DBRS Downgrades Inter Pipeline (Corridor) Inc. to A (low); Confirms Commercial Paper Rating at R-1 (low)

DBRS Limited (DBRS) has today downgraded the Issuer Rating and Senior Unsecured Debentures rating of Inter Pipeline (Corridor) Inc. (Corridor or the Company) to A (low) from “A.” The downgrades remove the ratings from Under Review with Negative Implications where they were placed on March 14, 2017. Concurrently, DBRS has confirmed Corridor’s Commercial Paper rating at R-1 (low), as the rating is consistent with the DBRS rating scales for long-term ratings of A (low). All trends are Stable.

DBRS’s rating actions follow Canadian Natural Resources Limited’s (CNRL; rated BBB (high)) acquisition of a 60% interest in the Athabasca Oil Sands Project (AOSP) and the Scotford upgrader, through its affiliate Canadian Natural Upgrading Limited (CNUL), from Shell Canada Energy (Shell) on May 31, 2017. Separately, CNRL and Shell jointly acquired Marathon Oil Corporation’s (Marathon) 20% share in AOSP and related oil sands investments. DBRS views that the replacement of Shell, which is considered to be a strong credit quality shipper, by the relatively weaker rated CNRL for a majority of the capacity (70%) contracted under the Corridor firm service agreement (FSA) has increased the overall counterparty risk of the shipping group. DBRS notes that, although the higher counterparty risk is marginally offset by the replacement of Marathon, a weaker counterparty, by CNRL and Shell, which are both investment-grade shippers, a one-notch downgrade is appropriate at this time.

Corridor’s business risk profile continues to be supported by a 25-year cost-of-service take-or-pay contract to 2028 with relatively strong investment-grade shippers that are also the AOSP sponsors: CNRL (70%), Chevron Corporation (20%; rated AA (low)) and Shell (10%). DBRS notes that there is no change to the terms of the FSA following the acquisition by CNRL. The FSA allows recovery of substantially all operating costs, including depreciation, taxes and financing costs, plus a return on equity on the rate base, which eliminates commodity or volume risk and provides a steady stream of cash flows. Corridor has exclusive rights to transport diluted bitumen produced by AOSP and provides a vital link between the Muskeg River Mine and the Jackpine Mine north of Fort McMurray, Alberta, and the Scotford upgrader, adjacent to Shell’s Scotford Refinery near Edmonton. Shell will continue as the operator of the Scotford upgrader and the Quest carbon capture and storage project after these assets were acquired by CNRL. DBRS believes that the shippers’ strong commitment to the AOSP incentivizes them to fully utilize the pipeline.

Corridor’s ratings incorporate DBRS’s review of financial information and other relevant information that is not disclosed, as Corridor is a private Company. DBRS notes that Corridor has maintained a stable financial profile with predictable cash flows supported by the long-term FSA. Although an upgrade to Corridor’s ratings is unlikely in the near term, ratings could come under pressure should the credit quality of the shippers deteriorate because of sustained weakness in oil prices or existing shippers being replaced by shippers with weaker credit profiles.

Notes:
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 to the right under Related Research or by contacting us at info@dbrs.com.

The principle methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (December 2016) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017), which can be found on dbrs.com under Methodologies.

DBRS 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@dbrs.com.

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