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, the rating confirmation is based on the modest 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 sound operating performance of the road since Traffic Availability.

ProjectCo reports that the estimated amount of work outstanding is less than 0.4% of the DB Contract value. To achieve total completion, the DB Contractors are required to complete closing documentation and as-built drawings, electrical and bridge deficiency corrections, finalize utility agreements and rectify minor deficiencies, as well as complete a small land purchase needed to accommodate drainage. Most of the remaining obligations are not sensitive to weather conditions; therefore, the majority of construction activities are expected to continue advancing, except for outstanding landscaping work along the corridor. ProjectCo now estimates that total completion will be achieved in summer 2014. 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 the 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 primarily 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 monitoring the progress of the rectification of remaining deficiencies to ensure there is no long-term impact on the project. In 2013, the DSCR was 1.15x, in line with pro forma expectations.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.