DBRS Confirms NorthwestConnect GP Senior Amortizing Bonds – Series 1 at “A,” Stable

DBRS Limited (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 Northwest Anthony Henday Drive, the 21-kilometre northwest segment of the Edmonton Ring Road, under a 33.25-year 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 minor amount of remaining works currently outstanding and the ample security from Flatiron Constructors Canada Limited, Parsons Overseas Company of Canada Ltd. and Graham Infrastructure Ltd. (collectively, the design-build (DB) Contractors) that remains in place to ensure that penalties related to outstanding work will not affect ProjectCo. The confirmation is also predicated on the sound operating performance of the road since Traffic Availability.

The achievement of Traffic Availability on November 1, 2011, was permitted by a waiver from the Province that allowed for the deferral of some construction activities; however, total completion was not reached on November 1, 2012, as expected, and remains outstanding at the time of this report. The DB Contractors initially encountered difficulties in supplying labour to complete the remaining work, although the DB Contractors have since added senior staff to lead the project to total completion.

The estimated value of work outstanding is expected to be less than $100,000 by the end of August. Of the 38 items that remain on the dispute resolutions list, most have been completed and are awaiting acceptance. All the items on the list are minor in nature, such as grading and landscaping, concrete repair and final inspections. ProjectCo now estimates that total completion will be achieved in December 2015. Failure to reach total completion by November 1, 2012, is not an event of default, but does entitle the Province to withhold double the estimated cost of the remaining work. While the Province has advised ProjectCo that it may exercise this right, this risk is more than sufficiently mitigated by the progress payments being withheld from the DB Contractors by ProjectCo and by the approximately $25 million in DB Contractor letters of credit still in place.

To date, the road has performed relatively well and operating period deductions have primarily been limited to construction-related deficiencies, mainly related to lighting. ProjectCo’s financial metrics should be insulated from the outstanding construction deficiencies as related penalties that have a liability cap of 90% of the construction contract price have been passed down to the DB Contractors. ProjectCo is monitoring the progress of the rectification of remaining deficiencies to ensure that there is no long-term impact on the project. In 2014, the DSCR was 1.16 times (x), which is slightly above the pro forma DSCR of 1.15x because of timing of cash flows and expenses.

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.

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

The applicable methodology is Rating Public-Private Partnerships (March 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.