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

DBRS Limited (DBRS Morningstar) confirmed Athabasca Indigenous Midstream Limited Partnership’s (AIM or the Issuer) Issuer Rating and the rating on its Series 1 Senior Bonds (the Senior Bonds) at A (low). Both trends are Stable. AIM is a nontaxable special-purpose vehicle. The Senior Bonds of approximately $865 million (outstanding balance: $862 million) on a fixed interest rate 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. The credit rating confirmations reflect stable operational and financial performances that were consistent with expectations during the review period. The Stable trends reflect DBRS Morningstar's view that operations and cash flow will continue to be highly stable in the next 12 months, underpinned by the long-term revenue contracts with creditworthy shippers, which are further enhanced by certain structural features.

For the review period, the financial performance was consistent with DBRS Morningstar's rating-case projections, with debt service coverage ratios (DSCRs) reaching 1.38 times (x) in F2022 and 1.37x for the rolling nine months ended Q2 F2023, respectively (before considering the embedded structural enhancement feature). The credit quality of the shipper group remains strong, with major shippers recording high profitability, in an environment of high energy prices. DBRS Morningstar also notes that no safety or material environmental events were recorded in the review period. In Q2 2023, there were several power supply disruptions driven by wildfire events at the Cheecham Terminal with only a minor impact on the shippers. DBRS Morningstar notes, however, the pipeline system's cash flow has no significant correlation with the volume or price volatility of the shipped oil products, or the overall cost inflation because the revenue contracts have largely passed on these risks to the shippers. DBRS Morningstar also notes that the working relationship between Enbridge Pipelines (Athabasca) Inc. (EPAI or the Operator) and the Issuer is healthy, with quarterly performance updates and timely engagement as needed.

The credit ratings reflect transaction strengths that include 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 that include potential operational and environmental event risk; weakness of a minority holding company structure; constraint of shippers’ credit quality; and refinancing risk, although this factor is considered insignificant for the time being.

AIM is owned by a group of 23 First Nation and Métis groups through a permitted transfer transaction and has an indirect minority interest of 11.57% in a pipeline system (the Partnership Assets or the Pipeline) in Alberta’s Athabasca oil sands region. Enbridge Inc. (Enbridge; rated BBB (high) and Under Review with Developing Implications by DBRS Morningstar), through its subsidiary EPAI, will continue to operate the Pipeline under an Operating Agreement. The Partnership Assets are highly connected to both the Edmonton and Hardisty market hubs, and they provide 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.

The debt service is dependent upon the quarterly distributions to AIM, upstreamed from the Pipeline and sized to yield a minimum DSCR of 1.37x, progressively rising to 1.61x under the rating case. 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. In addition, the transaction is further strengthened through a priority distribution and a series of contingent distributions to AIM, the minority owner, during the debt term. 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 DBRS Morningstar. The cash flow to support these structural enhancements is based upon Enbridge’s 81.5% ownership interest in Investor LP. AIM is obliged 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: (1) Enbridge is to provide a deficiency loan with flexible repayment terms to AIM for the 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; and (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 amount.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Project Finance (September 12, 2023) - https://www.dbrsmorningstar.com/research/420425

The following methodology has also been applied:
-- Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2022) - https://www.dbrsmorningstar.com/research/404917/global-methodology-for-rating-companies-in-the-pipeline-and-midstream-energy-industry

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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 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.

DBRS Morningstar 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. DBRS Morningstar trends and credit ratings are under regular surveillance.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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