A bank/bond financing backed the largest energy-related indigenous economic partnership to-date in North America. The transaction is being viewed as a possible template for more to come. By Alison Healey.
In October 2021, Calgary-based pipeline operator Enbridge entered into a deal with 23 First Nation and Metis Indigenous communities through which the groups would acquire an 11.57% non-operating interest in seven Enbridge-operated pipelines in the Athabasca region of northern Alberta for C$1.12bn (US$820m).
Athabasca Indigenous Investments, a newly created entity, is the acquirer and pipelines included in the deal are the Athabasca, Wood Buffalo/Athabasca Twin and associated tanks; Norlite Diluent; Waupisoo; Wood Buffalo; Woodland; and the Woodland extension. BMO Capital Markets was financial adviser to Enbridge and RBC Capital Markets was financial adviser to Athabasca Indigenous Investments.
The assets
The assets comprise the predominant pipeline system in Alberta’s oil sands region, serving multiple oil sands projects in the Athabasca basin with export capacity of 2,190 thousand barrels per day. The pipelines have an average age of 11 years and are connected to two major market hubs: Edmonton and Hardisty, and 93% of the revenues in initial years are supported by long-term contracts with shippers. They have an average remaining contract life of approximately 14 years and cost-of-service and take-or-pay contracts represent 82% of the initial revenues. A majority of the operations and maintenance (O&M) costs and required capital expenditure are passed on to the shippers, so the non-recoverable O&M costs and sustaining capex represent only a small portion of gross revenues.
The transaction
The transaction supports Enbridge’s Indigenous Reconciliation Action Plan (IRAP) and also served to fulfil the company’s goal to recycle capital at attractive valuations. The financing for the acquisition provided an example of how these types of partnerships, a growing trend, can utilise project finance. The IC’s investment was financed through a C$865.2m (US$645.2m) senior bond issue, and a 25-year amortising C$250m (US$186.4m) equity loan supported by a guarantee from the Alberta Indigenous Opportunities Corporation (AIOC).
The AIOC aims to bridge the gap between Indigenous groups seeking commercial partnerships in major projects and their financial capacity. It has the authority to provide up to C$1bn (US$745.5m) in loan guarantees to reduce the cost of capital for Indigenous groups and to support their ability to raise capital to invest in natural resources, agriculture, telecommunications, and transportation projects. AIOC’s credit quality is analogous to that of the Government of Alberta.
Athabasca Indigenous Midstream (AIM) was the issuer on the private bond offering, rated A (low) by DBRS. The bond issue due February 2042 has a weighted average life of 12.2 years and is structured with a C$76m (56.6m) balloon payment. The coupon is 6.069%. The 24.8-year loan has a weighted average life of 15.6 years and was priced with an interest rate of 4.524%.
The debt payments are sized to yield a minimum debt service coverage ratio (DSCR) of 1.37x progressively rising to 1.61x under the rating case, DBRS said. With structural enhancements, the deemed minimum DSCR is 1.60x. As majority owner, Enbridge will provide “significant credit support” to minority owner AIM during the debt term, DBRS said. The credit support is based on Enbridge’s cashflow strength in its remaining 81.5% ownership interest in the partnership. “Theoretically, cashflow from 51% of Enbridge’s ownership interest in the partnership assets can be utilised for such credit support. These structural enhancements will substantially enhance the stability of the distributions.”
DBRS estimates that the DSCR would stay at 1.3x even if none of the expiring TSAs were renewed, and said the distributions available to the partnership can withstand a non-recoverable O&M cost increase by 270%, or a 13.4% compounded annual cost inflation.
The bonds reside at a minority holding company that will only partially and indirectly own the pipeline 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,” DBRS pointed out. “Nonetheless, the structural weakness is substantially mitigated through unanimous partner approval under the two limited partnership agreements [LPAs] and a debt covenant package akin to a traditional project finance structure.”
Indigenous equity ownership
Equity ownership enables Indigenous groups to share in the commercial benefits of an infrastructure project, which leads to many positive results, according to a trend report from the Torys law firm, which represented AIM.
“These include better alignment of interests among Indigenous groups and non-Indigenous project participants, an opportunity for Indigenous entities to directly influence decision-making over critical infrastructure projects, and a basis and framework for ongoing consultation in relation to a project,” Torys said.
