. Through the consent and acknowledgment agreement (i.e. the direct lender agreement), the bondholders will essentially have veto power over key decision-making items that are of credit implications. The structural subordination is not a material concern because only a small working capital credit facility (capped at $50 million) that ranks ahead of the Senior Bonds will be allowed at the Trunkline LP. The debt package includes standard project finance structural features, including a cash flow waterfall subject to segregated and blocked accounts, a debt service reserve account and restricted payment test, etc. The Senior Bonds are primarily secured against the Issuer’s accounts, a first-ranking pledge of its owner’s 100% equity interest in the Issuer and a pledge of the Issuer’s proportionate ownership interest in Investor LP, which ultimately and partially owns the Trunkline LP/the Partnership Assets. The Issuer and the Project Entities (i.e. the Investor LP and Trunkline LP) are subject to customary separateness covenants. DBRS Morningstar relied solely on the separateness features applicable to the Issuer and each Project Entity to take comfort that such parties will remain legally and operationally separate and apart from the majority and minority owners, as well as their affiliates. DBRS Morningstar notes that it will not receive a substantive nonconsolidation legal opinion for this transaction.

A ratings upgrade is unlikely given the proposed minimum DSCR level, the constraint of the shipper group’s credit quality, AIM’s residual exposure to operational and environmental event risks, and a small refinancing risk that may increase over time. A negative rating action may be triggered by a material increase to any of the above-mentioned risk factors to negatively affect the ratings.

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

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is Global Methodology for Rating Project Finance (September 6, 2022; https://www.dbrsmorningstar.com/research/402400), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include Rating Companies in the Pipeline and Midstream Energy Industry (November 3; https://www.dbrsmorningstar.com/research/387443).

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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