DBRS Confirms Plenary Justice Okanagan LP at A (low) with a Stable Trend

DBRS Limited (DBRS) confirmed the A (low) Issuer Rating and Series A Senior Notes rating of Plenary Justice Okanagan LP (ProjectCo), the special-purpose entity created to design, build, finance and maintain the $185.5 million Okanagan Correctional Centre (OCC or the Project) under a 32.6-year Project Agreement (PA) signed between ProjectCo and the Province of British Columbia (the Province; rated AA (high) with a Stable trend by DBRS). The rating confirmation reflects the achievement of substantial completion, the solid experience of PCL Construction Group Inc. (PCL) and Honeywell Limited (Canada) (Honeywell or the Service Provider), the relatively low complexity of the work, the fairly straightforward service obligations and the supportive resiliencies.

Substantial completion was achieved as planned on September 30, 2016. All outstanding deficiencies have been rectified and Final Completion is expected to be achieved in Q1 2019. Honeywell continues to provide facility maintenance, lifecycle maintenance and utilities-management services for the 30-year service phase of the project. Operations have continued smoothly during the second year without material deductions. However, while it has yet not resulted in deductions (as the 12-month energy Test Period is ongoing), the actual natural gas (NG) consumption was above the target at the start of the Test Period. This is due to a combination of factors, including the geothermal system performing lower than anticipated, NG meter calibration issues and other heat uses related to staff/occupancy and weather conditions. ProjectCo, the Province and the Service Provider are working together to solve the situation. The energy consumption Test Period began in October 2018 and full data is expected to be available once the 12 months are over, from which a complete analysis by an independent third party, who will provide a certificate by 2020, will then be conducted. This diagnosis might result in an adjustment to the Design and Construction Energy Target outlined in the PA. Once the energy model is adjusted, any excess of energy consumption beyond the new target rates would be part of the gainshare/painshare mechanism between the Service Provider and ProjectCo.

The actual debt service coverage ratio (DSCR) for the second year of operations was 1.22 times (x) as per the Compliance Certificate, slightly better than expectations due to the recognition of savings relating to audit and insurance fees paid upfront in 2017. The projected financial metrics remain unchanged and adequate for the rating, with a minimum and average DSCR of 1.21x and operating and maintenance and lifecycle breakeven metrics of 44% and 46%, respectively. The relationship between the ProjectCo, the Service Provider and the Province remains collaborative, with no material issues reported.

While not currently expected, material deductions and/or Service Provider replacement could lead to a negative rating action. The potential for credit upside remains limited at the current rating given the fixed nature of the revenue stream.

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 & Criteria.

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.

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