RBC said it is actively involved and supportive of Indigenous reconciliation in its home geography and has advised on the vast majority of Indigenous Communities (ICs) transactions in Canada. The transaction has led to new business with several existing clients having approached RBC to discuss its IC efforts following in the footsteps of the Athabasca pipeline deal.
In its Q3 results Enbridge also highlighted the deal as a “landmark partnership” and said it provides a framework for potential future Indigenous partnerships, which the company believes will be a “critical component of future energy infrastructure development and ownership”.
Reconciliation Energy Transition Inc
Other deals that may ultimately end up in the project finance market include that of Reconciliation Energy Transition Inc (RETI), an affiliate company of Calgary-based First Nations consortium Project Reconciliation, which has been selected by the government of Alberta to evaluate a carbon sequestration hub east of Calgary.
RETI expects to enter into a carbon sequestration evaluation agreement with Alberta Energy that will advance evaluation and testing to confirm the viability of its plan to permanently sequester carbon dioxide in deep saline aquifers at an early rate of up to 5m tonnes per year, with expectations for increasing them to 10m tonnes in later development phases.
RETI believes the East Calgary Region Carbon Sequestration Hub will be the foundation for a Southern Alberta industrial centre focused on emerging renewable fuels and sustainable hydrogen development. RETI is focused on developing energy transition projects founded on material Indigenous equity ownership at the operating level.
Last year, RETI executed a memorandum of understanding (MoU) with Shell to collaborate on Shell's proposed Polaris carbon capture and storage (CCS) project. Under the MoU, RETI will work with its First Nations partners to raise funds to acquire an equity position in the Shell-led Polaris CO2 storage hub concept. Project Reconciliation is supported by the Indigenous Sovereign Wealth ESG Fund 1, which will back investments in clean energy. Funding for these projects will be made through special purpose limited partnerships that will include equity loans for First Nations partners.
LNG Newfoundland & Labrador’s proposed C$5.5bn (US$4.4bn) floating LNG export project is seeing increased interest from European buyers and may be fast-tracked, according to a report in The Financial Post. The start date of the project could be pushed forward to 2028 from 2030 if an expedited timeline is granted by regulators, the report said, citing remarks from chief executive officer Leo Power.
In October the Miawpukek First Nation indigenous group entered a project framework agreement with LNG-NL to negotiate a deal for the First Nations group to hold an equity stake in the project. It involves building an offshore production platform near oil producing fields in the Jeanne d'Arc Basin, a 600km subsea pipeline to Grassy Point in Placentia Bay, and a coastal liquefaction terminal that would produce 4m tonnes per year for sale to European markets. LNG-NL is a Newfoundland and Labrador-owned and operated company formed for permitting and developing the project.
The Canadian Infrastructure Bank
The Canada Infrastructure Bank (CIB) has also been actively evaluating and committing to projects with an Indigenous equity component. In June, the CIB committed C$80m (US$63.2m) to the Atlin hydroelectricity expansion project on Pine Creek in British Columbia. The CIB will make the investment in partnership with Tlingit Homeland Energy, an entity owned by the Taku River Tlingit First Nation.
The expansion project comprises a new 9.2MW hydroelectric facility and 93km transmission line to deliver clean power to the isolated Yukon microgrid. The project is expected to reduce the need for diesel fuel across the Yukon. The financing was the CIB's third commitment under the Indigenous Community Infrastructure Initiative (ICII) and its second partnership opportunity in British Columbia. The Yukon government, British Columbia government, Environment and Climate Change Canada, Canadian Northern Economic Development Agency and Crown Indigenous Relations and Northern Affairs Canada are also contributing funding to the project.
AIOC’s first loan guarantee was provided in 2020 to a consortium of six Alberta First Nations to enable their equity participation in the Cascade Power Project, a 900MW combined-cycle natural gas-fired power plant in Edson, Alberta. The First Nations groups agreed to invest C$93m (US$70.4m) for an equity stake in the project in a deal with sponsors that included pension fund manager OPTrust, Axium Infrastructure and DIF Capital Partners.
Along with Alberta-based Kineticor and joint development sponsors Macquarie Capital and OPTrust, the sponsors had closed financing for Cascade earlier that year with a C$1.5bn (US$1.12bn) loan. Macquarie was financial adviser and debt arranger on the loan, which brought in a total of 10 banks, including National Bank of Canada, Alberta Treasury Branches, Nomura, MUFG, ING, Siemens, Natixis, Canadian Western, and the Fiera Infrastructure private debt fund.
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