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

DBRS Limited (Morningstar DBRS) assigned an Issuer Rating of BBB (low) to NRM Cabin Intermediate #2 Limited Partnership (Issuer 2) and NRM Cabin Finance #2 Limited Partnership (Co-Borrower 2), and a rating of BBB (low) to the Senior Secured Bonds (the Bonds 2) co-issued by Issuer 2 and Co-Borrower 2. 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 will fully amortize to mature on July 31, 2033.

KEY CREDIT RATING CONSIDERATIONS
NorthRiver Midstream Inc. (NRM), through a subsidiary, currently owns approximately 70% interest in a natural gas gathering and processing facility (the Facility or the Assets) in British Columbia. It is also the facility operator under a long-term operating agreement. The construction of the Facility was never fully completed and the Facility is non-operational. As a result, the operator’s performance obligations are de minimis. The Facility is expected to stay non-operational for the foreseeable future. Nonetheless, NRM continues to benefit from the stable cash flows generated from the three long-term revenue contracts in the contemplated Transactions (defined in the next paragraph). The three revenue counterparties in the Transactions are major oil and gas producers or their subsidiaries. Morningstar DBRS assessed the two revenue counterparties in Transaction 1 to have credit quality at a very high and a high investment-grade level, respectively; and the revenue counterparty in Transaction 2 to have low investment-grade credit quality.

To monetize long-term revenue contracts, NRM is seeking to raise funds by way of two separate nonrecourse project bond issuances (Transaction 1 and Transaction 2, collectively known as the Transactions). Transaction 1 involves 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 revenue contracts with two separate counterparties having a very high and a high investment-grade credit quality, respectively. Transaction 2 involves 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 revenue contract with the counterparty that has a low-investment-grade credit quality. 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 will also involve the formation of another limited partnership SPV (New LP) to hold the Assets. The NRM subsidiary currently holding the Assets will assign 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. After financial close, New LP will start to advance monthly net cash flows (after deducting negligible operating costs) 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 non-operational, 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 “DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support” 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 considering project finance structural features. The ratings also take into consideration the decommissioning risk and mitigants, which include Brookfield’s guarantee to backstop future decommissioning cost.

CREDIT RATING DRIVERS
The ratings would be constrained by the credit quality of the revenue counterparty, which is a subsidiary of a major oil and gas producer. The assessment is based upon implicit support from its parent, when considering essentiality, reputation, and integration. Any material weakening of implicit support may cause Morningstar DBRS to reassess its credit quality.

Any change to the revenue counterparty’s credit quality including a reassessment of implicit support by its parent will move the ratings accordingly. 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.

CREDIT RATING RATIONALE
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.

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 decision 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 non-consolidation 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
Environmental (E) Factors
There were no Environmental factors that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factors that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factors that had a relevant or significant 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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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

Morningstar DBRS applied the following principal methodologies:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023),
https://dbrs.morningstar.com/research/411694
-- Global Methodology for Rating Project Finance (September 12, 2023),
https://dbrs.morningstar.com/research/420425

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 info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

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 info-DBRS@morningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577