DBRS Confirms NorthwestConnect General Partnership at “A”

DBRS has today confirmed its rating of “A” with a Stable trend on the Senior Amortizing Bonds – Series 1 of NorthwestConnect General Partnership (ProjectCo). ProjectCo is the special-purpose entity created to design, build, finance, operate and maintain the Northwest Anthony Henday Drive, the 21-kilometre northwest segment of the Edmonton Ring Road, under a 33.25-year agreement (the DBFO Agreement) with the Government of Alberta (the Province; rated AAA by DBRS). Although total completion was not achieved by November 1, 2012, as originally anticipated when the waiver establishing Traffic Availability was granted by the Province last year, the rating confirmation is based on the limited amount of construction work currently outstanding and the ample security from the DB Contractors (Flatiron Constructors Canada Limited, Parsons Overseas Company of Canada Ltd. and Graham Infrastructure) that remains in place to ensure that penalties related to outstanding work will not be borne by ProjectCo. The confirmation is also predicated on the solid operating performance of the road since Traffic Availability.

ProjectCo reports that only a minor amount of construction work remains outstanding, comprised of electrical and bridge deficiencies, lighting design issues and incomplete closing documentation. Failure to reach total completion by November 1, 2012, is not an event of default under the DBFO Agreement, nor is it under the DB Contract or financing agreements, but does entitle the Province to withhold two times the estimated cost of the remaining work. While the Province has advised ProjectCo that they may exercise this right, this risk is more than sufficiently mitigated by progress payments being withheld from the DB Contractor by ProjectCo that are approximately double the estimated cost of the remaining work, and by the approximately $50 million in DB Contractor letters of credit (LCs) still in place.

To date, the road has performed well and operating period deductions have been limited to construction-related deficiencies. ProjectCo’s financial metrics will unlikely be affected by outstanding construction deficiencies, as related penalties have been passed down to the DB Contractors, who have a liability cap of 90% of the construction contract price. DBRS has been advised by ProjectCo that they are carefully monitoring the progress toward completion of remaining deficiencies to ensure there is no long-term impact on the project.

Financial projections for the operating phase remain in line with original expectations, with the debt-to-capital ratio at 92% at the start of operations, and a somewhat limited EBITDA debt service coverage ratio (DSCR) of around 1.15 times (x). However, the pass-down of operating and maintenance (O&M) activities to an experienced subcontractor, the relatively low complexity of responsibilities, as well as the use of long-life pavement and a three-year look-forward major maintenance reserve are expected to provide stability to results. Additionally, a six-month debt service reserve as well as a 50% performance bond and 50% labour and material bond posted by the Operator will provide a cushion against unforeseen events during this phase, especially for challenging lifecycle planning.

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

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 applicable methodology is Rating Public-Private Partnerships, which can be found on our website under Methodologies.