DBRS Confirms Capital City Link General Partnership’s Issuer Rating and Long-Term Senior Bonds Rating at A (low), Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating of Capital City Link General Partnership (ProjectCo) at A (low), which was assigned on November 15, 2018. DBRS also confirmed the rating of the Long-Term Senior Bonds at A (low). All trends are Stable.

ProjectCo is a special-purpose entity (SPE) created to design, build, finance, operate and maintain the 27-kilometre northeast leg of Anthony Henday Drive in Edmonton (the Project) under a 34.5-year Design, Build, Finance, Operate and Maintain Agreement with the Province of Alberta (Alberta; rated AA with a Negative trend by DBRS).

The Project has been open to traffic since October 2016. The significant decrease in deductions during the past year is evidence of an improving operating environment. Deductions awarded to date in 2018 are about 80% lower than those incurred last year, largely due to fewer lane closures required to rectify construction deficiencies and light fixture malfunctions.

There are some remaining vegetation works and warranty items to be completed next year. The value of the warranty items is about $4.0 million to $5.0 million. The letter of credit (LOC) of about $34 million posted by the design-build contractors will remain in place until April 1, 2019. DBRS understands that ProjectCo is expecting the LOC to be extended to October 6, 2019, and the amount will be greater than the value of the warranty items.

ProjectCo’s operating and maintenance (O&M) obligations during this period have been passed down to Volker Stevin Highways Ltd. (Volker). Volker is responsible for the O&M of approximately a quarter of Alberta’s highways and is therefore familiar with the contractual requirements. ProjectCo indicated that the traffic volume in 2017 was higher than projected in some sections of the highway. Because ProjectCo retains lifecycle obligations throughout the 30-year operating period, a persistently higher-than-expected traffic volume could increase lifecycle costs considerably, without compensation from Alberta Transportation. In addition, the higher volumes may necessitate earlier-than-planned lifecycle works compared with the original forecast. Both of these potential events could affect the financial metrics of the Project, although they are not expected to do so in the near term. Given that the Project was recently constructed, pavement and structures remain in good condition and no lifecycle works have been scheduled or are required.

ProjectCo achieved an annual debt service coverage ratio (DSCR) of approximately 1.40 times (x) and 1.29x in December 2017 and September 2018, respectively. The forecast financial metrics remain unchanged from the time of the initial rating assignment, with a projected minimum DSCR of 1.27x over the term of the operating phase. The lifecycle (including the SPE budget because it includes specific asset management testing and intervention engineering) and O&M resiliencies of 28.6% and 41.6%, respectively, remain supportive of the ratings.

DBRS could take a negative rating action if there is a significant change in the lifecycle cost profile of the Project, which could potentially affect the financial metrics negatively. Given the fixed revenue stream from Alberta Transportation, DBRS notes that there is limited potential for an upgrade.

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

The principal methodology is Rating Public-Private Partnerships, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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